Michael Wilson & Partners Ltd v Sinclair & Ors

Following a bankruptcy order, a creditor cannot obtain a final third party debt order over a debt owed to the bankrupt. A final order is a proprietary remedy against the bankrupt’s property and is prohibited by Insolvency Act 1986, section 285(3)(a).

An interim third party debt order attaches the debt, but the attachment is incomplete until the debt is received. Section 346 therefore prevents the creditor retaining its benefit unless the court exceptionally disapplies that rule under section 346(6). The ordinary pari passu distribution of the bankrupt’s estate has primacy, and exceptional unfairness must be shown before one unsecured creditor obtains priority.

Michael Wilson & Partners Ltd sought to enforce judgments against Mr Sinclair and Sokol Holdings Inc by a third party debt order against Mr Emmott. It asserted that Mr Emmott owed them repayment of advances made under a 2007 deed.

Master Kay discharged the interim order, holding that no debt was due or accruing due because repayment required a demand. He also would have refused a final order in his discretion. The High Court dismissed MWP’s appeal: [2020] EWHC 1249 (Comm).

Permission for a second appeal was granted on the question whether a loan repayable 30 days after demand was a debt due or accruing due under CPR rule 72.2(1)(a). Before the appeal was heard, MWP’s own petition resulted in Mr Sinclair’s bankruptcy. The issue became whether the appeal could usefully continue despite the bankruptcy restrictions.

1. The appeal was dismissed as academic and was not heard on its substantive CPR point. Nugee LJ gave the reasons, with whom Simler LJ and David Richards LJ agreed. Mr Sinclair’s bankruptcy meant that MWP could not obtain a final third party debt order unless it had a reasonable prospect of relief under section 346(6) of the Insolvency Act 1986.

2. Section 285(3)(a) was mandatory. MWP was a creditor in respect of provable debts, and Mr Sinclair’s repayment claim against Mr Emmott was his property. A final third party debt order appropriates the debt, creates a proprietary interest or equitable charge over it, and gives the judgment creditor priority. It was consequently a remedy against the bankrupt’s property, prohibited after the bankruptcy order: Société Eram Shipping Co Ltd v Cie Internationale de Navigation [2003] UKHL 30 applied.

3. The interim order had attached the debt before bankruptcy, but section 346(1) prevented MWP retaining that benefit. Under section 346(5)(c), attachment is completed only on receipt of the debt; MWP had received nothing when bankruptcy commenced. A final order could not be made merely subject to a stay of enforcement. Unlike a money judgment, it would immediately affect estate property and divert it from the general creditors.

4. Relief under section 346(6) would be exceptional. The normal primacy of the pari passu rule imposed a heavy burden to establish sufficient unfairness. MWP had itself petitioned for Mr Sinclair’s bankruptcy and had not sought to defer it pending this appeal. Those circumstances gave it no realistic prospect of establishing an exception.

5. The court also declined its narrow discretion to hear an otherwise academic appeal solely on costs. That course required particular caution, and MWP had brought about the event which made its appeal academic. Post-hearing material gave no reason to reopen the appeal or continue the interim order.

• Court of Appeal (Civil Division): The court held that Mr Sinclair’s bankruptcy made the appeal academic, declined to hear it solely on costs, and refused to continue the interim third party debt order.

• High Court, Commercial Court: HHJ Pelling QC dismissed MWP’s appeal from the Master, holding that no debt was due or accruing due under the 2007 deed: [2020] EWHC 1249 (Comm).

• High Court, Commercial Court: Master Kay discharged the interim third party debt order. He held that repayment was not due without a demand and, alternatively, would have refused a final order in the exercise of discretion: [2018] EWHC 1496 (Comm).