The Official Receiver v Christopher James Hatton

A bankruptcy restrictions order is mandatory where the court considers it appropriate having regard to the bankrupt’s conduct. Conduct which places assets beyond creditors’ reach may justify an order, particularly where it indicates want of probity or creates a need for public protection. The statutory examples are non-exclusive, and extenuating circumstances may be considered.

However, the Official Receiver must prove the relevant misconduct on the balance of probabilities. A transfer is not misconduct merely because an asset appears valuable if liabilities materially reduce its value and the alleged purpose is unproved. On a sale subject to a secured charge, the charge is overreached and attaches to the proceeds, so the debtor may not have removed those proceeds from the reach of creditors.

The Official Receiver applied for a bankruptcy restrictions order against Christopher James Hatton under paragraph 2(1) of Schedule 4A to the Insolvency Act 1986. The application concerned three transactions: a transfer of shares connected with a Portuguese property, the disposal of proceeds from the sale of a house, and an attempted variation of a testamentary inheritance.

The alleged misconduct was that the transactions were intended to defraud or prejudice creditors within the meaning of section 423 of the Act. It was accepted that Mr Hatton believed he had a defence to the underlying creditor claims and that he had not become insolvent as a result of the transactions. The central issues were whether the transactions involved conduct making a bankruptcy restrictions order appropriate and whether the alleged purposes and asset values had been proved.

1. Application dismissed. The statutory discretion under paragraph 2(1) of Schedule 4A to the Insolvency Act 1986 requires the court to consider the bankrupt’s conduct, including the non-exclusive examples in paragraph 2(2). Conduct placing assets beyond creditors’ reach may indicate want of probity and create a need for public protection. Extenuating circumstances may be taken into account, but once the court concludes that an order is appropriate, the order is mandatory (paras [4]-[6]).
2. The Official Receiver failed to prove that the share transfer involved a transfer of real value intended to prejudice creditors. The purchase price of the Portuguese property had been paid by the company, creating a loan to the property-owning company. The evidence showed that the loan was reflected in the company’s accounts. The alleged value of the shares therefore depended on the property’s net value after the loan. Marketing particulars for an unsold property did not prove its market value. Nor did the evidence establish, on the balance of probabilities, that the purpose of the transfer was to put the shares beyond the creditors’ reach (paras [27]-[51]).
3. The house-sale ground was misconceived. On completion, the first charge was paid and the second charge was overreached. The secured creditor’s equitable property right detached from the house and attached to the remaining proceeds. Mr Hatton was never entitled to use those proceeds to pay the creditors. Their subsequent re-lending to the debtor company, secured against another property, did not create the alleged removal of assets from creditors’ reach (paras [52]-[64]).
4. The alleged statement made in court could not found a bankruptcy restrictions order. The doctrine of immunity from suit protects statements or conduct in court, and reliance on the statement would offend that principle, as explained in Re MBI International & Partners Inc [2022] Ch (para [65]).
5. The evidence did not establish that the attempted implementation of the deceased father’s wishes was misconduct. The court noted the possible relevance of a secret trust, including intention, communication and acceptance, but the parties had not asked it to decide those issues. The Official Receiver had not proved that the inheritance arrangement was intended to place assets beyond creditors’ reach (paras [66]-[69]).