Azuonye v Kent

The Court of Appeal held that future payments due under an income payments order (IPO) made in an earlier bankruptcy which had ended by discharge are provable debts in a later bankruptcy that commences after that discharge. The court analysed the relevant provisions of the Insolvency Act 1986, in particular sections 310 and 335, and followed the broad approach to provable debts expressed in Re Nortel GmbH (in administration) [2013] UKSC 52. The panel rejected the respondent’s construction of section 335(2) as creating an exception where the later bankruptcy follows discharge, and found no general common-law rule (or rule under the Insolvency Rules) rendering future variable-periodical payments non-provable except where specifically excluded by statute (for example family proceedings). The court therefore concluded that future IPO payments falling due after the commencement of the later bankruptcy must be recovered by proof in that later bankruptcy and are not directly enforceable by the trustee of the earlier bankruptcy.

Background and parties: The appellant (the bankrupt) was made bankrupt on 28 April 2015 and automatically discharged on 27 April 2016. The respondent, the trustee in the first bankruptcy, obtained an IPO on 18 November 2016 (later varied) requiring monthly payments. The appellant was made bankrupt again on 4 December 2017 and the respondent was appointed trustee of the second bankruptcy. The appellant contended the second bankruptcy discharged or defeated the IPO.

Procedural history:

• County Court (DJ Coonan): directed that the IPO remained enforceable against the appellant (order of 16 January 2018 and later variation to £3,000 per month).
• High Court (Falk J), with permission from Rose J: appeal by the appellant dismissed (CH-2018-000069).
• Court of Appeal: appeal with permission from Lewison LJ, heard 10 July 2019; allowed.

Nature of the issue and relief sought: Whether the debtor’s liability for future payments under an IPO made in the earlier bankruptcy is a provable debt in a later bankruptcy that commences after the debtor has been discharged from the earlier bankruptcy; the appellant sought a declaration that the IPO had been discharged/was not enforceable.

Issues framed:

• Does section 335 of the Insolvency Act 1986 operate to prevent future IPO payments being provable where the later bankruptcy follows discharge from the earlier bankruptcy?
• Is there a rule of law or exception (including under rule 14.2(5) of the Insolvency Rules 2016 or common law) that prevents variable court-ordered periodical payments (an IPO) from being provable?

Court’s reasoning (concise): The court reviewed the statutory scheme for bankruptcy, definitions of "bankruptcy debt" and "provable debt" (section 382; Insolvency Rules), and the purpose and mechanics of IPOs (section 310). It held that section 335 applies only where a later bankruptcy is made while the bankrupt is undischarged and does not create an implied exception for later bankruptcies after discharge. The Supreme Court’s approach in Re Nortel, emphasising a broad scope of provable liabilities, was determinative. Authorities on foreign maintenance orders and on family/matrimonial periodical payments were examined and distinguished: Cartwright and similar cases concern foreign/variable orders or family proceedings and do not establish a general rule excluding variable orders from proof in bankruptcy. Rimer J’s reasoning in Re Bradley-Hope was confined to family proceedings; the Insolvency Rules and Act otherwise reach such liabilities unless expressly excluded. Consequently future IPO payments are provable in the later bankruptcy. The court also observed practical limitations to avoiding IPOs by re-bankruptcy (possibility of annulment, assets acquired after the first bankruptcy, proof in later bankruptcy, and entitlement of later trustee to seek a fresh IPO).

Subsidiary findings: arrears due under the IPO at the commencement of the second bankruptcy are provable; the trustee of the later bankruptcy may apply for a new IPO; the respondent’s reliance on section 335(2) and on a general common-law immunity for variable orders from proof was rejected.

Appeal allowed. The court held that when a later bankruptcy commences after discharge from an earlier bankruptcy, future payments under an income payments order made in the earlier bankruptcy are provable debts in the later bankruptcy and are not enforceable by the earlier trustee against the bankrupt. The court’s reasoning relied on the statutory scheme of the Insolvency Act 1986 (notably sections 310, 335 and the definitions in section 382), the broad approach to provable debts in Re Nortel, and the absence of a statutory or common-law exception applicable to IPOs in the circumstances of this case.

County Court (District Judge Coonan) — held IPO remained enforceable and directed disclosure and variations (orders from January and March 2018); Appeal to the High Court (Falk J) — appeal dismissed (Chancery Appeals CH-2018-000069); Permission to appeal to the Court of Appeal granted by Lewison LJ; Court of Appeal ([2019] EWCA Civ 1289) allowed the appeal.