Hood v JD Classics Ltd (In Administration)

For the purposes of Insolvency Act 1986 ss 271 and 284 and rule 10.29 of the Insolvency (England and Wales) Rules 2016, the relevant question is whether the payment involved a disposition of property beneficially owned by the debtor. A direct payment by a third party to the petitioning creditor remains a disposition of the third party’s property where the debtor is obliged to reimburse that party, unless the debtor had a beneficial interest in the money. It is not confined to payments made by way of gift. The court must apply the statutory language and the distinction drawn by rule 10.29 between the debtor’s property and property of another person. The pari passu principle informs the statutory scheme but cannot add words to it.

HMRC presented a bankruptcy petition against Derek Thomas Hood. JD Classics Ltd, a supporting creditor, later sought change of carriage. Mr Hood’s former wife and business associate paid the petition debt directly to HMRC. The associate’s payment was found to be a loan repayable by Mr Hood, but the money had never been beneficially owned by him.

Deputy Judge Jones held that the associate’s payment was caught by s 284 of the Insolvency Act 1986, permitted change of carriage, and made a bankruptcy order. Mr Hood appealed, contending that the payment was a disposition of the third party’s property and therefore prevented both change of carriage and a bankruptcy order.

1. Appeal allowed. The payment of £530,000 by Mr Hill directly to HMRC was a disposition of Mr Hill’s property, not of Mr Hood’s property. The associated repayment obligation was a debt owed by Mr Hood and was not property within s 436 of the Insolvency Act 1986.
2. The court applied the approach in Smith v Ian Simpson & Co [2001] Ch 239. A payment from the debtor’s own property may be void under s 284 and cannot ordinarily prevent a bankruptcy order. Rule 10.29(3), however, distinguishes a disposition of the debtor’s property from a disposition made by another person.
3. The statutory concept of property requires beneficial ownership or a beneficial interest. Money advanced under a loan may remain beneficially owned by the lender, particularly where it is paid directly to the creditor. The authorities concerning purpose-restricted loans and trusts supported that analysis. Re Salaman was not persuasive because it was decided under the Bankruptcy Act 1914, contained no adequate analysis of the legal status of loaned money, and did not explain why a direct third-party payment became the bankrupt’s property.
4. The pari passu principle is an important policy underlying ss 271 and 284 and rule 10.29, but it does not justify replacing the statutory test with a general inquiry into creditor prejudice. The rules deliberately distinguish change of carriage from substitution and permit direct third-party payments to prevent change of carriage where the debtor’s own property has not been disposed of.
5. The judge below therefore erred in law. Rule 10.29(3) prevented change of carriage, and s 271(1)(a) prevented a bankruptcy order because the petition debt had been paid by third parties. The appropriate consequential orders were adjourned for further submissions, including on any stay or permission to appeal.

• High Court (Chancery Division): appeal from the order of Deputy Judge Jones dated 28 February 2020. The order granting change of carriage and making a bankruptcy order was held to be erroneous in law.