Ashleigh Fletcher & Anor v Vibhutiben Desai

Section 339 of the Insolvency Act 1986 permits restoration of the position that would have existed without a transaction at an undervalue, but does not permit one unsecured creditor to obtain priority contrary to the pari passu distribution of an insolvent estate. A vesting order under section 342 takes effect from the date of the order and does not retrospectively create security over property in which the bankrupt previously had no interest. In an insolvent section 423 claim, the application is treated as made on behalf of all victims. Relief cannot therefore be granted solely for one victim where that would prejudice the statutory distribution scheme. The section 375 review jurisdiction is discretionary and exceptional, but need not be considered where the proposed relief has no legal basis.

The applicants, trustees in bankruptcy, had obtained an order declaring a trust deed and subsequent transfers of two properties transactions at an undervalue and vesting the properties in them. The respondent, a judgment creditor, had obtained charging orders over the bankrupt’s interests in the properties before the bankruptcy order, although the properties had already been transferred.

She applied under section 375 of the Insolvency Act 1986 to vary the vesting order so that her charging orders remained valid and secured her claims. She also relied on section 423 and sought to revive related relief. The central issue was whether either avoidance provision permitted the court to recognise her charges despite the consequences for the pari passu distribution of the bankruptcy estate.

1. The application to vary the order was dismissed. The proposed recognition of the respondent’s charging orders had no legal basis under section 339 or section 423 of the Insolvency Act 1986.
2. Proceedings under the avoidance provisions are causes of action vested in the relevant insolvency office-holder. Recoveries form part of the insolvent estate and are distributed according to the statutory order of priority. Ordinary unsecured creditors rank equally and cannot obtain a better recovery than other creditors.
3. The restoration language in section 339(2) does not authorise restoration which breaches the pari passu rule. It must be read consistently with the management and realisation of the insolvent estate.
4. The respondent was not a secured creditor when the vesting orders were made. Her charges had attached only to interests of the bankrupt, but he had no interest in the properties when the charges were granted. Under Stonham v Ramratten [2011] 1 WLR 1617, vesting under section 342 takes effect from the date of the order and is not retrospective.
5. An insolvent section 423 application made under section 424(1)(a) is treated as made on behalf of every victim. Section 425(1)(a) correspondingly focuses on vesting property for the benefit of all persons on whose behalf the application is made. The court could not grant one victim relief which would breach pari passu distribution.
6. Kubiangha v Ekpenyong [2002] EWHC 1567 (Ch) did not assist the respondent. It concerned a solvent section 423 claim and a different charge affecting beneficial ownership; it was not authority for recognising an individual victim’s charging orders in an insolvent section 423 claim.
7. Section 375 confers a wide but judicially controlled discretion, generally requiring exceptional circumstances and a material difference from the circumstances before the original court. Since the relief sought was legally unavailable, it was unnecessary to decide whether those conditions were satisfied. The respondent’s section 423 claim also failed, and she had no defence to discharge of the charging orders.