Michael Wilson & Partners Ltd v Sinclair & Ors

The Court of Appeal determined that the appeal concerning the making final of a third party debt order (TPDO) had become academic after the judgment debtor, Mr Sinclair, was made bankrupt. The court held that a TPDO, when made final, creates a proprietary interest in the debt (an equitable charge) and therefore constitutes a "remedy against the property" of the judgment debtor within the meaning of s.285(3)(a) Insolvency Act 1986. As a result, s.346(1) prevents a creditor from retaining the benefit of an attachment made before bankruptcy unless the attachment was completed before the commencement of the bankruptcy, and completion requires receipt of the debt (s.346(5)(c)).

The appellant (MWP) could not pursue the appeal unless it had a reasonable prospect of persuading the court to exercise its exceptional discretion under s.346(6) to set aside that rule. The court concluded that MWP had no realistic prospect of obtaining such relief because (i) the pari passu principle in bankruptcy ordinarily precludes giving one unsecured creditor priority after bankruptcy, (ii) MWP itself had presented the petition that led to the bankruptcy, and (iii) there was no evidence to show exceptional unfairness to other creditors that would justify displacing the statutory rule. The court therefore declined to hear the substantive appeal and also declined to exercise its discretion to hear the appeal solely on costs.

Background and procedural posture.

MWP, a judgment creditor of Mr Sinclair and Sokol Holdings Inc., applied for a third party debt order (TPDO) against Mr Emmott on the basis that he owed monies to Mr Sinclair and/or Sokol. An interim TPDO was made by Master Kay. The interim order restrained Mr Emmott from making payments reducing certain specified sums. Master Kay later discharged the interim TPDO on the primary ground that, under a 2007 deed governing advances from Mr Sinclair to Mr Emmott, repayment was only due 30 days after demand and, in the absence of any demand, there was no "debt due or accruing due" for the purposes of CPR r 72.2(1)(a). Master Kay also exercised his discretion to discharge on grounds of non-disclosure and other conduct. HHJ Pelling dismissed MWP's appeal against Master Kay's decision. MWP obtained permission to appeal to this Court.

Nature of the claim and issues.

• The relief sought: an order making interim TPDO final so that sums due from Mr Emmott to Mr Sinclair (or Sokol) would be paid to MWP to satisfy judgment debts.
• Key legal issues: (i) whether sums repayable 30 days after demand under the 2007 deed constituted a "debt due or accruing due" within CPR r 72.2(1)(a); (ii) whether the court should exercise its discretion to make an interim TPDO final; and (iii) after Mr Sinclair was made bankrupt, whether MWP could continue the appeal given the operation of ss.285 and 346 of the Insolvency Act 1986 and whether it had a reasonable prospect of success under s.346(6).

Court's reasoning.

The court analysed the nature of a TPDO by reference to leading authority (Société Eram) and concluded that an interim TPDO attaches and a final TPDO creates a proprietary interest (equitable charge) in the debt owed by the third party to the judgment debtor. Because a final TPDO has proprietary effect, s.285(3)(a) prevents a creditor from obtaining a remedy against the property of a bankrupt in respect of a provable debt. Section 346(1) prevents a creditor who, before the commencement of bankruptcy, attached a debt from retaining the benefit of that attachment against the trustee unless the attachment was completed before bankruptcy; completion requires actual receipt of the debt (s.346(5)(c)).

The court therefore concluded that, once Mr Sinclair was made bankrupt, MWP could not obtain a final TPDO unless it could show a reasonable prospect of obtaining relief under s.346(6). The court reviewed the high threshold for relief under s.346(6) and the pari passu principle reflected in Roberts Petroleum and other authorities and held that MWP had no realistic prospect of persuading the court to displace that principle. Factors weighing against MWP included that it had itself presented the petition that resulted in the bankruptcy and there was no persuasive evidence that other creditors should be disadvantaged.

Disposition on costs and hearing.

The court exercised its discretion not to proceed with the substantive appeal as it had become academic and also declined to hear it solely on the question of costs, having regard to the narrow scope for doing so and the fact that MWP had itself caused the bankruptcy to occur.

This was an appellate context. The Court concluded that the appeal had become academic following the making of a bankruptcy order against Mr Sinclair and that MWP could not realistically obtain relief under s.346(6) IA 1986 to preserve the benefit of its interim TPDO. Because a final TPDO gives rise to a proprietary interest in the debt, s.285(3)(a) prevents a creditor from obtaining such a remedy after bankruptcy and s.346(1) prevents retention of the benefit of an attachment unless it was completed before bankruptcy. The Court therefore declined to hear the substantive appeal and also declined to exercise its discretion to hear the appeal solely on costs.

Master Kay QC made an interim TPDO (23 May 2017) and later discharged it ([2018] EWHC 1496 (Comm)). Males J granted permission to appeal and stayed the order (23 August 2018). HHJ Pelling QC dismissed MWP's appeal ([2020] EWHC 1249 (Comm)) and ordered costs. Popplewell LJ granted a stay and later permission to appeal to this Court (stay 3 July 2020; permission 17 November 2020). Before the Court of Appeal hearing Mr Sinclair was made bankrupt (bankruptcy order 9 March 2021), after which the Court of Appeal declined to hear the substantive appeal as academic for the reasons given in the judgment.