Claiming
Cases
Stein v Blake
[1995] UKHL 111996] 1 AC 243
LORD KEITH OF KINKEL
My Lords,
For the reasons given in the speech to be delivered by my noble and learned friend Lord Hoffmann, which I have read in draft and with which I agree, I would dismiss this appeal.
LORD ACKNER
My Lords,
I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Hoffmann. For the reasons he gives I too would dismiss this appeal.
LORD LLOYD OF BERWICK
My Lords,
I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Hoffmann. For the reasons he gives I too would dismiss this appeal.
LORD NICHOLLS OF BIRKENHEAD
My Lords
I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Hoffmann. For the reasons he gives, with which I agree, I too would dismiss this appeal.
LORD HOFFMANN
My Lords,
The issues
If A and B have mutual claims against each other and A becomes bankrupt, does A’s claim against B continue to exist so that A’s trustee can assign it to a third party? Or is the effect of section 323 of the Insolvency Act 1986 to extinguish the claims of A and B and to substitute a claim for the net balance owing after setting off the one against the other? And if the latter is the case, can the trustee assign the net balance (if any) before it has been ascertained by the taking of an account between himself and B? If yes, is that what the trustee in this case has done? These are the issues in this appeal.
The facts
The plaintiff Mr. Stein was adjudicated bankrupt on 16 July 1990. He was at the time a legally aided plaintiff engaged in suing the defendant Blake. It is unnecessary to go into the details save to say that Mr. Stein was claiming damages for breach of contract and a declaration that he was entitled to be indemnified against certain tax liabilities. Mr. Blake was counterclaiming for damages for misrepresentation and had in addition an indisputable cross-claim under various orders for costs in any event. Mr. Blake perhaps hoped that Mr. Stein’s trustee, in whom the right of action (if any) had vested, would decide that it was not in the interests of creditors to spend money on pursuing the litigation. If so, he was right, but the trustee did not abandon the claim. Instead he executed a deed dated 4 April 1991 by which he assigned the benefit of the action back to Mr. Stein in return for 49% of the net proceeds. Mr. Stein again obtained legal aid. Mr. Blake applied to have the proceedings dismissed on the ground that a claim subject to a set-off under 323 of the Insolvency Act 1986 could not validly be assigned. The application succeeded before the judge but his decision was reversed by the Court of Appeal. Mr. Blake now appeals.
Bankruptcy set-off
Section 323 reads, so far as relevant, as follows:
“(1) This section applies where before the commencement of the bankruptcy there have been mutual credits, mutual debts or other mutual dealings between the bankrupt and any creditor of the bankrupt proving or claiming to prove for a bankruptcy debt. (2) An account shall be taken of what is due from each party to the other in respect of the mutual dealings and the sums due from one party shall be set off against the sums due from the other. (3) . . . (4) Only the balance (if any) of the account taken under subsection (2) is provable as a bankruptcy debt, or, as the case may be, to be paid to the trustee as part of the bankrupt’s estate.”
Bankruptcy set-off compared with statutory legal set-off.
Section 323 is the latest in a line of bankruptcy set-off provisions which go back to the time of Queen Anne. As it happens, legal set-off between solvent parties is also based upon statutes of Queen Anne. But the two forms of set-off are very different in their purpose and effect. Legal setoff does not affect the substantive rights of the parties against each other, at any rate until both causes of action have been merged in a judgment of the court. It addresses questions of procedure and cash-flow. As a matter of procedure, it enables a defendant to require his cross-claim (even if based upon a wholly different subject-matter) be tried together with the plaintiff’s claim instead of having to be the subject of a separate action. In this way it ensures that judgment will be given simultaneously on claim and cross-claim and thereby relieves the defendant from having to find the cash to satisfy a judgment in favour of the plaintiff (or, in the 18th century, go to a debtor’s prison) before his cross-claim has been determined.
Bankruptcy set-off, on the other hand, affects the substantive rights of the parties by enabling the bankrupt’s creditor to use his indebtedness to the bankrupt as a form of security. Instead of having to prove with other creditors for the whole of his debt in the bankruptcy, he can set off pound for pound what he owes the bankrupt and prove for or pay only the balance. So in Forster v. Wilson (1843) 12 M. & W. 191, 204, Parke B. said that the purpose of insolvency set-off was “. . . to do substantial justice between the parties. …” Although it is often said that the justice of the rule is obvious, it is worth noticing that it is by no means universal. (Wood, on English and International Set-Off (1989), paras. 24-49 to 24-56. It has however been part of the English law of bankruptcy since at least the time of the first Queen Elizabeth, (op. cit.. para. 7-26.)
Legal set-off is confined to debts which at the time when the defence of set-off is filed were due and payable and either liquidated or in sums capable of ascertainment without valuationor estimation. Bankruptcy set-off has a much wider scope. It applies to any claim arising out of mutual credits or other mutual dealings before the bankruptcy for which a creditor would be entitled to prove as a “bankruptcy debt.” This is defined by section 382 of the Insolvency Act 1986 to mean:
“(1) . . . any of the following (a) any debt or liability to which he is subject at the commencement of the bankruptcy (b) any debt or liability to which he may become subject after the commencement of the bankruptcy (including after his discharge from bankruptcy) by reason of any obligation incurred before the commencement of the bankruptcy. . . (3) For the purposes of references in this Group of Parts to a debt or liability, it is immaterial whether the debt or liability is present or future, whether it is certain or contingent or whether its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion: and references in this Group of Parts to owing a debt are to be read accordingly.”
Taking the account under section 323
Bankruptcy set-off therefore requires an account to be taken of liabilities which, at the time of bankruptcy, may be due but not yet payable or may be unascertained in amount or subject to contingency. Nevertheless, the law says that the account shall be deemed to have been taken and the sums due from one party set off against the other as at the date of the bankruptcy. This is in accordance with the general principle of bankruptcy law, which governs payment of interest, conversion of foreign currencies etc., that the debts of the bankrupt are treated as having been ascertained and his assets simultaneously distributed among his creditors on the bankruptcy date: see In re Dynamics Corporation of America [1976] 1 W.L.R. 757, 762. It is clear, therefore, that when section 323(2) speaks of taking an account of what is “due” from each party, it does not mean that the sums in question must have been due and payable, whether at the bankruptcy date or even the date when the calculation falls to be made. The claims may have been contingent at the bankruptcy date and the creditor’s claim against the bankrupt may remain contingent at the time of the calculation, but they are nevertheless included in the account. I consider next how this is done.
Quantifying the cross-claims
How does the law deal with the conundrum of having to set off, as of the bankruptcy date, “sums due” which may not yet be due or which may become owing upon contingencies which have not yet occurred? It employs two techniques. The first is to take into account everything which has actually happened between the bankruptcy date and the moment when it becomes necessary to ascertain what, on that date, was the state of account between the creditor and the bankrupt. If by that time the contingency has occurred and the claim has been quantified, then that is the amount which is treated as having been due at the bankruptcy date. An example is Sovereign Life Assurance Co. v. Dodd [1892] 2 Q.B. 573, in which the insurance company had lent Mr. Dodd £1,170 on the security of his policies. The company was wound up before the policies had matured but Mr. Dodd went on paying the premiums until they became payable. The Court of Appeal held that the account required by bankruptcy set-off should set off the full matured value of the policies against the loan.
But the winding up of the estate of a bankrupt or an insolvent company cannot always wait until all possible contingencies have happened and all the actual or potential liabilities which existed at the bankruptcy date have been quantified. Therefore the law adopts a second technique, which is to make an estimation of the value of the claim. Section 322(3) says:
“The trustee shall estimate the value of any bankruptcy debt which, by reason of its being subject to any contingency or contingencies or for any other reason, does not bear a certain value.”
This enables the trustee to quantify a creditor’s contingent or unascertained claim, for the purposes of set-off or proof, in a way which will enable the trustee safely to distribute the estate, even if subsequent events show that the claim was worth more. There is no similar machinery for quantifying contingent or unascertained claims against the creditor, because it would be unfair upon him to have his liability to pay advanced merely because the trustee wants to wind up the bankrupt’s estate.
The occasion for taking the account
In what circumstances must the account be taken? The language of section 323(2) suggests an image of the trustee and creditor sitting down together, perhaps before a judge, and debating how the balance between them should be calculated. But the taking of the account really means no more than the calculation of the balance due in accordance with the principles of insolvency law. An obvious occasion for making this calculation will be the lodging of a proof by a creditor against whom the bankrupt had a cross-claim. Indeed, it might have been thought from the words “any creditor of the bankrupt proving or claiming to prove from a bankruptcy debt” in section 323(1) that the operation of the section actually depended upon the lodging of a proof. But it has long been held that this is unnecessary and that the words should be construed to mean “any creditor of the bankrupt who (apart from section 323) would have been entitled to prove for a bankruptcy debt”. Thus the account to which section 323(2) refers may also be taken in an action by the trustee against a creditor who, because his cross-claim does not exceed that of the trustee, has not lodged a proof: see Mersey Steel and Iron Co. v. Naylor Benzon & Co. (1882) 9 Q.B.D. 648 and In re Daintrey [1900] 1 Q.B. 546, 568.
Once one has eliminated any need for a proof in order to activate the operation of the section, it ceases to be linked to any step in the procedure of bankruptcy or litigation. This is a sharp contrast with legal set-off, which can be invoked only by the filing of a defence in an action. Section 323, on the other hand, operates at the time of bankruptcy without any step having to be taken by either of the parties. The “account” in accordance with section 323(2) must be taken whenever it is necessary for any purpose to ascertain the effect which the section had. This is shown most clearly by the Australian case of Gye v. Mclntyre (1991) 171 C.L.R. 609. In 1980 Gye, Perkes and three others bought a hotel in New South Wales from a company for $ 1.25m. For this purpose they borrowed $200,000 from Mrs Mclntyre, who was the company’s tenant. The business was a failure and in June 1982 Mrs Mclntyre obtained judgment by default for $224,000 in respect of her loan, interest and costs. Execution was stayed while Gye and Perkes pursued an action for damages against Mrs Mclntyre for having fraudulently induced them to buy the hotel from the company by overstating its profits. In 1985 both Gye and Perks entered into binding compositions with their creditors under which they assigned certain assets and promised certain payments to a trustee for the benefit of their creditors. The assigned assets did not include the benefit of the action against Mrs Mclntyre and she did not prove as a creditor in either composition. In 1988 the action against Mrs Mclntyre was successful and Gye and Perks obtained judgment in the sum of $214,600. They claimed a declaration that she was not entitled to set off the 1982 judgment, for which she could have proved in the compositions. The Australian Bankruptcy Act 1966 provides, if I may paraphrase in English terminology, that bankruptcy set-off shall apply in a composition as if a bankruptcy order had been made on the day on which the resolution accepting the composition was passed and the trustee of the composition was the trustee in bankruptcy.
It will be observed that in this case the creditor was neither seeking to prove nor being sued by the trustee in bankruptcy. The issue was the effect which the deemed bankruptcy had had upon a claim which had never passed to the deemed trustee and which was later litigated between the bankrupt and the creditor. The High Court of Australia held that bankruptcy set-off applied. The judgment of the court said, at p. 622:
“Section [323] is a statutory directive (‘shall be set off) which operates as at the time the bankruptcy takes effect. It produces a balance upon the basis of which the bankruptcy administration can proceed. Only that balance can be claimed in the bankruptcy or recovered by the trustee. It its operation is to produce a nil balance, its effect will be that there is nothing at all which can be claimed in the bankruptcy or recoverec :n proceedings by the trustee. The section is self-executing in the sense that its operation is automatic and not dependent upon ‘the option of either party’: see, per Lord Selborne L.C. in In re Deveze; Ex parte Barnett (1874) 9 Ch. App. 293, 295.”
The court noted the majority decision of this House in National Westminster Bank Ltd v. Halesowen Presswork & Assemblies Ltd [1972] A.C. 785 that the application of section 323 is mandatory in the sense that it cannot be excluded by prior agreement of the parties. But it said that whether or not it could be excluded by agreement, its operation did not depend upon any procedural step. If, for example, the cross-claims produced a nil balance, one would hardly expect either the creditor to prove or the trustee to sue. But there could be no doubt that if the question subsequently needed to be decided, the two claims would be treated as having extinguished each other. The court said:
“Even if one were to accept the dissenting view of Lord Cross of Chelsea in the National Westminster Case [1972] A.C. 785, 813-818 to the effect that the otherwise automatic operation of a provision such as [section 323] may be excluded by an antecedent agreement, it would be wrong to attribute to the legislature the illogical intent that a directive which was intended to be otherwise automatic in its operation and to apply in circumstances where set-off produced a nil balance should not operate at all unless and until either the bankrupt’s creditor saw fit to exercise the option of lodging a formal proof of debt or the trustee in bankruptcy instituted proceedings for recovery of a debt due to the bankrupt.”
Do the causes of action survive?
The principles so far discussed should provide an answer to the first of the issues in this appeal, namely, whether if A, against whom B has a cross-claim, becomes bankrupt, A’s claim against B continues to exist as a chose in action so that A’s trustee can assign it to a third party. In my judgment the conclusion must be that the original chose in action ceases to exist and is replaced by a claim to a net balance. If the set-off is mandatory and self-executing and results, as of the bankruptcy date, in only a net balance being owing, I find it impossible to understand how the cross-claims can, as chooses in action, each continue to exist.
This was the conclusion of Neill J. in Farley v. Housing & Commercial Developments Ltd [1984] B.C.L.C. 442. Mr. Farley was the principal shareholder in W. Farley & Co. (Builders) Ltd, which in 1972 had entered into two agreements with the defendant company to build blocks of flats. Both led to disputes, with claims by the building company for money due under the contracts and cross-claims by the defendant for damages. In 1975 the building company went into insolvent liquidation. In 1979 the liquidator purported to assign to Mr. Farley the benefit of the agreements and all moneys payable thereunder. Mr. Farley then commenced arbitration proceedings under the agreements. The arbitrator stated a special consultative case (p. 447) asking:
“(1) Whether by reason of the provisions of [the then equivalent of section 323 as applied to companies] upon the contractor becoming insolvent and being wound up . . . the debts due under the [two agreements] ceased to have a separate existence as chooses in action (and thus thereafter could not be assigned) being replaced by a balance of account under [section 323].”
Neill J. answered in the affirmative. I think that he was right. The cross-claims must obviously be considered separately for the purpose of ascertaining the balance. For that purpose they are treated as if they continued to exist. So, for example, the liquidator or trustee will commence an action in which he pleads a claim for money due under a contract and the defendant will counterclaim for damages under the same or a different contract. This may suggest that the respective claims actually do continue to exist until the court has decided the amounts to which each party is entitled and ascertained the balance due one way or the other in accordance with section 323. But the litigation is merely part of the process of retrospective calculation, from which it will appear that from the date of bankruptcy, the only chose in action which continued to exist as an assignable item of property was the claim to a net balance.
The reasoning of the Court of Appeal.
The Court of Appeal took the view that Farley was wrong and that the separate causes of action survived the bankruptcy and could be assigned, subject to the “equity” of the bankruptcy set-off. My Lords, the notion of an assignment subject to equities looks plausible when one is dealing with an assignment of the only claim which the bankrupt has against a creditor. In such a case it produces the same result as an assignment of the net balance. But the fallacy is exposed if the bankrupt has more than one claim. Take, for example, the two contracts in Farley’s case and assume that the liquidator at first assigns only one to Mr. Farley. If each contract continues to exist as a chose in action, each can be the subject of a legal assignment. Mr. Farley sues on his contract and by way of defence the defendants plead counterclaims for damages under both contracts. The court decides that the damages exceed the sums due under the contract and dismisses the action. The liquidator then assigns the other contract to Mrs Farley. She is not bound by the decision in her husband’s case and the defendant would have to plead and prove its counterclaims all over again. The account envisaged by section 323 would have to be taken twice (with possibly differing results) when the section plainly contemplates a single calculation.
The argument for the plaintiff, which was recorded and accepted by Balcombe L.J. in the Court of Appeal [1994] Ch. 16, 22, began with the proposition that “Nothing in the wording of section 323 changes the nature of set-off as it operates between solvent parties; it merely widens the categories of claim capable of being, and which must be, set off.” I hope I have demonstrated that this submission is fundamentally wrong. It is true that bankruptcy set-off does cover a much wider range of claims than legal set-off. But for present purposes the important difference is that the latter must be pleaded and is given effect only in the judgment of the court, whereas the latter is self-executing and takes effect on the bankruptcy date.
Secondly it was submitted for the plaintiff (pp. 22-23) that “the language of the section draws a distinction between what is due – which is the word used in subsections (2) and (3) – and what is payable or recoverable – as under subsection (4). The separate causes of action (claim and cross-claim) remain due, and do not cease to exist, until the set-off has been completed by payment one way or the other.” This argument is derived, via Derham on Set-Off (1987), p. 74, from a dictum of Mason J. in Day & Dent Constructions (Pty) Ltd v. North Australian Properties (Pty) Ltd (1982) 150 C.L.R. 85. The learned judge said that “due” in the Australian equivalent of section 323(2) meant due at the date when the account had to be taken and he relied upon this construction to explain why a creditor should be entitled to set off a debt which was contingent at the bankruptcy date. I would respectfully disagree because I think that “due” merely means treated as having been owing at the bankruptcy date with the benefit of the hindsight and, if necessary, estimation prescribed by the bankruptcy law. The valuationprovision in section 322(3) shows that the contingency need not have occurred even at the time when the account has to be taken. But the point was not necessary for the decision and was in any case addressing the question of what obligations should be taken into account in arriving at the net balance rather than whether those obligations survived as chooses in action.
Thirdly, Balcombe L.J. placed much weight upon a dictum of Brett J. in New Quebrada Co. Ltd v. Can (1869) L.R. 4 C.P. 651, 653-654. This was an action by a company in liquidation for calls against three partners, joint owners of shares in a company. The plea was a set-off of a debt alleged to be owing by the company to the shareholders. It is important to bear in mind that this was pleaded as a legal set-off under the Statutes of Set-off, not a bankruptcy set-off arising on the liquidation of the company. Bankruptcy set-off did not apply to company liquidations until the Judicature Act 1875. It was therefore essential that the debt relied upon as set-off should have been legally actionable by the defendants. The replication was that after the action had been brought and before the plea, one of the partners had become bankrupt and his interest in the company’s alleged debt had vested in his assignee. It had therefore ceased to be actionable by him. There was a demurrer to this replication. In support of the demurrer it was argued that the bankrupt’s share in the debt had not vested in his trustee because under section 171 of the Bankruptcy Act 1849 (the then equivalent of section 323 of the Insolvency Act 1986) it was on his bankruptcy automatically set off against the calls due to the company. Bovill C.J., applying an earlier decision, disposed of the case on the ground that section 171 applied only to a sole trader and not to one partner in a firm. Byles J. and Montague Smith J. agreed. Brett J. also agreed, but went on to consider obiter what the effect of section 171 would have been if the bankrupt had been a sole trader. In his view, the debt owing to the bankrupt would have vested in his trustee and therefore ceased to be actionable by the bankrupt. Having so vested, it would then have been liable to be set off in the bankruptcy against the company’s claim to prove for calls. He added:
“[Section 171] does not, I think, extinguish the mutual debts, but if it did, I should have thought it would have answered the plea of set-off. In either view I think it does not leave a right of action in the bankrupt against the plaintiffs, and that he cannot, therefore, avail himself of his claim against the plaintiffs under an ordinary plea of set-off, and that, on the present pleadings and argument, it seems to me, is all we have to decide.”
It should be noticed that section 171 of the Bankruptcy Law Consolidation Act 1849 (12 & 13 Vict. c. 106) said that “one debt or dema d may be set against another”, as opposed to the words “the sum due from tne one party shall be set off against any sum due from the other party” which were used in the equivalent section [section 39] of the Bankruptcy Act 1869 (32 & 33 Vict. c. 71) and all its successors. It is therefore perhaps not surprising that the mandatory and self-executing nature of the set-off was not as fully apparent under the Act of 1849 as it is today. At any rate, I do not think that despite the eminence of its author, this somewhat throw-away dictum on the Bankruptcy Act 1849 can be regarded as authoritative on the construction of section 323 of the Insolvency Act 1986.
Can the net balance be assigned?
The next question is whether the trustee can assign the net balance. (I should mention that the question was not put to Neill J. in Farley v. Housing & Commercial Developments Ltd. [1987] B.C.L.C. 442.) The duty of the trustee under section 305(2) is to realise the bankrupt’s estate and the right to the net balance is part of the property of the bankrupt vested in the trustee. One method of realisation is to transfer or assign the individual assets for value. In Ramsey v. Hartley [1977] 1 W.L.R. 686 the Court of Appeal, following authority which went back more than a century, held that even a bare right of action was property which the trustee was entitled to assign. His statutory duty to realise the estate excluded the doctrines of maintenance and champerty which would otherwise have struck down such an assignment. Likewise, there is no rule to prevent him from assigning such a right of action to the bankrupt himself. So why should a trustee not assign the right to the net balance?
Mr. Mark, for the appellant, says that the right cannot be assigned until the balance has been quantified by the account taken under section 323. The reason, he says, is that the trustee must be party to the taking of that account. Bankruptcy set-off is, as Lord Simon of Glaisdale said in National Westminster Bank Ltd v. Halesowen Presswork & Assemblies Ltd [1972] A.C. 785, 809, part of a “code of procedure whereby bankrupts’ estates … are to be administered in a proper and orderly way.” So, for example, section 322(3) (which I have already quoted) requires that the value of a contingent or otherwise unascertained debt to be estimated by the trustee.
I think that this submission of Mr. Mark is wrong for the same reasons that persuaded me that his submission on the first issue was right. If bankruptcy set-off is self-executing, it does not require the trustee or anyone else to execute it. The argument gives too literal a meaning to the notion of taking an account. The case of Gye v. Mclntyre (1991) 171 C.L.R. 609 shows the account being taken in proceedings to which the trustee was not a party. It is true that the situation arose because in a composition, the parties are able to decide which property should vest in the trustee and could exclude the claim against Mrs Mclntyre. In the case of a bankruptcy, vesting is determined by the law. But for present purposes I can see no logical distinction between a case in which the trustee assigns the right to the net balance and one in which the bankrupt’s claim, though subject to bankruptcy set-off, did not vest in him in the first place.
It is true that the trustee will ordinarily not be party to the action between assignee and creditor. So if the creditor is asserting that there is actually a net balance in his favour for which he is entitled to prove, a successful outcome of the action will not, as a matter of res judicata, oblige the trustee to allow his proof. But there is no reason why a defendant should not, with leave, join the trustee as a defendant to his counterclaim. Even if the action had been brought by the trustee, the creditor would have needed the leave of the court to make a counterclaim. In these circumstances, there seems to me little additional inconvenience in having to add the trustee as a party. I would therefore hold that a trustee may assign the right to the net balance like any other chose in action.
Questions of construction.
Did the actual deed executed by the trustee have the effect of carrying the net balance? That is a question of construction. If a trustee purports to assign the bankrupt’s rights in a cheque for £10,000, it would be absurd to hold that the deed has no effect because it turns out that the drawer of the cheque has some small counterclaim against the bankrupt. The intention of the parties is clear enough. If the assignment would have carried the original cause of action, it will also, as a matter of conveyance, carry the right to the balance after deduction of the cross-claim. Whether the assignee would have any claim against the trustee for having purported to assign a greater interest than he actually had need not here be considered.
There is greater difficulty if the trustee has assigned less than the net balance, i.e. to have kept back some credit item in the calculation. This would be an assignment of a part of a debt. On ordinarily principles it would not be enforceable in proceedings to which the trustee was not a party. Only if the trustee joined as a plaintiff could the single account envisaged by section 323 be taken.
In this case the deed of assignment of 4 April 1991 recited that the trustee had agreed with the bankrupt for the assignment to him of:
“such claims and legal rights of action as are hereinafter mentioned which the trustee as trustee in bankruptcy of the assignee may have against [the defendant]”
The operative part said in clause 1 that the trustee assigned to the bankrupt:
“such claim or claims against Mr. Blake as the Trustee may have as trustee in the bankruptcy of the assignee as presently formulated, or as amended by counsel with the Trustee’s approval, based only on the facts pleaded in consolidated action number Ch. 1989 S-8148 and 1988 S-4555 (“the Claim”) to the intent that the assignee shall be entitled (subject as hereinafter mentioned) to such monies as Mr. Blake may be to the Assignee in settlement of the Claim.”
By clause 6 (ii) the parties agreed, for the avoidance of doubt, that:
“nothing in this agreement shall affect the Trustee’s right to take action against Mr. Blake if so advised in relation to matters not arising out of the facts other than those pleaded in the aforesaid consolidated action.”
My Lords, the fact that the assignment makes no express reference to the defendant’s cross-claim is, for the reasons I have given, no obstacle to holding the assignment effective to carry whatever balance is due after its deduction. But if the effect of this last clause was that the trustee retained a part of his claim to the net balance against Mr. Blake, then in my judgment the action would not have been properly constituted until the trustee had been added as a party. Mr. Blake could not be put in a position in which he had to raise the same cross-claim in two sets of proceedings. His remedy would have been to apply to have the action stayed until the trustee had been added. Before your Lordships’ House, however, Mr. Bannister Q.C. for the plaintiff said that the trustee asserted no other causes of action against Mr. Blake. He is willing to make it clear that he is assigning the whole of the net balance due to the bankrupt’s estate. In these circumstances it is unnecessary to discuss further the question of what might have happened if there had been an application for a stay on the grounds that the proceedings were not properly constituted. The application to which the judge actually acceded was to dismiss the action on the ground that Mr. Stein had no title to sue. For the reasons which I have given, which I think were the alternative reasons of Staughton L. J., the Court of Appeal was in my judgment right to hold that the judge’s order could not be supported. I would therefore dismiss this appeal.
The wider issues.
I should add in conclusion that although the appeal may have turned on a somewhat technical question, it is a symptom of a wider problem. Although Mr. Mark argued that it was inconvenient and unjust for the account under section 323 should be taken between him and Mr. Stein, rather than between him and the trustee, he frankly admitted that his main grievance was that despite the bankruptcy, he was still being pursued by Mr. Stein with the benefit of legal aid. But he acknowledged that this complaint would have been the same if there had been no counterclaim and the case had not fallen within section 323 at all.
It is a matter of common occurrence for an individual to become insolvent while attempting to pursue a claim against someone else. In some cases, the bankruptcy will itself have been caused by the failure of the other party to meet his obligations. In many more cases, this will be the view of the bankrupt. It is not unusual in such circumstances for there to be a difference of opinion between the trustee and the bankrupt over whether a claim should be pursued. The trustee may have nothing in his hands with which to fund litigation. Even if he has, he must act in the interests of creditors generally and the creditors will often prefer to receive an immediate distribution rather than see the bankrupt’s assets ventured on the costs of litigation which may or may not yield a larger distribution at some future date. The bankrupt, with nothing more to lose, tends to take a more sanguine view of the prospects of success. In such a case the trustee may decide, as in this case, that the practical course in the interests of all concerned (apart from the defendant) is to assign the claim to the bankrupt and let him pursue it for himself, on terms that he accounts to the trustee for some proportion of the proceeds.
It is understandable that a defendant who does not share the bankrupt’s view of the merits of the claim may be disappointed to find that notwithstanding the bankruptcy, which he thought would result in a practical commercial decision by an independent trustee to discontinue the proceedings, the action is still being pursued by the bankrupt. His disappointment is increased if he finds that the bankrupt as plaintiff in his own name has the benefit of legal aid which would not have been available to the trustee. Similar considerations apply to an assignment of a right of action by the liquidator of an insolvent company to a shareholder or former director. In such a case there is the further point that the company as plaintiff can be required to give security for costs. The shareholder assignee as an individual cannot be required to give security even if (either because he does not qualify or the Legal Aid Board considers that the claim has no merits) he is not in receipt of legal aid.
I mention these questions because they were alluded to by Mr. Mark as a policy reason for why the courts should be restrictive of the right of bankruptcy trustees or liquidators to assign claims. But the problems can be said to arise not so much from the law of insolvency as from the insoluble difficulties of operating a system of legal aid and costs which is fair to both plaintiffs and defendants. Mr. Blake is in no worse position now that he was before the bankruptcy when Mr. Stein was suing him with legal aid (although this would not have been the case if the plaintiff had been a company.) Mr. Blake’s complaint is that the bankruptcy has brought him no relief. But whether it should seems to me a matter for Parliament to decide.
Stein (A.P.) (Respondent) v. Blake (Appellant)
JUDGMENT
Die Jovis 18° Maii 1995
Upon Report from the Appellate Committee to whom was referred the Cause Stein against Blake, That the Committee had heard Counsel as well on Monday the 3rd as on Tuesday the 4th days of April last upon the Petition and Appeal of David Blake of 2 Ordnance Hill, St. John’s Wood, London NW8, praying that the matter of the Order set forth in the Schedule thereto, namely an Order of Her Majesty’s Court of Appeal of the 5th day of May 199 3, might be reviewed before Her Majesty the Queen in Her Court of Parliament and that the said Order might be reversed, varied or altered or that the Petitioner might have such other relief in the premises as to Her Majesty the Queen in Her Court of Parliament might seem meet; as upon the case of Allan Stein lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:
It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled, That the said Order of Her Majesty’s Court of Appeal of the 5th day of May 1993 complained of in the said Appeal be, and the same is hereby, Affirmed and that the said Petition and Appeal be, and the same is hereby, dismissed this House: And it is further Ordered, That the Appellant do pay or cause to be paid to the said Respondent the Costs incurred by him in respect of the said Appeal to this House, the amount thereof to be certified by the Clerk of the Parliaments if not agreed between the parties: And it is also further Ordered. That the costs of the Respondent be taxed in accordance with the Legal Aid Act 1988.
Cler: Parliamentor:
Murphy v. Revenue Commissioners
[1976] IR 15
Kenny J.
Harrex Ltd. was incorporated in the Republic of Ireland on the 15th September, 1954, and carried on business as manufacturers of handbags. On the 13th March, 1959, the company executed a mortgage debenture in favour of the National Bank Ltd. by which the company demised to the bank the lands described in the schedule to the deed for the residue of the term of years for which the lands were held; the company also assigned to the bank the fixed plant, machinery and fixtures and charged “by way of floating security in favour of the bank all their undertaking and assets whatsoever, both present and future” with the payment of sums thereby secured. The mortgage debenture also provided that the bank, at any time after it had demanded payment of the moneys due, might appoint in writing a receiver of the property and assets thereby charged; the debenture provided that the receiver should be the agent of the company, that he was to have power to take possession of and collect the property charged by the debenture, and that he was to carry on the business of the company. On the 2nd January, 1968, the applicant was appointed receiver of all the assets of the company, and on the 8th March, 1968, the company permanently discontinued its trade. At the time when the receiver was appointed the company owed the respondents the sum of £2,841 for corporation profits tax, turnover tax. wholesale tax and interest.
Section 311 of the Income Tax Act, 1967, provides that where a trade is permanently discontinued and any person carrying it on has sustained in it a loss (called a terminal loss in the section), he may claim that the amount of that loss is to be set off or deducted from the profits on which he has been charged to income tax under Schedule D in respect of the trade for the three years of assessment preceding that in which the discontinuance occurred. The company’s terminal loss was agreed at £7,781 but the respondents claim to be entitled to set off the £2,841 against it. The applicant disputes their right to do so and he has now brought these proceedings in which he asks the Court to decide whether the respondents are entitled to the set-off which they have claimed.
The terminal loss was a future asset of the company and so was charged with the sum due to the bank; and so when the loss arose on the 8th March, 1968, there was an immediate equitable assignment of it to the bank. The effect of the appointment of a receiver is that property comprised in the floating charge is thereby assigned in equity to the debenture holder. Set-off is now governed by s. 27, sub-s. 3, of the Supreme Court of Judicature Act (Ir.), 1877, which provides in effect that where there are mutual debts between the plaintiff and the defendant one debt may be set off against the other. The applicant’s argument is that these were not mutual debts because the moneys claimed by the respondents were due when the receiver was appointed in January, 1968, while the claim for payment arising out of the terminal loss did not arise until March. 1968. I think that the assignment of the future assets of the company in January, 1968, was subject to the right of any creditor to whom a debt was then due to set it off against the sum which that future asset might realise and that the contention of the respondents is correct. I think this is the correct view on principle and that it is supported by the reported cases.
In Biggerstaff v. Rowatt’s Wharf Ltd. 4 the defendant company had issued a series of debentures charging their assets with payment of the amount secured. On the 1st November, 1893, a firm called Harvey, Brand & Co. had bought from the defendants 7,000 barrels at 3/6d. each and paid for them. On the 30th October, 1894, a receiver was appointed over the assets of the defendant company by the court; at that date 2,784 barrels only had been delivered. Harvey, Brand & Co. owed rent to the defendant company and they claimed that they were entitled to set off the amount due for barrels undelivered against the rent. The Court of Appeal in England decided that the amount due for the barrels not delivered was an ascertained sum. that there had been a total failure of consideration which entitled Harvey. Brand & Co. to get the price back and that a right of set-off existed. In the course of his judgment, Kay L.J. said at p. 105 of the report:”It is true that as against an assignee there can be no set-off of a debt accrued after the person claiming set-off has notice of the assignment . . . I think that if at the time of the assignment there was an inchoate right to set-off it can be asserted after the assignment, for the assignment is subject to the rights then in existence. The question is whether the assignment took place at the issue of the debentures or at the appointment of a receiver. The debentures contain provisions the effect of which is that the company is at liberty to go on with its business as if the debentures did not exist. until possession is taken under them. From that time the company cannot deal with its assets as against the title of the debenture-holders; up to that time it can deal with them in every legitimate way of business. Therefore the date to be regarded is the time of taking possession . . . There was an inchoate right of set-off at the time when the receiver was appointed; and that, and not the time of issuing the debentures, is the time to be looked to. The debentures must be regarded as incomplete assignments which do not become complete until the time when the receiver is appointed.”
In N. W. Robbie & Co. Ltd. v. Witney Warehouse Co. Ltd. 5 the plaintiff company, which was incorporated in the Republic of Ireland, issued a debenture to the Bank of Ireland securing all moneys due from time to time by a floating charge on their assets. Between the 24th May, 1961, and the 6th July, 1961, the plaintiff company sold goods on credit to the defendants at a price of £95. On the 6th July, 1961, the bank appointed a receiver of the property included in the debenture. After the 6th July, 1961, the plaintiff company, with the approval of the receiver, sold goods, which had been part of their stock on that date, to the defendants for £1,251. As these goods formed part of the assets of the plaintiff company at the date when the receiver was appointed, the floating charge had attached to them. Between November, 1960, and the end of January, 1961, the plaintiff company had bought goods on credit from a third company, a subsidiary of the same parent company as the defendants, and £852 was due for these. On the 6th October, 1961, the benefit of this debt of £852 was assigned to the defendants and notice of the assignment was given to the plaintiffs. When the plaintiffs sued the defendants for the £95 and £1,251, the defendants sought to set off the debt of £852. This claim failed because the debts of £95 and of £1,251 became assigned in equity to the debenture-holder before the debt of £852 had been assigned to the defendants and there was, therefore, no mutuality of debts.
In the course of his judgment, Russell L.J. said at p. 1338 of the report:”Thus far, in my judgment, by force of the debenture charge an equitable charge attached in favour of the debenture-holders not only on the £95 debt existing at the date of the appointment of the receiver and manager, but also upon the other debts constituting the total of £1,346 as they came into existence on delivery of goods to the defendants after such appointment. These choses in action belonging to the company became thus assigned in equity to the debenture-holders, at times when the defendants had no cross-claim of any kind against the company and consequently no right of set-off. Before the defendants acquired by assignment this cross-claim the defendants must be fixed with knowledge of this equitable assignment to the debenture-holders (by way of charge) of the debt owed by the defendants to the company. A debtor cannot set off his claim against X against a claim by X against him which the debtor knows has been assigned by X to Y before the debtor’s claim arose. Just as an assignee of a chose in action takes subject to an already existing right of set-off, so a debtor with no existing right of set-off cannot assert set-off of a cross-claim which he first acquires after he has notice of the assignment of the claim against him . . .” In the present case, at the date of the appointment of the receiver there was an existing right of set-off for the Revenue debts then due.
Rother Iron Works Ltd. v. Canterbury Precision Engineers Ltd. 6, which is a decision of the Court of Appeal in England. has a close resemblance in its facts to the present case. In August, 1971, the plaintiff company executed a mortgage debenture in favour of its bank: it contained a floating charge on all the assets, present and future, of the company and power to appoint a receiver. On the 4th October, 1971, the plaintiff company owed the defendants £124 for goods sold. Between the 4th and 18th October, 1971, the plaintiff company contracted to sell to the defendants goods at a price of £159. On the 21st October, before this contract had been carried out, the bank appointed a receiver. The goods ordered by the defendants were delivered to them on the 3rd November. The plaintiff company brought an action for £159 and claimed that the defendants were not entitled to set off the £124 because the debt of £159 had arisen when the goods were delivered and after the charge had crystallised and so, they said, the debts were not mutual. It was held that the appointment of the receiver operated as an equitable assignment of the plaintiff company’s rights under the contract for the purchase by the defendants of goods, but that these were always subject to the defendants’ right to assert a set-off of £124 and that the debenture-holder could not be in a different or better position than the plaintiff company.
In the present case the debt due to the respondents was in existence when the receiver was appointed, and so the equitable assignment of the future asset (the right to payment of a terminal loss) was always subject to the right of set-off. In my opinion, the respondents are entitled to set off
In the Matter of Siobhan Mullee Bankruptcy
[2012] IEHC 275
Mr. Justice Gilligan delivered the 3rd day of February, 2012
1. The same situation applies in respect of a petition for arrangement by Dominic Mullee, the petitioner’s husband, in proceedings bearing Record No. 2330 AD.
2. Three issues arise for determination before the court following upon the earlier judgment as delivered herein on the 14th December, 2011. The first issue relates to the amount of the debt due pursuant to the guarantees as referred to in the earlier judgment, and in particular the amount of interest which the bank is entitled to on the basis that the arranging debtor contends that no interest is due on the debt after the date of the order of protection, which in this instance is the 22nd March, 2010, as under the Bankruptcy Rules such is interest is only calculable up to the date of the granting of protection. The arranging debtor relies on a passage from Forde & Simms: “Bankruptcy Law” Round Hall 2009 at p. 137, paras. 8- 11 wherein in it is stated:-
“Interest cannot be recovered in respect of the period following adjudication which causes some injustice in periods of very high interest rates and where the administration of insolvent estate takes a long time. As Costello J. said in a company liquidation case:-
‘It has long been established that in the case of an insolvent company which is being wound up, creditors whose debts carry interest are entitled to dividends only upon what was due for principal and interest at the commencement of the winding up and interest ceases to run from that date.’
This is rule is confirmed by the 1988 Act and is extended to any other financial “consideration in lieu of interest”.”
3. Mr. Jennings on behalf of the arranging debtor relies on s. 75(2) of the Bankruptcy Act 1988, in support of this proposition. In particular, making reference to the fact that the issue has been clarified by s. 75(2) which has recently been substituted by a new s. 75(2) by s. 30(f) of the Civil Law (Miscellaneous Provisions) Act 2011 (No. 23 of 2011) with effect from the 2nd August, 2011, in providing:-
“(2) Where interest or any pecuniary consideration in lieu of interest is reserved or agreed for on a debt which is overdue at the date of adjudication or order for protection the creditor shall be entitled to prove or be admitted as a creditor for such interest or consideration up to the date of adjudication or order for protection.”
4. Mr. Jennings contends that the bank is claiming almost eight months of additional interest to which it is not entitled. While no exact figure is available the arranging debtor estimates that the overcharging of interest by the bank runs to a sum in the region of €130,000.00.
5. The second issue that arises is in respect of the fact that the bank has altered its position from the content of the grounding affidavit of debt of November, 2010 and that in effect the bank has subsequently obtained further valuation reports in April, June and September, 2011 and exhibited these in affidavits wherein it sought to amend its claim to reflect the falling value of its security and accordingly, amend its valuation and proof.
6. Mr. Jennings contends that the bankruptcy rules make specific provision for amending valuations and proofs and the bank has failed to follow this procedure. Section 24(5) of the first schedule of the Bankruptcy Act 1988, sets out the circumstances in which a creditor may amend its valuation and proof in stating as follows:-
“Where a creditor has valued his security he may at any time amend the valuation and proof on showing to the satisfaction of the official assignee, or the court, that the valuation and proof were made bona fide on a mistaken estimate, but every such amendment shall be made at the cost of the creditor and upon such terms as the court shall order, unless the official assignee allows the amendment without application to the court.”
7. In essence Mr. Jennings contends that amended valuations were put in moving down the line which reflected the falling values of the company’s profit assets and no order of the court was sought or granted to reflect the fluctuations of the property market generally.
8. Reliance is placed on the decision of Budd J. in In Re Michael Clenaghan a Bankrupt [1961], 95 ILTR at p. 89. Mr Jennings contends that the valuations of November, 2010 are the correct valuations to be used for the purpose of assessing the amount due and owing to the bank, and that the bank simply cannot moving down the line keep putting in further valuations reflecting a fall in property prices.
9. The third issue that arises is in respect of the estimated legal costs involved in litigation as taken by the bank as against the solicitors who acted on behalf of the company Mullee Properties Limited in respect of various property transactions. Mr. Jennings quite candidly does not dispute the amount of the estimated legal costs, but takes the view that they may be “a bit on the high side” and relies on the discretion of the court to reduce these somewhat.
10. Ms. Kelly Smith on behalf of the bank contends that s. 75(1) of the Bankruptcy Act 1988, makes clear that the nature and extent of the debts capable of being proved is extremely wide so as to encompass contractual interest. In this case she contends that the right to contractual interest has accrued and that s. 75(2) of the Bankruptcy Act 1988, is quite clear in providing for the banks entitlement to the appropriate interest as due on all outstanding sums and the section was only substituted by s. 30(f) of the Civil Law (Miscellaneous Provisions) Act 2011 (No. 23 of 2011) with effect from the 2nd August, 2011, and the reference therein contained to the order for protection is the only issue that arises and quite clearly in the particular circumstances that pertain the substitution is not retrospective and cannot apply. In the circumstances that pertain a letter of demand was served on the 15th September, 2009, a receiver was appointed to the company on the 17th September, 2009, and on the 26th October, 2010, demands were served on the guarantors. All events occurring prior to the 2nd August, 2011, so that, in effect, the right to contractual interest had accrued. Furthermore, it is contended that in the particular circumstances the bank was not put on notice of the events taking place and the bank was not initially listed as a creditor.
11. Reliance is placed on ss. 26 and 27 of the Interpretation Act 2005, in dealing with the position of the repeal and substitution of a legislative provision and, in particular, s. 26(1) which provides that:-
“Wherein enactment repeals another enactment and substitutes other provisions for the enactment so repealed the enactment so repealed continues in force until the substituted provisions come into operation. Following from s. 27(1)(e) the repeal does not affect any right, privilege, obligation or liability acquired, accrued or incurred under the enactment and does not prejudice or affect any legal proceedings civil or criminal pending at the time of the repeal in respect of any such right, privilege, obligation, liability, offence or contravention.”
12. Further reliance is placed on s. 27(2) which provides that where an enactment is repealed the proceedings in being may be carried out as if the enactment had not been repealed.
13. In the present case it is contended that s. 75(2) continues to apply as a result of s. 27 of the Interpretation Act 2005. It is clear that the substituted s. 75(2) cannot apply in the particular circumstances of this case, and that in particular not only were the arranging debtors petitions issued prior to the commencement of the 2011 Act, but the bank had also sought to prove its debt prior to the commencement of the 2011 Act. On this basis it is respectfully submitted that the bank’s right to prove for interest had accrued prior to the introduction of the substituted s. 75(2).
14. Reliance is also placed on the decision of Dunne J. in Start Mortgages Ltd v. Gunne [2011] 1 EHC at p. 275 wherein Dunne J. confirmed that proceedings in respect of a right acquired or accrued may be continued as if the enactment had not been repealed.
15. As regards the question of valuations as submitted by the bank originally, it is accepted on the bank’s behalf that the original valuations only referred to finished and unfinished houses and did not include a substantial number of fully serviced sites.
16. Ms. Smith refers to s. 24 of the Bankruptcy Act 1988, with reference to secured creditors and in particular s. 24(5)(6) and (7), and contends that effectively subs (5), (6) and (7) clarify the situation.
17. The relevant sections provide as follows:-
“(5) Where a creditor has valued his security he may at any time amend the valuation and proof on showing to the satisfaction of the Official Assignee, or the Court, that the valuation and proof were made bona fide on a mistaken estimate, but every such amendment shall be made at the cost of the creditor, and upon such terms as the Court shall order, unless the Official Assignee allows the amendment without the application to the Court.
(6) Where a valuation has been amended in accordance with subparagraph (5), the creditor shall forthwith repay any surplus dividend which he may have received in excess of that to which he would have been entitled on the amended valuation or, as the case may be, shall be entitled to be paid, out of any money for the time being available for dividend, any dividend or share of dividend which he has not received by reason of the inaccuracy of the original valuation before that money is made applicable to the payment of any future dividend but he shall not be entitled to disturb the distribution of any dividend declared before the date of the amendment.
(7) If a creditor having valued his security subsequently realises it, or if it is realised under the provisions of subparagraph (4), the net amount realised shall be substituted for the amount of any valuation previously made by the creditor, and shall be treated in all respects as an amended valuation made by the creditor.”
18. As regards the decision of Budd J. in Michael Clenaghan a Bankrupt, Ms. Kelly contends that this case was decided on old 1905 rules representing a very different situation to the provisions of the 1988 Bankruptcy Act and that, in essence, in the Clenaghan case no amendment was permitted, but that is not the situation that pertains in the Bankruptcy Act 1988.
19. Ms. Smith was not required by the court to comment on the aspect of the litigation costs.
20. Paragraphs 15 and 16 of the first schedule of the Bankruptcy Act 1988, set out as follows:-
“(15) In respect of debts due after the adjudication or order for protection the liability for which exists at the date of such adjudication or order for protection a creditor may prove her value of the debt at that date.
(16) Where a person who is liable to make any periodical payment (including rent) is adjudicated bankrupt or is granted an order for protection on a day other than the day on which such payment becomes due the person entitled to the payment may prove for a proportionate part of the payment for the period from the date when the last payment became due to the date of the adjudication or order for protection as if the payment accrued due from day to day.”
21. The reality of the situation is that pursuant to the Bankruptcy Rules interest is only calculable up to the date of the order granting protection. While some doubt may arise in respect of the appropriate interpretation of s. 52(2) of the Bankruptcy Act 1988, that situation has now been clarified by the substitution of a new s. 75(2) by s. 30(f) of the Civil Law (Miscellaneous Provisions) Act 2011 (No. 23 of 2011) with effect for the 2nd August, 2011. However, no authority in support of the Bank’s proposition to the effect that s. 75(2) of the Bankruptcy Act 1988, was considered and found to differ from the bankruptcy rules, has been submitted to the court and thus, no authority for the proposition that interest continues to run from the date of protection. By analogy the passage from Forde & Simms “Bankruptcy Law” Round Hall 2009 at para. 137, appears to follow the line of the bankruptcy rules in respect of the winding up of an insolvent company in that creditors whose debts carry interest are entitled to dividends only upon what was due for principal and interest at the commencement of the winding up and interest ceases to run from that date and, in my view, the date of the commencement of the winding up in respect of a company can be safely equated to the date of the protection order. Accordingly, in my view on this aspect I prefer the submissions as made out on behalf of the arranging debtor and interest accordingly ceases to run from the date of the protection order. As has been previously stated herein, the situation has been further clarified with effect from the 2nd August, 2011, by the substitution of s. 30(f) of the Civil Law (Miscellaneous Provisions) Act 2011.
22. The bank accordingly is not entitled to prove interest in the bankruptcy proceedings as and from the date of the protection order.
23. As regards the issue of valuations, the court is satisfied that pursuant to s. 24 of the Bankruptcy Act 1988, where a creditor has valued his security he may at any time amend the valuation but only on the basis that the valuation of proof was made bona fide on a mistaken estimate and then only upon such terms as the court shall order unless the official assignee allows the amendment without application to the court.
24. In the court’s views. 24(6) and (7) only clarify events that are to take place following an amendment of a valuation which has arisen bona fide on a mistaken estimate.
25. The court is satisfied that no case has been made out in general terms in respect of the 2010 valuation to the effect that the content thereof was bona fide set out on a mistaken estimate and thus, also bearing in mind that no application has been made to the court to allow an amended valuation, and it not being the case that the official assignee has allowed any amendment without application to the court, the Bank is obliged at this point in time to rely on the November, 2010 valuation insofar as it provided a value at that time in respect of the finished and unfinished houses.
26. However, the matter does not end there because it does appear that there was a bona fide mistake in that a significant number of serviced sites were not included in the November, 2010 valuation but were included in the September 2011 valuation, and in these circumstances on the basis that it does appear there was a bona fide mistake made the court is satisfied in the exercise of its discretion that it is appropriate accordingly that, in this one regard, the fully serviced sites are to be valued as per the appropriate November, 2010 valuation. The court is of the opinion that the view as expressed adequately deals with the situation that has arisen in the round.
27. As regards the costs of litigation the court does not propose to interfere in any way with the figure as claimed.
28. It is most unfortunate that this matter has taken up so much time and clearly it is now incumbent on the parties to reach agreement as per the court’s directions and findings so as to move this matter to a conclusion.
Macks Bakeries Ltd., Re.
[2003] 2 ILRM 75, [2003] IEHC 2, [2003] 2 IR 396
NOTE OF EX TEMPORE JUDGMENT delivered by Mr Justice Kelly on the 9th day of April, 2003.
On the 11th December, 2002 Mr Luby was appointed liquidator of Macks Bakeries Limited. That was done pursuant to a resolution of the members passed at an extraordinary general meeting of the company. That appointment was confirmed at a meeting of the creditors held later that day.
On the 13th December, 2002 the liquidator wrote to the respondent asking for details of all matters in respect of which the respondent had acted as solicitor for the company. He also
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requested details of title deeds, outstanding fees due to the respondent and “confirmation or any lien or other security which you claim”.
On the 20th December, 2002 the respondent provided the details requested. The fees payable by the company amounted to a total of € 32,307.70. On the 29th January, 2003 the respondents claimed fees in respect of work done in relation to the liquidation of the company amounting to a total of € 2,625.70.
The respondent asserted and continues to assert a solicitor’s common law retaining lien over folio MY20399 Co. Mayo and files and documents relating to the company in the respondent’s possession as security for those fees. I should note for the sake of completeness that the respondent also holds folios MY4433F and MY4434F Co. Mayo. These are held on accountable trust receipt and a lien is not asserted in relation to these documents.
The present application is made pursuant to section 244(A) of the Companies Act, 1963 as amended by the Companies Act, 1990 which insofar as it is relevant provides
“Where the court has appointed a provisional liquidator or a company has been wound up by the court or by means of a creditors’ voluntary winding up, no person shall be entitled as against the liquidator or provisional liquidator to withhold possession of any deed, instrument, or other document belonging to the company, or the books of account, receipts, bills, invoices or other papers of a like nature relating to the account or trade, dealings or business of the company, or to claim any lien thereon provided that –
(a) where a mortgage, charge or pledge has been created by the deposit of any such document or paper with a person, the production of the document or paper to the liquidator or provisional liquidator by the person shall be without
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prejudice to the person’s rights under the mortgage, charge or pledge (other than any right to possession of the document or paper) …”
The applicants contend that the wording of this section is crystal clear. They say that the effect of the section is to unambiguously disentitle the respondent to rely upon the lien so as to avoid handing over possession of the documents in suit to the applicant.
This statutory provision was introduced for the first time in the Companies Act, 1990. It was not part of Irish law prior to then.
Attention was drawn to the equivalent section in the United Kingdom which is s.246 of the Insolvency Act, 1986 but that differs significantly from the section in suit and is of little assistance.
The applicants contend that the court is obliged to give effect to the plain and unambiguous words of the section by making the order sought. They call my attention to the commentary on this section which is contained in Lynch Marshall and O’Farrell’s work on Corporate Insolvency Law at paragraph 7.24 where the authors comment as follows
“Finally, certain liens may not be enforceable against a liquidator in a compulsory or creditors voluntary liquidation under s.244(a) of the 1963 Act, an amendment inserted by the 1990 Act. Such liens are liens over documents belonging to the company or ‘other papers of a like nature relating to the account or trade, dealings or business of the company’. These liens are not enforceable against the liquidator, in that such documents cannot be withheld by any person. However, where a charge has been created, the production of documents ‘shall be without prejudice to the person’s rights under the mortgage charge or pledge…’ For example, where a bank has title documents in its possession by way of equitable deposit these documents
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must be surrendered but this will be without prejudice to the existence of the deposit itself. It is not possible for solicitors to retain title documents of a company in liquidation as security for payment of fees, nor is it possible to retain the books of account of a company to ensure payment”.
It is argued that that passage accurately describes the meaning and effect of the section.
For the respondents it is correctly pointed out that the solicitor’s lien at common law was expressly recognised by the Supreme Court in Re Galdan Properties Limited (In Liquidation) [1998] IR 213. There McCarthy J. said
“A solicitor holds a general or retaining lien; in that respect it differs from the ordinary lien derived from possession of the article to which value has been added and to which there attaches a lien for payment of the charges in respect of that added value. A solicitor’s lien attaches to all documents and other personal property in his possession as such solicitor and relates to all outstanding charges, as solicitor, not merely those in respect of the particular documents over which the lien is claimed. The lien entitles the solicitor to retain the documents, or the personal property, until payment of the full amount of the bill, subject to taxation if required and if the bill is still liable to taxation”.
This is the form of lien which is asserted here. There is no doubt but that the lien provides an enhanced status as against other creditors to the holder of it.
The respondent points out that pursuant to the provisions of s.284(1) of the Companies Act, 1963 the law of bankruptcy is to be applied in an insolvent liquidation in order
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to establish the rights of creditors of the insolvent company. Section 3(l) of the Bankruptcy Act, 1988 defines a secured creditor as meaning “any creditor holding any mortgage charge or lien on the debtor’s estate or any part thereof as security for a debt due to him”.
The respondent asserts that if s.244(A) has the meaning attributed to it by the applicant it will leave the applicant with no security in respect of the fees payable to him by the insolvent company and that this will be to give the section an effect which it ought not to have. It is contended that the intended effect of the section is not to extinguish the legal rights of persons in the position of the respondent. Whilst reference is made to the decision in Kelly v. Scales [1994] 1 ILRM 42 it is clear that the issue in that case was whether or not s.244(A) had retrospective effect and so has little relevance to the question in suit.
It is said by the respondent that if s.244(A) has the meaning attributed to it by the applicants it has brought about a change in the law of insolvency which was not intended or alternatively resulted from an oversight which gives rise to an implicit amendment to s.3(1) of the Bankruptcy Act, 1988.
Reliance was placed upon the judgment of Henchy J. in Minister for Industry & Commerce v. Hales [1967] IR 50 where Henchy J. applied a presumption which avoids an interpretation of an Act which would result in “radical and far reaching changes in the law of contract”.
The respondent submits that the law of lien is well established and to interpret s.244(A) in the manner sought would give effect to radical and far reaching changes. To justify such a result the statutory provision relied on would have to be clear and unambiguous as to the amendment of the position of lienees under s.3(1) of the Bankruptcy Act, 1988. It is said that the section is not sufficiently clear and unambiguous to merit such application.
The object of all statutory interpretation is to discern the intention of the legislature. That has to be done by reference to the language which is used in the section.
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I have come to the conclusion that the language which is used in s.244(A) is clear and unambiguous and allows of no other interpretation but that the legislature intended that the holder of a lien would not be entitled to claim such as against a liquidator in the position of the applicant. I do not think that it can be said that the legislature had brought about this result by inadvertence or oversight. In fact it appears to me that s.244(A) demonstrates a quite sophisticated approach to the issue because of, in particular, the saver which is to be found in subsection (a) thereof in respect of the holder of a mortgage charge or pledge.
It appears to me to be clear and unambiguous that the legislature intended that the rights of holders of consensual securities would be preserved in the manner specified. On the other hand the holder of a lien which comes into effect by operation of law and not by the consent of the parties is not so protected.
There is little doubt but that this section has brought about a change in the law of insolvency insofar as the holders of liens are concerned. However, having regard to the clear wording used (“no person shall be entitled as against the liquidator … to claim any lien thereon”) such a change cannot be regarded as unintended. Neither is it ambiguous. This conclusion is, in my view, fortified by the legislative protection or comfort given to holders of consensual securities.
In these circumstances I am of opinion that the effect of the section is to render it impossible for the respondent solicitors to retain the title documents of the company in liquidation as security for payment of fees. Accordingly there will be the appropriate declaration and order.
Springline Ltd., Re
[1997] IEHC 163; [1999] 1 IR 467; [1998] 1 ILRM 301 (28th October, 1997)
JUDGMENT of Mr. Justice Shanley delivered the 28th day of October 1997.
1. A Petition to appoint an Examiner in relation to this company was presented to the High Court on the 19th February 1996 and on the 26th February of that year, an Examiner was appointed to the company. The examination of the company proceeded until May 1996 when the Examiner, Mr Rory O’Ferrall, found it impossible to put in place a scheme of arrangement and thereafter informed the High Court on or about the 8th May 1996 that as there was no possibility of a scheme of arrangement being put in place, the protection of the Court should be withdrawn. On the 8th May 1996 the High Court made an Order withdrawing the protection of the Court from the company thus terminating the Examinership. On the 16th May 1996 a Petition to wind up the company was presented to the High Court and on the 21st May 1996 a provisional Liquidator was appointed. On the 10th June 1996 a winding-up Order was made by the High Court in relation to the company.
2. Mr O’ Ferrall now claims payment of his costs remuneration and expenses in the winding up in the amount of IR£54,210.28 (inclusive of VAT). Mr O’ Ferrall applied to the High Court on the 29th July, and 9th October, 1996 and obtained Orders from the Court sanctioning payments of sums amounting to £54,210.28.
3. The question which this Court is asked to determine is the priority of the remuneration costs and expenses claimed by the Examiner Mr. O’ Ferrall in relation to the work done by him on behalf of Springline Limited in liquidation in his capacity as such Examiner.
4. The principal function of an Examiner appointed under the provisions of the Companies (Amendment) Act 1990 is to investigate the possibility of whether a company, which is unable to pay its debts, is capable of surviving as a going concern. The effect of the presentation of a Petition, which results in the appointment of an Examiner, also results in protection being available to a company for a limited period during which time the property of the company is preserved from the clutches of its creditors. The 1990 Amendment Act makes provision for liabilities incurred by a company during the protection period. In particular, Section 10 deals with circumstances under which the Examiner may incur certain liabilities and Section 29 of the Act deals with the payment of costs and remuneration of examiners appointed by the Court.
Section 29 (3) of the Companies (Amendment) Act 1990 provides as follows:-
The remuneration, costs and expenses of an examiner which have been sanctioned by order of the court shall be paid in full and shall be paid before any other claim, secured or unsecured, under any compromise or scheme of arrangement or in any receivership or winding-up of the company to which he has been appointed.
Section 29(3) of the Companies (Amendment) Act 1990 clearly gives a priority to the remuneration costs and expenses of an Examiner but it is the extent of that priority that is at issue. To that end it is necessary first to look at the provisions of the Companies Acts insofar as they relate to insolvent companies and to determine the rules which apply in relation to such companies as to the proof and ranking of claims in a winding-up of an insolvent company and the payment of the costs, charges and expenses of liquidators of such companies.
WINDING-UP UNDER THE COMPANIES ACTS 1963 TO 1990.
5. It is appropriate I believe to start with Section 244 of the Companies Act 1963 which provides as follows:-
“The Court may, in the event of the assets being insufficient to satisfy the liabilities, make an order as to the payment out of the assets of the costs, charges and expenses incurred in the winding up in such order of priority as the court thinks just.”
6. That is a provision, as appears clear, which deals expressly with the costs charges and expenses incurred during the winding-up, it is not a provision which deals with in any way the debts which are provable in a winding-up.
Section 284(1) of the Companies Act 1963 provides as follows:-
“In the winding up of an insolvent company the same rules shall prevail and be observed relating to the respective rights of secured and unsecured creditors and to debts provable and to the valuation of annuities and future and contingent liabilities as are in force for the time being under the law of bankruptcy relating to the estates of persons adjudged bankrupt, and all persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company may come in under the winding-up and make such claims against the company as they respectively are entitled to by virtue of this section.”
7. As is apparent from the foregoing subsection, one of its effects is to provide that debts provable in a winding-up are to be determined in accordance with the rules in force for the time being under the law of bankruptcy.
Section 283(1) of the Companies Act 1963 provides as follows:-
“Subject to subsection (2), in every winding up (subject, in the case of insolvent companies, to the application in accordance with the provisions of this Act of the law of bankruptcy) all debts payable on a contingency, and all claims against the company, present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company, a just estimate being made, so far as possible, of the value of such debts or claims which may be subject to any contingency or which sound only in damages, or for some other reason do not bear a certain value”.
Order 74 of the Rules of the Superior Courts deal among other things with the proof of debts and also with the charges, costs and expenses payable out of the assets of a company in liquidation. I do not at this stage propose to deal in any detail with the provisions of Order 74 other than to refer to two rules. Rule 108 provides that:-
“A creditor may prove for a debt not payable at the date of the winding up order or resolution, as if it were payable presently, and may receive dividends equally with the other creditors, deducting only thereout a rebate of interest at the rate of six per cent per annum computed from the declaration of a dividend to the time when the debt would have become payable according to the terms on which it was contracted. “
Rule 128(1) provides as follows:-
“The assets of a company in a winding up by the Court remaining after payment of the fees and expenses properly incurred in preserving, realising or getting in the assets including where the company has previously commenced to be wound up voluntarily such remuneration, costs and expenses as the Court may allow to a Liquidator appointed in such voluntary winding up, shall, subject to any order of the Court, be liable to the following payments which shall be made in the following order of priority, namely:
First – The costs of the petition, including the costs of any person appearing on the
petition whose costs are allowed by the Court.
Next – The costs and expenses of any person who makes or concurs in making
the company’s statement of affairs.
Next – The necessary disbursements of the Official Liquidator, other than expenses properly incurred in preserving, realising or getting in the assets hereinbefore provided for.
Next – The costs payable to the solicitor for the Official Liquidator.
Next – The remuneration of the Official Liquidator.
Next – The out-of-pocket expenses necessarily incurred by the committee of
inspection (if any)”.
8. As I have already noted, Section 284(1) of the Companies Act 1963 makes provision for the application of the Rules in force for the time being under the law of bankruptcy to debts provable in the winding-up of an insolvent company. The debts which are subject to such rules in bankruptcy are those debts which are defined by Section 283(1) of the Companies Act 1963 as:-
“…. all debts payable on a contingency, and all claims against the company, present or future, certain or contingent, ascertained or sounding only in damages,…”
The Debtors Act (Ireland) 1872 provides in Section 4 thereof that:
“In in this Act, if not inconsistent with the context, the following terms shall have the meanings herein-after respectively assigned to them; that is to say,
“debt contracted after the passing of this Act” shall mean any sum of money due or payable under or in respect of any contract or obligation made or entered into or liability incurred, or cause of action or suit arisen after the passing of this Act:…”
Section 252 of the Irish Bankrupt and Insolvent Act 1857 (now repealed) provided that:
“Any person who shall have given Credit to the Bankrupt or Insolvent upon valuable Consideration for any Money or other Matter or Thing whatsoever which shall not have become payable at the Time of the filing of the Petition of Bankruptcy or Insolvency and whether such Credit shall have been given upon any Bill, Bond, Note, or other negotiable Security or not, shall be entitled to prove or may be admitted as a Creditor in respect of such Debt, Bill, Bond, Note, or other Security, as if the same was payable presently, and receive Dividends equally with the other Creditors, deducting only thereout a Rebate of Interest for what he shall so receive at the Rate of Six Pounds per Centum per Annum, to be computed from the Declaration of a Dividend to the Time such Debt would have become payable according to the Terms upon which it was contracted”.
The Bankruptcy Act 1988 which repealed in its entirety the Irish Bankrupt and Insolvent Act 1857 deals in Section 75 with debts provable in bankruptcy and arrangements and provides in Section 75(1) :-
“Debts and liabilities, present or future, certain or contingent, by reason of any obligation incurred by the bankrupt or arranging debtor before the date of adjudication or order for protection and claims in the nature of unliquidated damages for which the bankrupt or arranging debtor is liable at that date by reason of a wrong within the meaning of the Civil Liability Act, 1961, shall be provable in the bankruptcy or arrangement.”
Finally, the first schedule to the Bankruptcy Act 1988 provides at Article 15
that:-
“In respect of debts due after the adjudication or order for protection, the liability for which existed at the date of such adjudication or order for protection, a creditor may prove for the value of the debt at that date. “
9. I have already referred to Order 74 of the Rules of the Superior Courts and in particular Rules 108 and 128 of Order 74. This Order sets out in detail the procedure for ascertaining the creditors of a company and the proof by those creditors of their claims, that procedure is succinctly described by Keane J. in his work “Company Law in the Republic of Ireland” at paragraph 38.71 as follows:-
“In order to ascertain the creditors, an advertisement is published at such time as the court directs fixing a time within which the creditors are to send in to the liquidator particulars of their claims. This advertisement also appoints a day for adjudicating on the claims. The Liquidator sets out in an affidavit the debts which he thinks should be allowed without further evidence and those which should be proved. At the adjudication, the Examiner decides which debts should be allowed upon the liquidator’s affidavit and which creditors should come in and prove. The liquidator then gives notice to the latter of the time at which they are to attend to prove their claims. The value of contingent or unliquidated claims is to be ascertained, as far as possible, according to their value at the date of the winding up order. Debts can be proved by sending particulars of the claim through the post, an affidavit not being necessary unless the liquidator and the Examiner specifically require one. A creditor may come in and prove at any time before the final distribution of assets, but he cannot disturb any dividend already paid. The Examiner states the results of his adjudications in certificates. “
Section 228 (D) of the Companies Act 1963 provides that:-
“a person appointed liquidator shall receive such salary or remuneration by way of percentage or otherwise or as the court may direct, and if more such persons than one are appointed liquidators, their remuneration shall be distributed among them in such proportions as the court directs;”
10. Whilst this Section remains unrepealed the fact is that the costs, remuneration and expenses of a liquidator in a compulsory winding-up are usually fixed by the Court on application made from time to time by the liquidator to the Court.
11. In addition, of course, the priority of the liquidator in respect of his costs remuneration and expenses is determined by Order 74 Rule 128 which I have already referred to in detail. Where there are disputes or differences of opinion as to the amount of the remuneration claimed by a liquidator such differences are usually referred to the Examiner’s Office for consideration and reporting finally to the Court. As the authors of Corporate Insolvency and Rescue (Irene Lynch, Jane Marshall and Rory O’ Ferrall) note at paragraph 2.85 of their work McCarthy J. observed in Re. Merchant Banking Limited [1987] ILRM 260 that the inquiry conducted by the Examiner is;
“one of amount and not of nature or kind”.
12. The foregoing analysis of the provisions of the Companies Acts and of the Bankruptcy Act 1988 and its rules, makes it clear that an entirely different approach is adopted relating to the proof and ascertainment of debts and the means whereby the remuneration, costs and expenses of a liquidator are determined. It is equally clear that the Bankruptcy Code has over time given a clear and unambiguous meaning to the words “debt” and “claim”.
THE SUBMISSIONS
13. It was argued by Mr Shipsey that the effect of Section 29(3) of the Companies (Amendment) Act 1990 is that while the costs, remuneration and expenses of an Examiner have priority over secured or unsecured claims of creditors of the company, they do not have priority over the costs, remuneration and expenses of a liquidator appointed by the Court to an insolvent company. He argued that if the Examiner was to be entitled to his costs, remuneration and expenses in priority to the liquidator, he would have to satisfy the Court that the words “other claim” appearing in Section 29(3) of the Companies (Amendment) Act 1990 embraced the remuneration, costs and expenses of a liquidator appointed by a Court in the winding-up of an insolvent company. He drew attention also to Sections 244, 281 and 283 of the Companies Act 1963 . Section 244 as I have already indicated deals with the situation where the assets of a company are insufficient to satisfy the liabilities of the company and that section provides that the Court may make an Order as to the payment out of the assets of the costs, charges and expenses incurred in the winding up in such order of priority as the Court thinks just. Section 283 deals with those debts which may be proved against the company. Mr McBratney for the Examiner, argued that Section 29 (3) of the Companies (Amendment) Act 1990 providing for the priority of the remuneration, costs and expenses of the Examiner expressly gives that priority over “any other claim, secured or unsecured….” . He contended that this phrase was so wide as to necessarily embrace the costs, charges and expenses of a liquidator or the costs, remuneration and expenses of a liquidator referred to in Order 74 Rule 128 of the Rules of the Superior Court . He also pointed to Section 281 of the Companies Act 1963 (as did Mr Shipsey, but for a different reason). Mr McBratney argued that in relation to Section 281 there was a reference again to “all other claims” in a provision which provided for the priority of the costs, charges and expenses incurred by a voluntary Liquidator in a winding up and payable out of the assets of a company in priority to all other claims.
CONCLUSIONS
14. The real issue in this case is whether the liquidator’s costs, charges and expenses (or costs, remuneration and expenses) can under any circumstances be described as representing a debt or claim against the company. If such costs, remuneration and expenses can be regarded as “a debt” or “a claim” against the company then, Section 29(3) of the Companies (Amendment) Act 1990 has the effect of giving the costs, remuneration and expenses of the Examiner a priority over the costs, remuneration and expenses of a liquidator, in a winding-up by the Court. In my opinion the liquidator’s costs, charges and expenses cannot be regarded as constituting “a claim” or “a debt” against the company. The costs, expenses and remuneration of the Examiner, Mr O’ Ferrall in this case, of course, represents a debt provable against the company in the winding-up of the company under the supervision of the Court. But as I have said the real issue, of course, is whether the costs, expenses and remuneration of the liquidator can be regarded as “a claim” or “a debt” against the company. Section 283 of the Companies Act 1963 refers to the fact that all claims against the company present or future, shall be admissible to proof against the company upon a winding-up of the company. Section 75 of the Bankruptcy Act 1988 provides that debts and liabilities “present or future” shall be provable in the bankruptcy or arrangement.
15. I do not think that it can be argued that references to a future “claim” or a future “debt” (as appears in the Bankruptcy Act 1988 and the Companies Act 1963 ) can be argued to refer in any way to the cost expenses remuneration or charges of a liquidator in a winding up by the Court. It seems to be clear that the notion of a future debt or a future claim at the date of a winding-up or at the date of an adjudication of bankruptcy relates to obligations of the company or the bankrupt, incurred before the date of winding-up or the date of adjudication, but in respect of which obligation its discharge follows the date of winding-up or adjudication. That this is the proper construction of “future claims” or “future debts” is reinforced by the wordings of Section 75 of the Bankruptcy Act 1988 and Rule 15 of the Schedule to that Act. Because debts and claims under the Bankruptcy Rules are provable as of the date of adjudication (or in the case of a winding-up as of the date of the commencement of the winding up) obligations incurred by companies after the date upon which the company was wound up cannot fall into the category of future claims or future debts. Such is the position of the liquidator’s costs, expenses and remuneration. They were not obligations incurred before the winding up Order was made: they were obligations which necessarily occurred after the date of the winding-up Order and therefore do not fall to be proven as debts in the liquidation or as claims in the liquidation in the manner provided for in Order 74 of the Rules.
16. While the Examiner is given a priority by Section 29(3) of the Companies (Amendment) Act 1990 it is not a priority in respect of anything other than all other claims against the company whether secured or unsecured: It does not give the Examiner priority over the costs, expenses and remuneration of the Official Liquidator in this case.
17. I am conscious that it is the duty of the Court in all cases where it can possibly do so to construe an act in such a way as will give effect to the intention of the legislature. I am equally conscious that the Legislature would not have wished to leave an Examiner in the position that Mr O’Ferrall finds himself in now, namely, having done work for which he is not to receive any remuneration other than the remuneration he can recover by dividend (if any) in the course of the winding-up. It does seem to me that there is no way, without doing violence to the subsection, whereby subsection (3) can be construed in such a manner as to allow for the payment to Mr O’ Ferrall of his remuneration ahead of that of the Liquidator. As Mrs Justice Denham said in the case of Mahon & Others, Applicants -v- Butler & Others, Respondents in a judgment delivered on the 1st August, 1997:-
“It is not for the Courts to Legislate. If there is a lacuna in legislation then it is appropriate to indicate that gap – but not to fill it. If there is a policy decision in the legislation then that is a matter for the Oireacthas”.
Order 74 Rule 128 (1) does provide, as already noted, that:-
“The assets of a company in a winding up by the Court remaining after payment of the fees and expenses properly incurred in preserving, realising or getting in the assets, including where the company has previously commenced to be wound up voluntarily such remuneration, costs and expenses as the Court may allow to a Liquidator appointed in such voluntary winding-up, shall, subject to any order of the Court, be liable to the following payments which shall be made in the following order of priority….”
18. If it could be argued that what the Examiner had in substance done was to preserve, realise and get in the assets of the company, or to do any of those things alone, then it might be arguable that he was entitled to be paid his fees for such, before the Official Liquidator was paid his costs, remuneration and expenses. However it seems to be clear on a perusal of the provisions of the Companies (Amendment) Act 1990 that the principal function of the Examiner is to investigate the viability of the company and, in certain circumstances, to formulate proposals for its survival and to present a scheme of arrangement to the members and creditors and, ultimately, to the Court for the survival of the company as a going concern. It is true, that while the Examiner is performing the functions and exercising the powers given to him by the Companies (Amendment) Act 1990 the assets of the company are preserved. However, this is not by anything done by the Examiner himself but rather it is the consequence of the Order of the Court which extends the protection of the Court to the company during the period of the Examinership. Accordingly, it seems to me that nothing which the Examiner has done which gives rise to his claims in these proceedings could colourably be regarded as properly incurred ” in preserving, realising or getting in the assets” of the company. Consequently it does not seem to me that it is possible to use the wording of Rule 128 of Order 74 to make provision for the costs, expenses and remuneration of Mr O’ Ferrall.
19. In my view the Examiner is not entitled to his remuneration costs and expenses in priority to those of the Official Liquidator of the company.
Hogg & Co., Ltd. v. Gallagher.
[1932] IR 35
Supreme Court.
KENNEDY C.J. :
31. July.
This was a creditor’s suit, commenced by originating summons, for the administration of the real and personal estate of Peter Gallagher, late of Kiltyclogher in the County Leitrim, who died intestate on the 3rd February, 1922. The plaintiffs on behalf of themselves and all other creditors brought the proceedings against the defendant, Delia Gallagher, the widow and the administratrix of the intestate. The heir-at-law of the intestate, an infant by his guardianad litem, was afterwards added as defendant by order of the Court.
The primary decree for administration was pronounced on the 19th February, 1923. Advertisements for creditors and encumbrancers were in due course settled by the Chief Clerk and published by Mr. Hastings Dare Draper, solicitor for the plaintiffs having carriage of the proceedings, in newspapers issued in the last week of March and first week of April, 1923. The advertisement required the creditors of the intestate, on or before the 30th April, 1923, to send by post to Messrs. Horan and Devine, solicitors of the defendant, the administratrix, particulars of their claims, a statement of their accounts and the nature of the securities (if any) held by them. The advertisement also required all persons claiming to be incumbrancers affecting the real estate and freehold registered land of the intestate, by their solicitors, to come in and prove their claims at the Chambers of the Master of the Rolls, on or before the 30th April, 1923, and on or before the said date to file affidavits in proof of their claims, or in default thereof to be peremptorily excluded from the benefit of the order for administration. Every creditor and incumbrancer holding any security was required to produce the same before the Master of the Rolls at Chambers on the 9th May, 1923, being the time appointed for adjudicating on the claims. This advertisement is in the form set out at No. 3 in Appendix L to the Rules of the Supreme Court, 1905, with the addition of the notice to incumbrancers. A number of claims were sent in by creditors in response to the advertisement, and amongst them an account was received from the respondents on this appeal, Thomas Plunkett, Limited, Grocers, of Enniskillen, stating that there was due to them from the intestate a sum of £220 16s. 8d. The claim referred to two promissory notes, both dated 1st June, 1921, given by the intestate to the claimants, one for £100 payable two months after date, the other for £100 payable four months after date. On the 25th January, 1924, Messrs. Horan and Devine, solicitors, wrote to Messrs. Thomas Plunkett, Limited, by direction of the Chief Clerk requiring production of the two “Bills” (sic) mentioned in the claim, and on the 28th January, 1924, a reply was sent by Messrs. Clarke and Gordon, solicitors of Thomas Plunkett, Ltd., covering copies of the promissory notes, and asking to be informed of the nature of the proceedings in the action and the present position. On the 30th January, 1924, Messrs. Horan and Devine wrote in reply to Messrs. Clarke and Gordon informing them that the amount of their clients’ debt as inserted in the Claim Sheet was £202, and stating that they supposed the difference of £18 odd was for interest. They went on to inform Messrs. Clarke and Gordon that the intestate “died insolvent,” and that his estate was being administered in the Court of the Master of the Rolls. They added that the claim of Thomas Plunkett, Ltd., had already been ruled upon, but that the Chief Clerk had directed further particulars, and that the matter would come before him again on the 7th February, “in order to dispose of the claims against the estate.” In an acknowledgment of this letter on the 1st February, 1924, Messrs. Clarke and Gordon noted that the amount inserted in the Claim Sheet as due to Thomas Plunkett, Ltd., was £202, and said that the additional amount was made up of interest to date, and they requested Messrs. Horan and Devine to let them know how the estate would work out, and how much was likely to be paid in the pound.
Enquiries as to the estate and assets of the intestate were also proceeding in Chambers, and the next fact in evidence on this appeal is a letter written on the 16th January, 1925, by Messrs. Horan and Devine to Thomas Plunkett, Ltd., wherein, after referring to the administration proceedings, they say that they have been directed to obtain the title deeds (or particulars thereof) relating to certain property of the intestate. They say that they have been informed that Thomas Plunkett, Ltd., hold the deeds relating to the title of premises in the town of Kiltyclogher in the occupation of one, McGowan, and two small houses in the occupation of John Kerrigan and Frank McGillan. They request that, if this be so, Thomas Plunkett, Ltd., will let them have the deeds (or copies) for production in the Chambers of the Chancery Court, and inform them of the circumstances under which the deeds came into the custody of the company. A reply to this letter was written by Messrs. Clarke and Gordon, solicitors for the company, on the 19th January, 1925, in which they informed Messrs. Horan and Devine that Thomas Plunkett, Ltd., received the deed of conveyance of a licensed house and two houses adjoining in Kiltyclogher along with “a promissory note” (sic) as security for the amount of their account, and that the document was then in their custody. They then enquired as to the nature of the proceedings, and how it was proposed to deal with their clients’ claim. In their reply of the 21st January, 1925, Messrs. Horan and Devine reminded Messrs. Clarke and Gordon of their previous correspondence on the subject of the claim put in by Thomas Plunkett, Ltd., and that the amount of £202 was allowed by the Chief Clerk, and that they would in due course receive payment on foot thereof. They stated that they had been directed to obtain the title deeds of the intestate’s property, and requested that Thomas Plunkett, Ltd., send the deeds held by them for production before the Chief Clerk and asked for copies. Messrs. Clarke and Gordon replied on the 23rd January, 1925, that “we note that out clients’ claim was put on the Claim Sheet for £102 (sic) and allowed by the Chief Clerk. We shall be glad to hear if this is put on as a preferential payment.” They offered copies of the documents of title mentioned at the usual scrivenery charges. Messrs. Horan and Devine wrote on the 26th January, 1925, pointing out to Messrs. Clarke and Gordon that they had not fully answered the letter of the 21st January, and asking them to state in what manner their client came into possession of the title deeds. They also stated that the claim of Clarke and Gordon’s clients “is not a preferential one.” On the 28th January, 1925, Clarke and Gordon wrote to Horan and Devine sending a copy of the conveyance to the intestate, and stating that they also held several other documents of title of the property which were lodged with Thomas Plunkett, Ltd., together with promissory note as security for the amount of their debt. and they added “we shall be glad by your seeing they rank in the claims as secured creditors. Would you please let us know the present position of the estate, whether it is solvent and when the allocation is likely to take place.” No reply was sent to this very unsatisfactory sequel to a long correspondence. It would have been better if Horan and Devine, notwithstanding the strain on their patience and courtesy, had sent an answer, but it is certain that they had repeatedly made their position clear that the claim of Thomas Plunkett, Ltd., sent to them was a claim on foot of a simple contract debt and had been put on the Claim Sheet and allowed by the Chief Clerk as such, and that they denied it was a “preferential claim” (to use Clarke and Gordon’s phrase). It was precisely a year since they had first informed Clarke and Gordon that the estate of the intestate was insolvent, and was being administered in a creditors’ suit in the Court of the Master of the Rolls. Moreover, the claim of Thomas Plunkett, Ltd., was made in response to the advertisement which I have quoted, and which gave very clear directions to creditors as to proof of securities if they claimed as secured creditors. In these circumstances, apart from the knowledge of the ordinary practice of the Courts to be attributed to solicitors. the ingenuous request, of Messrs. Clarke and Gordon can hardly be regarded seriously. It was their responsibility, and not that of Messrs. Horan and Devine, to take any step they might think fit to alter the position of simple contract creditor which their client had deliberately adopted as had been frequently impressed upon them. They chose, however, to do nothing.
The Chief Clerk’s certificate was filed on the 25th February, 1925. The claim of Thomas Plunkett, Ltd., appears in the schedule of unsecured debts where it is allowed at the sum of £200 for principal and £2 for interest. The debts of the intestate amounted to £7,329, and his estate was hopelessly insolvent. The property comprised in the title deeds held by Thomas Plunkett, Ltd., is set out at No. 7 in the schedule of outstanding personal estate. The real estate (including registered land) of the intestate was shown to be subject to encumbrances set out in the certificate.
The further consideration of the Chief Clerk’s certificate took place on the 16th March, 1925. The creditors (including Thomas Plunkett, Ltd.) were declared entitled to be paid their debts set out in the schedule, abating rateably if necessary. The property at No. 7 in the schedule of outstanding personal estate being the property comprised in the title deeds held by Thomas Plunkett, Ltd., was ordered to be sold in Court, the proceeds of sale to be lodged in Court, and carriage of the sale was given to the defendant, client of Messrs. Horan and Devine. An order was made for the allocation of the funds in Court.
On the 8th April, 1925, Horan and Devine applied to Clarke and Gordon by letter for the title deeds held by their client for the purposes of the sale ordered by the Court. Clarke and Gordon replied with an enquiry whether their client had been returned as a secured creditor. Horan and Devine answered that Thomas Plunkett, Ltd., had elected to go on the Claim Sheet in respect of their claim and, as they could not have it both ways, they were not returned as secured creditors. They said they would apply to the Court for the title deeds if necessary. On the 19th November, 1925, an order was made that Thomas Plunkett, Ltd., lodge the title deeds in Court for the purposes of the sale ordered on further consideration “subject and without prejudice to their lien (if any) affecting same.” The property was subsequently (in the year 1926) sold for the sum of £150, which was lodged in Court to a separate credit.
On the 11th November, 1929, an order was made by the High Court (Mr. Justice Johnston) on the application of Thomas Plunkett, Ltd., by notice dated the 7th November, 1929, whereby it was declared that the deposit by the intestate with Thomas Plunkett, Ltd., of the documents of title before mentioned gave to Thomas Plunkett, Ltd., a lien of equitable mortgage upon the property comprised in the said documents for the amount of the sums due to them by the intestate as found by the Chief Clerk’s certificate; and the applicants valuing the security at £200, it was ordered that they rank for that sum in priority to the other creditors of the intestate on the part of his estate comprised in the documents, and the applicants were ordered to pay all parties costs of the application. The present appeal has been taken against that order by the plaintiffs in the suit.
As I understand, the ground upon which the learned Judge based his order was that the solicitors for Thomas Plunkett, Ltd., were not aware at the time when the proof for the debt was being lodged in the Chambers (i.e., in March, 1923) that their clients were actually secured creditors. The application was grounded on an affidavit by the secretary who is also a director of Thomas Plunkett, Ltd. He exhibited the correspondence with Messrs. Horan and Devine, but offered no excuse or explanation either of original mistake or subsequent misunderstanding, but treated the application as a matter of course.
The present case is to be distinguished from the class of cases, of which Harrison v. Kirk (1) is an instance, in which the right of a creditor of a deceased person whose estate is being administered by the Court, to obtain payment of his debt so long as there is money in Court available to meet his claim, is well established. Notwithstanding that the prescribed time for proof has passed, or even that the process of administration has practically run its full course, if there is still within the grasp of the Court a surplus of assets which would otherwise pass to next-of-kin or beneficial donees, it may be made to answer a lawful debt even if the claim is belated, though usually on terms as to costs.
Here, however, we have an estate which has proved to be insufficient to pay the debts and liabilities of the deceased in full, and the case falls within sect. 28, sub-sect. 1, of the Judicature Act, 1877, which provides that in such case the rules in force under the law of bankruptcy are to prevail and be observed as to the respective rights of secured and unsecured creditors and as to debts and liabilities provable.
Under the bankruptcy practice, if a secured creditor sends in a claim for his full debt, and acts in such a way as to show an election, such proof is treated as an abandonment of his security, but the Court has power to allow the proof to be withdrawn if satisfied that what has occurred has been due to mistake or other sufficient cause. In the administration of the estate of a deceased person, however, it is by no means certain that the estate to be administered will prove insolvent, and in applying the rules in bankruptcy to administration proceedings, the Court of Appeal in Ireland, in Cooper v. Teahan (1), laid down the salutary principle that proof by a creditor is not necessarily an election to abandon his security at least up to the hearing on further consideration where the creditor did not know that the estate was insolvent.
In support of the order made, much reliance was placed upon the principles stated in In re McMurdo, Penfield v.McMurdo (2). In that case, which was the administration of an insolvent estate, a secured creditor declined to prove and, after the Chief Clerk’s certificate had become binding, he was allowed by the Court of Appeal in England to prove, notwithstanding the certificate. A somewhat similar case was Browne v. Browne (3). We have not in this case to decide in what cases a creditor may after further consideration prove a debt which he has omitted to prove. In the present matter, the creditor, before further consideration, had his attention drawn to the insolvency of the estate. He had full information as to the securities which he claimed to hold for his debt, and his attention was drawn to the fact that he was found as a simple creditor. Notwithstanding all this, he allowed the further consideration to proceed without making any attempt to have the certificate altered. In these circumstances, he cannot be allowed afterwards to retract his proof as a simple creditor so that he may have the benefit of the securities held by him.
It was sought to be established that the creditor was entitled to rely upon the defendant to have his position made secure. As a matter of courtesy between solicitors, it would seem that a reply might have been sent to Messrs. Clarke and Gordon’s letter of the 28th January, 1925, even though the defendant’s solicitors had in previous correspondence intimated that they were disputing the claim of Thomas Plunkett, Ltd., to be secured creditors. But Thomas Plunkett, Ltd., who had sent in a proof as simple creditors, were not entitled as a matter of course to have the proof altered. It rested upon them to make a special application explaining the circumstances, and upon such an application all parties interested would be entitled to be heard and, if necessary in their own interests, to vary their own previous attitudes. If Thomas Plunkett, Ltd., omitted knowingly to make such an application, they cannot escape the consequences by seeking to cast an obligation on the defendant. It is to be observed that they did not approach the creditor-plaintiff in the suit, or the solicitor for the creditor-plaintiff.
In our opinion, the application made by Thomas Plunkett, Ltd., should have been refused, and the order of Mr. Justice Johnston must be reversed (except as to so much of it as deals with costs).
In re Greer
Court of Bankruptcy.
29 June 1877
[1877] 11 I.L.T.R 109
Miller J.
Miller, J.
The Provincial Bank of Ireland, through their public officer, made a proof of debt in this matter in the following form:—“Amongst other sums, in the sum of £7,168 1s. 8d. on foot of the several bills of exchange as set forth in the first schedule thereto. Said several bills of exchange were respectively endorsed to the said society or co-partnership for full value, paid in cash, were duly presented for payment when and where payable, and were dishonoured, and due notice of the dishonour of same respectively given to the bankrupt. For the purposes of securing the repayment of the said sum, or any other sum or sums of money due by the bankrupt to the Provincial Bank, the said bankrupt heretofore granted to officers of the Provincial Bank therein named certain mortgage securities therein specified, and also endorsed to the Provincial Bank of Ireland, as collateral security for all moneys due by the bankrupt to the bank, certain bills of exchange. The said bankrupt was, at the date of filing such petition, and still was indebted to the bank over and above the said sum of £7,168 1s. 8d. in various sums of money, amongst others in the sums of £2,829 8s. 8d. and £9,575 17s. 8d., the particulars of which were specified in the 2nd and 3rd schedules thereto annexed. That said sums of £2,829 8s. 8d. and £9,575 17s. 8d. far exceed the value of the policies of insurance, hereditaments, and premises so mortgaged to the bank, and the value of said bills thereinbefore mentioned, endorsed to the said bank as collateral security. The said Provincial Bank, therefore, thereby declined to treat said debt of £7,168 1s. 8d. as an unsecured debt, and to uncover and exclude the same from the sum and sums of money secured by said mortgages. ” No question was, or perhaps could properly have been, raised in respect of that proof of debt in substance, but the Provincial Bank of Ireland, on the 20th of February, 1877, filed their charge in this matter for the purpose of realising the several securities as held by them from the bankrupt, and thus stated and referred to in that proof of debt. And to that charge a discharge was filed by the assignees on the 28th of May, 1877; and after referring to *109 the proof of debt as filed by the Provincial Bank, they submit, among other things, what it is here alone necessary for me to advert to—namely, “but in case the securities, in the charge of the Provincial Bank mentioned, should prove insufficient, that the bank should not be at liberty to prove upon the estate for any further sum than the sum of £7,168 1s. 8d. in said proof mentioned. And that such securities were only available to the extent of the sum then due to the bank in respect of the demands mentioned in the 2nd and 3rd schedules to the proof, &c.” It had been long settled, according to the law of bankruptcy prior to the passing of the Bankruptcy (Ireland) Amendment Act, 1872, that a proof of debt, in form as that filed by the Provincial Bank, would be perfectly valid, and that its operation would be that those securities, as held by the bank, would thenceforth only stand as such securities for the portion of the debt due to the bank which had not been uncovered by the proof of debt filed by that bank; and further, that if such securities, when realised, should prove insufficient to discharge the debt, which according to the proof of debt remained alone covered by such securities, the bank might still make a further proof for such deficiency, or, in other words, the Provincial Bank, holding the securities generally which had not been specifically made applicable to any particular portion of their debt, would have been fully justified in appropriating the securities held by them, as they have done by their proof of debt. This was established so far back as the year 1830, in the case of ex parte Amphlets, Mont. Rep. 77. The petition there was by the assignee, and stated that an attorney had proved £70 without having exhibited a bond to the bankrupt by a debtor, and which was deposited with the attorney as security, and it prayed that the bond might be given up. The attorney stated that he had a further demand of £50 for costs against which he had set this bond. The petition was dismissed with costs. The same principle has been followed up in several cases, up to the case which has been referred to in argument of ex parte Johnson, in re Bulmer, &c., 3 De G. M. & G. Lord Hatherly says, at page 235, “The question must, therefore, be dealt with on the footing of there being in the existing state of things no special agreement regulating the appropriation of the fund.” (And such is the case as regards the debt owing by the bankrupt to the Provincial Bank in this matter.) But, Lord Hatherly goes on to say:—“In such a case the doctrine of the court is clear that the creditor holding a security is entitled to apply it in discharge of whatever liability of the bankrupt he may think fit. The authorities referred to on this subject in the argument are conclusive; I allude particularly to the case of ex parte Hunter (6 Ves. 94), and to the two cases of ex parte Howard and ex parte Astley.” But, it is alleged by the assignees that such doctrines have been subverted by the 63rd section of the Bankruptcy Amendment Act, and the 88th General Order. The 63rd section enacts, “A secured creditor shall, for the purpose of voting at any meeting of creditors in any arrangement, or in any composition after bankruptcy under the said Act or this Act, be deemed to be a creditor only in respect of the balance (if any) due to him after deducting the value of his security, and the amount of said balance shall, until the security be realised, be determined in the prescribed form.” That section is in terms limited to “ the purpose of voting, ” and regulating the amount for which alone the creditor should be permitted to vote, and merely says:—A secured creditor shall be deemed a creditor only in respect of the balance after deducting the value of his security. But, it is manifest that such a provision cannot in any way interfere with the right of a creditor to appropriate securities which he held generally, according to the doctrine already enunciated, to certain portions of the debt due to him, and stating that for some of his debts he, the creditor, holds no security. But then, it is said that the prescribed form referred to in that 63rd section has reference to the 88th General Order, which directs that—“A secured creditor, whether in bankruptcy or arrangement, unless he shall have realised his security, shall, previously to being allowed to prove or vote, state in his proof the particulars of his security, &c.” The observations already made would likewise apply to that rule—namely, that it has reference solely to what a secured creditor must do, unless he has realised his security “ previously to his being allowed to prove or vote. ” The position of the Provincial Bank, in respect to the objection as thus raised by the discharge, is, that they have made a proof in respect of which they have not any security whatever, and they have filed their charge and are proceeding to realise securities which they held in respect of another distinct debt; and in respect of such latter debt the Provincial Bank can neither prove nor vote unless they shall have realised their securities, and the proceeds of such securities should in that case prove insufficient to discharge that debt, or unless the Provincial Bank shall in the meantime put a value upon them; and until the Provincial Bank have made a proof, in respect of such latter debt, they cannot participate in respect of that secured debt in any intermediate dividend that may be made of the bankrupt’s estate; but, the discharge of the assignees is no answer to the charge as filed by the Provincial Bank, and which must in that respect be established.
But, a further question of a wholly different nature has been put forward by the 5th and 18th paragraphs of the charge as thus filed by the Provincial Bank, in which other parties than the assignees are directly interested. The 5th paragraph states that:—“By indenture of 9th of January, 1863, between Robert Orr M’Kittrick and the bankrupt, M’Kittrick demised the farm of land therein described, and stated to contain 16a. 1r., for 99 years from the 1st of November, 1862, subject to a rent of £28 8s. 9d., and to the observance of the several lessees’ covenants, therein contained.” The 18th paragraph states that:—“By deed of the 8th of December, 1864, between the bankrupt, of the one part, and Archibald Crothers, William M’William, and Arthur Greer, the bankrupt, for love and affection towards his children therein named, assigned to Crothers, M’William, and Greer, all the premises comprised in said lease of the 9th day of January, 1863, for the residue of the term of 99 years, granted by the said lease of the 9th day of January, 1863, subject to the payment of the rent by said lease reserved, and subject also to the observance of the several lessees’ covenants, therein contained, upon the trusts in the deed of the 8th of December, 1864, particularly mentioned; that said deed was a voluntary settlement without valuable consideration, and was consequently void and inoperative against the Provincial Bank as mortgagees for valuable consideration, as thereinbefore stated, of the premises comprised in said deed of the 8th of December, 1864.” Crothers, M’William, and Greer, filed a discharge to those 5th and 18th paragraphs of the charge of the Provincial Bank; and by the 8th paragraph thereof, “Dischargeants say that the said deed of the 8th of December, 1864, is not a voluntary deed, nor was the same executed without valuable consideration as in the said charge was alleged, and they say further, and charge that the said bank is not a purchaser of said term for valuable consideration as in the said charge alleged. ” William M’William, one of the dischargeants, filed an affidavit in this matter on the 18th of January, 1877, in support of that discharge, in which he states:—“That the settlement of the 8th of December, 1864, was executed by the bankrupt at the time he contemplated marriage with his present wife, and that previous to and at the time of the execution of the said deed he (M’William) approved of the action of the bankrupt in making said settlement. That the age of the youngest of the children of the bankrupt, for whose benefit that deed was executed, was now about 12 years.” And he then proves the execution of that deed of the 8th of December, 1864, by himself and Archibald Crothers, and that the attorney, witness to said respective signatures, is at present in America. By the terms of the original lease of the 9th of January, 1863, 16 acres and 1 rood of ground, Cunningham measure, were made subject to a rent of £28 8s. 9d., and the lessee thereunder and his assignees were bound thereunder, by covenants under their hands and seals, not alone to pay that apparently heavy rent, but also to keep the premises demised in good and sufficient order, repair, and condition, and within two years from the 9th of January, 1863, to lay out £150 in erecting good and substantial buildings on the premises thereby *110 demised. The deed of the 8th of December, 1864, states, by recital, the objects of the deed—viz., “That the bankrupt several years ago intermarried with his late wife, who died on the 3rd of November, 1863, leaving the four children therein named, minors under the age of 21 years, surviving her, and that he was desirous of making some provision for his said children, and had agreed to assign the leasehold premises comprised in the lease of 1863, and the rents thereof, to those dischargeants by name upon the trusts therein mentioned—that is to say, that such trustees should hold such premises for the residue of the term of 99 years from 9th Jan, 1863, subject to the rents and covenants contained in that lease, upon trust during the minority of such four children, and in such manner as such trustees shall in their discretion think fit, to pay and apply the rents, issues, and profits, and produce of the said lands in and towards the support and education of the said four children, until each, being a son, should attain the age of 21 years, or being a daughter should attain that age, or be married, and no longer.” That deed was formally registered in the Registry of Deeds’ Office on the 8th of March, 1865; and if the bankrupt was so circumstanced at the date of that settlement of the 8th of March, 1864, as to enable him to make such a provision for his issue by a former marriage, when he had in contemplation at the time a second marriage, there could not well be a more meritorious act on the part of the bankrupt. And in reference to the position of the bankrupt at the date of the execution of that deed of the 8th of December, 1864, the bankrupt also filed an affidavit on the 18th of June, 1877, and he therein states, as is likewise stated by the 12th paragraph of the charge of the Provincial Bank, that he, the bankrupt, made the first deposit of the lease of the 9th of January, 1863, with the Provincial Bank about the 27th of October, 1868, being long subsequent to the registration of the deed of the 8th of December, 1864; and, therefore, I shall leave out of consideration altogether whether or not the Provincial Bank had, at the time of such deposit, notice of the prior deed of the 8th of December, 1864, as being wholly immaterial. The bankrupt further stated by that affidavit that he was perfectly solvent at the date of the said deed of the 8th of December, 1864, and that such deed of the 9th of January, 1863, had been deposited, with other documents, with the Provincial Bank in that year 1868, on the occasion of his, the bankrupt’s, requesting the Provincial Bank to give to him a standing overdraft of £1,000; and there is no evidence whatever to show that the bankrupt was not perfectly solvent, as he has alleged, at the date of that deed of the 8th of December, 1864. It does, however, appear from a recital in the deed of the 8th of December, 1864, that the sum of £150 and upwards had been, previous to the date of that deed, expended in good and substantial buildings on the said farm, in compliance with the covenants in that behalf contained in the lease of the 8th of January, 1863; and therefore, any obligations under that covenant could not form any part of the consideration of that deed of the 8th of December, 1864; but, that expenditure by the bankrupt upon such substantial buildings prior to the deed of assignment of the 8th of December, 1864, had the effect of rendering still more onerous the further covenant thereby cast upon the assignees of the lessee under the deed of the 9th of January, 1863, as already referred to, on the part of the lessee and his assignees, to keep the demised premises in good order, repair, and condition. It may be conceded that the deed of the 8th of December, 1864, could not, under any of the circumstances as stated, be maintained as not being voluntary upon any such ground as that it came within the consideration of the second marriage; but, notwithstanding its severance from the marriage consideration, the deed of the 8th of December, 1864, is altogether free from any taint whatever that would connect it in any way with actual fraud in its execution, and on the contrary, having regard to the position and circumstances of the bankrupt at the date of it, also the number of children that he had by his first marriage, also the smallness of the provision which he was making for his children, confined as it was to their maintenance and education during their respective minorities, that deed, of the 8th of December, 1864, being executed by the bankrupt in contemplation by him of a second marriage, was, in every sense, a righteous act, and should be sustained and carried out if it be possible upon any other grounds. The naked question thus presented is, whether the deed of the 8th of December, 1864, is a voluntary deed under the statute of Charles, corresponding with the statute of Elizabeth in England; and upon that question I have always understood that, when the subject matter of an assignment was held under a lease at a full or substantial rent, and that such lease contained onerous covenants on the part of the lessee thereunder, such as for the payment of that rent thereby reserved, and to keep the premises thereby demised in good order, repair, and condition, such an assignment of that leasehold interest (if free from any actual fraud) to an assignee who executes that assignment, and thereby subjects himself to the performance of those covenants, could not be held as being voluntary within the statute, as against subsequent purchasers for value; and that, on the contrary, the obligations which the assignee thereby took upon himself under his hand and seal, in exoneration of the lessee, supplied a sufficient consideration as a protection against the statute for such assignment, if registered, as against any, or, as in this case, a subsequent purchaser for value after the registration of such an assignment, and, whether or not, such subsequent purchaser for value had notice or not of such a previous assignment. However, in a recent case of Price v. Jenkins, before Vice-Chancellor Hall, L. R. 4 Ch. Div. 483, and referred to during the argument, he declared an assignment of a leasehold interest by a father to his son, without any pecuniary consideration, void, as being voluntary within the statute, and gave an elaborate judgment, in which he distinguished the case before him from the various cases that had been cited before him, in which deeds had been sustained as not being voluntary within the statute or the ground that they fell within, and were sustained by the marriage consideration. That same case of Price v. Jenkins was quickly brought before the Court of Appeal, and is only reported in the Weekly Notes of the 28th of April last, at page 34,1 where Lord Justice James, at that page, says:—“That he thought it was impossible to sustain the Vice-Chancellor’s decree, upon a ground which was not argued in the court below. The property in this case was leasehold, and the assignee of the leasehold necessarily came under obligation to pay the rent and perform the covenants in the lease. He could not, therefore, be considered a volunteer under the statute; the amount of the consideration was immaterial. He was, therefore, of opinion that T. Jenkins, the son, was not a volunteer, and that the bill must be dismissed.’” I have only to add that I entirely concur in the reasons, so far as they have been expressed in that report in the Weekly Notes, for the judgment as pronounced by the Court of Appeal in that case; and I am of opinion that the trustees, as assignees under the deed of the 8th of December, 1864, are not volunteers under the statute, under the circumstances which I have stated, and that the charge of the Provincial Bank must be dismissed, as against such trustees, and as the trustees are innocent parties, with costs, except such costs as I have already directed the trustees to pay to the Provincial Bank; but I will declare that the Provincial Bank are to have such costs, along with their costs of proving their charge, annexed to their demand, on the ground that the bankrupt, through whom the assignees derive, should, when making his deposit of deeds, by way of equitable mortgage for the purpose of obtaining an overdraft, wholly apart from the fact or effect of registration, have specified clearly what the particular interest in these premises was which he then proposed to pledge, as he would otherwise mislead the party with whom he was making such deposit—and in that respect, I am not very clear that the bank had such notice, at the time of the deposit, as would have enabled them to form any definite opinion as to its effect upon the value of the deposit. Subject to the qualification as above, the charge of the bank must be taken as proved, subject to an account as to the sum due; and when the Provincial Bank apply for *111 an order for the sale of the premises as vested in them, the trustees, as assignees under the deed of the 8th of December, 1864, can be sufficiently protected.
Re W. C. Daly
, a Bankrupt
Court of Bankruptcy and Insolvency.
11 November 1872
[1872] 6 I.L.T.R 172
Harrison J.
This case came before me on Friday last, upon a sitting taken out to audit the account of the mortgagees, the Munster Bank (Limited). I reserved judgment until to-day, not so much because I entertained any doubt of what my decision should be, as that I felt the question one of importance to the Munster Bank, and on which they were entitled to have my careful consideration of the question raised, before it was determined. The bankruptcy took place in the month of October, 1871. On the 6th of Dec., 1871, the Munster Bank filed a charge claiming to be secured creditors, by virtue of a letter of equitable deposit, affecting certain premises in said charge mentioned, and praying for a sale of said premises, and that, out of the proceeds of said sale, they should be declared to be entitled to be paid the sum of £484 12s. 6d., with interest and costs, being the amount alleged in the second schedule to their charge to be due them on December 1, 1871, under their security. No discharge was filed by the assignees, and on January 23, 1872, the charge came on for hearing before me, in the presence of the respective solicitors for the Munster Bank and the assignees, and of Mr. Deering, the official assignee, and an order was made declaring the charge well proved, and referring it to the Chief Registrar, to take an account of the amount due chargeants, and declaring the mortgagees entitled to proceed to a sale of the premises. On March 12, 1872, the Chief Registrar made his report, finding that the sum of £484 12s 6d. was due to the Munster Bank up to December 1, 1871. In April, 1872, the Munster Bank filed a proof of debt in the matter, dated the 9th of April, in the name of their secretary and general manager, in whose name the previous proceedings had been carried on, claiming to be creditors for the sum of £234 12s. 6d. on foot of an account for cash advances made to the bankrupt, and alleging (as in the usual printed fo rm of proof of debt) that the particulars of demand and all securities for the same are truly set forth in the schedule, and that, save as thereby appearing, the said Bank had not received any manner of security for said sum. The schedule sets out the same amount as had been set out in the charge already filed by the Bank, showing the same balance of £484 12s. 6d. due to the Bank, and the mode by which the sum of £234 12s. 6d. was ascertained, in respect of which the proof of debt is thus set out:—
“By amount estimated value of mortgaged premises,
£250
0
0
“Estimated balance,
234
12
6”
And the securities held by the bank are described as a certain “letter of deposit or equitable mortgage, dated, &c., with the several deeds in the schedule thereto annexed.” On April 22, the sitting came on before the Chief Registrar for proof of debts, and the proof of the Munster Bank is returned on the list of the Chief Registrar as proved on that day for the sum of £234 12s. 6d. On May 14, the assignees’ account, founded on that proof of debt list as so settled, was audited by the Court, and on June 18 a dividend of 2s. 8d. in the £1 upon the debts included in said list, amounting to £3,570 14s. 7d., was struck by the Court. On June 21 Mr. Deering, the official assignee, transmitted to the Munster Bank the usual dividend warrant for the sum of £54 5s. 8d., the amount of their dividend on the debt of £234 12s. 6d. proved by them. On June 24, he received same back from Mr. Belton, the secretary and manager of the bank, with a letter in the following words:—“I beg to return the dividend order in W. C. Daly’s case, pending the realisation of our securities, as I expect the proceeds of the sale will pay our debts.” It appears that, on June 4, a sale of the premises specified in the charge of the Munster Bank took place, and that a sum of £515 was realised thereout.
On these facts, the assignees contend that the Bank are only entitled to receive out of the proceeds of the sale the sum of £250, at which they valued their security, when they proved a debt for the balance of the sum due then; and an affidavit of Mr Deering was filed on July 22nd last, disclosing the above facts, and a notice was served on the Bank of the filing of same, and that it would be used on the audit of the mortgagee’s account, for the purpose of having it declared that the assignees were entitled to the balance of the funds produced by the mortgaged premises after payment of the costs of the charge and incident to the sale, and over and above said sum of £250. I am of opinion that the assignees are right in their contention, and that the Munster Bank, having filed a proof of debt in which they valued their security, on which they did not nor could rely in that particular proceeding, and having proved for the balance, must be taken to have elected to waive any claim to have the sum which was included in said proof of debt, paid out of the proceeds of the sale of the premises included in their security. No case of surprise or mistake of fact is attempted to be made on their behalf, nor have they taken any-steps to get rid of their proof, even if such steps were open to them after what has occurred That proof was put in with full knowledge of the amount due on foot of their security, and if, in the events that have happened, the bank are sufferers by having put in that proof, they have only themselves to blame. The proof was a deliberate step, taken to enable them to receive a dividend with the other unsecured creditors of the bankrupt, out of the proceeds of his general assets; all parties and the Court acted on that step; the assignees’ account was audited on the faith of it, and of the other proofs of debts which were filed being accurate; a dividend was struck, with due diligence, after that audit; and th e bank cannot, in my opinion, be heard now to insist, because it happens that they formed too low an estimate of the value of the mortgaged premises, that they are not bound by that act, but should receive substantially the whole amount realised at the sale, as if such proof had never been put in or acted upon as it has been. Mr. Perry showed that loss, most probably, would accrue to the unsecured creditors, if the bank were permitted so to do, as the sum of £31 5s. 8d., retained for their dividend, would produce no appreciable sum for division among the general unsecured creditors, whose debts are reported to amount to £3,570 14s 7d. ; whereas, had the bank not intervened and made a proof of debt, this sum would have been added to and included in the dividend already declared. But, I prefer basing my judgment on the principle I have already stated; and I hold, upon the general principles of the Bankrupt Law, and the true construction of the 262nd section of the present Bankrupt and Insolvent Act, that the bank must be held to have elected to come in as unsecured creditors for the sum of £234 12s. 6d, and that if authority were wanting in support of this view it is supplied by the case of Ex parte Downes, 18 Ves., 290, 1 Rose, 96. As a general rule, no creditor, holding security for his debt, is entitled to receive a larger dividend than any other creditor, if he comes in and proves in the bankruptcy. The 262nd section of the Act of 1857 provides, amongst other matters, that “the proving or claiming a debt, under any bankruptcy or insolvency, by any creditor shall be deemed an election of such creditor to take the benefit of such bankruptcy or insolvency, with respect to the debt so proved or claimed.” And in the case of Ex parte Downes, Lord Eldon, C., refused to allow a mortgagee to retract his proof and have *173 the benefit of his mortgage, after he had proved in the matter, and thereby elected to come in under the bankruptcy. The case is very shortly reported as follows. [His Lordship referred to the case and the judgment, as reported 18 Ves., 290.] The report of the case in 1 Rose R., 96, states the additional facts, that the petitioner grounded his application on an affidavit stating that he had been deceived, and had made his election through a mistake ; but these circumstances were not deemed sufficient to entitle him to rescind his election. Again, in Ex parte Davenport, 1 M. D. & De G., 313, it was decided that a creditor who had obtained the common order for sale of his security, with liberty to prove for the deficiency, could not afterwards abandon that order, and claim to prove for his whole debt, retaining his security; although the order had not been acted upon, and he was not aware of his rights when it was obtained. And in Ex-parte Solomon, 1 Glynn & J. 25, it was held that a creditor who had a lien on the property of the bankrupt for his debt was concluded by proving his debt, voting in the choice of assignees, and signing the certificate, and he was ordered to deliver up the property on which he had a lien. It must be remembered that a secured creditor is not bound to come in at all under a bankruptcy; or, if he does apply for liberty to file a charge and establish his security, he can do so, and, if the sale produce a sum insufficient to pay his secured debt, he can then prove for the deficiency, but such proof is without prejudice to any dividends already declared—the policy of the bankrupt law being to pay all creditors equally, and, whilst it does not prevent a secured creditor realising his security in this Court, and obtaining a dividend on the balance, if any, it takes especial care that the unsecured creditors shall not suffer or be delayed thereby. If he proves in the ordinary manner, without waiting for a sale of his security, such proof is, in my opinion, a conclusive election, which he cannot be allowed to retract. I, therefore, hold that the bank are only entitled to be paid out of the proceeds of the sale of the premises mentioned in their security, the costs of their charge and of the sale, and the sum of £250, at which they valued their security in their proof, and that the balance of the proceeds of the sale be paid over to the assignees, to be divided among the unsecured creditors. No costs of the argument to the mortgagees, who are to have the ordinary costs of appearing on the audit, the assignees to have their costs out of the fund.
In re M. A. Galvin, a Bankrupt.
Court of Bankruptcy.
29 January 1897
[1897] 31 I.L.T.R 27
Judge Boyd
It is, in my opinion, a very hard case that if a department of the Crown tries to take away part of the bankrupt’s estate, to which the assignees are entitled, the Crown should not be liable to pay costs if it fails in that attempt. However, I consider I would be going in the face of the decision in Reg. v. Beadle if I gave costs against the Crown. Although the decision of the Vice-Chancellor, in 31 L. R. Ir., seems to take another view, still the point does not seem to have been raised in that case. No rule as to costs, therefore.
Re Coltsman, a bankrupt
Bankruptcy.
11 May 1894
[1894] 28 I.L.T.R 108
Judge Miller
The Judge.
This matter came before the registrar sitting to take proof of debts, and was adjourned into Court on the ground that the claim of the trustees depended on the value of their interest on a covenant by the bankrupt to pay the annuity during his life, and for the payment of a sum of money on his death; but the registrar thought he had no jurisdiction, and accordingly no proof of the age of the bankrupt, nor of his state of health was given. On the 17th April, 1894, a notice of motion was served on behalf of the trustees of the marriage settlement of 1883, applying for an order that the claims of the trustees for the two sums of £637 and £640 might be admitted. In reply to the Court it was stated that the valuation of the reversion of £750 at £640 was not *108 disputed, but that of £637 as the value of the annuity the assignees contended should not be admitted. It appears that the bankrupt, on the marriage of his daughter, by a settlement made in 1883, agreed to pay the trustees an annuity of £112 10s. as interest on a sum of £2,250, until, on the bankrupt’s death, that sum should vest in the trustees. This interest was paid till the 3rd Oct., 1892, and not since. The trustees took no steps to enforce payment till 19th Oct., 1893, when an affidavit in proof of debt in this matter was filed. An actuary found (correctly I think) that the value of the annuity was £637, and in accordance with s. 49 of the Bankruptcy Act, the Court found that that sum represented the then value of the annuity. The bankrupt died soon after, but these proceedings were continued to wind up the estate. Now I declare that when the value was ascertained and admitted, it was done once for all, and for all purposes. Both this disputed sum of £637, and the undisputed sum of £640, having been once ascertained, must be admitted on the proofs of debt without charge. The case of Ex parte Bates, re Pannell, 11 Ch. Div. 914, rules this, and supplies all that is necessary to support the motion. I should have been disinclined to follow Ex parte Wardley, L. R. 6 Ch. D. 790, even if it had not been discussed and disapproved in Ex parte Bates. As regards the costs, since this matter does not come before me by way of appeal, but upon adjournment under the 2nd Gen. Ord., the question as to the creditor’s costs falls under the 149th Gen. Ord., and must be borne by them as part of their costs of proof. The assignees, however, shall have their costs (since there is no specific or special reason against it), as the claim of the creditors was complicated, and no unnecessary or useless expense was put on the creditors by the course adopted by the assignees.
Re: O’Rourke, (a bankrupt)
[2018] IEHC 176 (16 March 2018)
JUDGMENT of Ms. Justice Costello delivered on the 16th day of March, 2018
1. The issue in this case is whether or not surcharge payable by the discharged bankrupt (the taxpayer) on foot of a notice of opinion issued by the Revenue Commissioners pursuant to s. 811 of the Taxes Consolidation Act, 1997 (the TCA) to the effect that a pre adjudication transaction was a tax avoidance transaction is a pre or post adjudication debt or liability which is provable in the taxpayer’s bankruptcy pursuant to s. 75 of the Bankruptcy Act, 1988 as amended.
Background
2. In 2006 the taxpayer made capital gains in excess of €121 million on the disposal of his interest in certain property and shares. In December, 2006 he entered into a transaction (the impugned transaction) relating to the acquisition of certain German bonds which reduced the taxpayer’s capital gains tax return for the year 2006 by €2,693,799. In 2007 he duly filed a self assessed return for his capital gains tax liability for 2006 claiming a reduction in his liability in respect of the impugned transaction.
3. On the 13th April, 2010 the Revenue Commissioners anti avoidance unit (direct taxes) notified the taxpayer that it would commence an audit of the impugned transaction commencing on the 5th May, 2010 pursuant to s.811 of the Taxes Consolidation Act, 1997 (“TCA”). On the 27th July, 2011 the taxpayer was adjudicated bankrupt. On the 20th December, 2011 a report on the impugned transaction was furnished to the nominated officer for his consideration under provisions of s. 811 of the TCA. On the 21st December, 2011 a notice of opinion pursuant to s. 811 was sent to the taxpayer. The nominated officer formed the opinion that the impugned transaction was a tax avoidance transaction within the meaning of s. 811 and he determined that the tax advantage in the sum of €2,693,799 should be withdrawn from the taxpayer and a surcharge was payable pursuant to s. 811A of the TCA.
4. On the 17th January, 2012 the taxpayer appealed against the determination pursuant to the provisions of s. 811 (7) TCA notwithstanding the fact that he had been adjudicated a bankrupt and that the right to appeal the notice of opinion had vested in the Official Assignee. On the 27th July 2014 the taxpayer was discharged from bankruptcy. On the 4th December, 2015 the Appeal Commissioner rejected the taxpayer’s appeal and held that the tax consequences specified in the notice of opinion should stand. On the 11th December, 2015 the taxpayer’s solicitors required that the appeal be reheard by a judge of the Circuit Court pursuant to s. 942 TCA. However on 9th May, 2016 the Official Assignee withdrew the taxpayer’s appeal against the notice of opinion. Accordingly the Revenue Commissioners wrote to the taxpayer on the 21st July, 2016 notifying him of this fact and advising him that the opinion was now final and conclusive. The letter stated that the capital gains tax due following the withdrawal of the appeal was a pre bankruptcy debt but that:
“The surcharge imposed by Section 811A Taxes Consolidation Acts, 1997 on that capital gains tax charge arises when the notices of opinion becomes final and conclusive, that is, when the appeal was withdrawn on 09 May 2016.
The surcharge, in the sum of €239,867, is now due and payable and should be paid immediately.”
5. On the 13th February, 2017 a final demand in that amount was raised against the taxpayer. The taxpayer contends that the liability to CGT and to the surcharge levied pursued to s. 811A related to a “tax” event, CGT from 2006, which predated the bankruptcy of the taxpayer. Section 136 of the Bankruptcy Act, 1988 prohibits any creditor’s remedy against the property or person of the bankrupt. The liability to pay the surcharge was a debt provable in his bankruptcy by reason of the provisions of s. 75 of the Bankruptcy Act, 1988 and that accordingly he is not liable to pay the surcharge levied by the Revenue Commissioners.
6. The parties could not resolve the issues between them and so the taxpayer issued a motion seeking the following reliefs:
“1. An order pursuant to s. 61 (7) of the Bankruptcy Act, 1988 requiring the Official Assignee to exercise his powers pursuant to s. 61 (3) (b) of the Bankruptcy Act, 1988 to compromise the Revenue Commissioners claim to a surcharge pursuant to s. 811 A of the Taxes Consolidation Act, 1997, in the amount of €239,867, it being a pre adjudication debt of Dermot O’Rourke.
2. Further or in the alternative, an order pursuant to s. 61 (7) of the Bankruptcy Act, 1988 requiring the Official Assignee to seek the directions of this honourable court pursuant to s. 61 (6) of the Bankruptcy Act, 1988 to determine whether the Revenue Commissioners claim to a surcharge pursuant to s. 811 A of the Taxes Consolidation Act, 1997, in the amount of €239,867, is a pre adjudication debt of Dermot O’Rourke.”
7. In written submissions the taxpayer recast the issue raised by his motion as whether the imposition of a surcharge by the Revenue Commissioners is a provable debt pursuant to s. 75 of the Act and therefore, a provable debt for the purposes of the taxpayer’s bankruptcy. The parties approached the motion on this basis in argument before the court.
Section 75 of the Bankruptcy Act, 1988
8. Section 75 provides:
“(1) Debts and liabilities, present or future, certain or contingent, by reason of any obligation incurred by the bankrupt or arranging debtor before the date of adjudication or order for protection and claims in the nature of unliquidated damages for which the bankrupt or arranging debtor is liable at that date by reason of a wrong within the meaning of the Civil Liability Act, 1961, shall be provable in the bankruptcy or arrangement…
(4) An estimate may be made by the Court of the value of any debt which, by reason of it being subject to any contingency or for any other reason, does not bear a certain value and the amount of the estimate shall be proved as a debt.”
9. All parties were agreed that a debt or liability is provable in a bankruptcy if it arises “by reason of any obligation incurred” by the bankrupt before the date of adjudication. The taxpayer’s argument was that the obligation to pay the surcharge pursuant to ss. 811 and 811A of the TCA was incurred in 2007 when the taxpayer filed his capital gains tax return in respect of the year 2006. The Revenue Commissioners say that the obligation was only incurred when the opinion of the nominated officer became final and conclusive pursuant to the provisions of s. 811 of TCA, which in this case was 21st July, 2016, and accordingly the obligation to pay the surcharge is a post adjudication debt.
The Authorities
10. Initially the Revenue Commissioners relied upon In The Matter of Sean Barry, a Bankrupt (unreported, High Court, Fullam J. 3rd March, 2017) as being substantially determinative of the issue in this case. However researches on behalf of the taxpayer revealed that the two decisions of the English Court of Appeal upon which Fullam J. relied (Glenister v. Rowe [2000] Ch 76 and R. (Steele) v. Birmingham City Council [2006] 1 WLR 2380) had been expressly overruled by the Supreme Court of England and Wales in the case of In Re Nortel GmbH [2014] AC 209. On that basis the Revenue Commissioners no longer sought to rely upon the decision in Barry and it was accepted that this Court should not follow it, as it had been decided per incuriam.
11. In Nortel the Supreme Court considered the effect of r. 13.12 of the Insolvency Rules in England and Wales, which are in similar terms to s. 75 of the Act of 1988. Insofar as is relevant, the rule provides:
“13.12.—(1) “Debt”, in relation to the winding up of a company, means (subject to the next paragraph) any of the following—
(a)any debt or liability to which the company is subject at the date on which it goes into liquidation;
(b)any debt or liability to which the company may become subject after that date by reason of any obligation incurred before that date; …
(3) For the purposes of references in any provision of the Act or the Rules about winding up to a debt or liability, it is immaterial whether the debt or liability is present or future, whether it is certain or contingent, or whether its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion; …” (emphasis added).
12. The question for consideration was whether a particular statutory liability in issue in that case arose “by reason of any obligation incurred before” the insolvency event.
13. At para. 74 Lord Neuberger of Abbotsbury observed that the word obligation in many contexts has the same meaning as liability but it clearly cannot have the same meaning in the context of r. 13.12 as it must imply a more inchoate or imprecise meaning than liability because the liability is what can be proved for, whereas the obligation is the anterior source of that liability.
14. At para. 77 he held:
“I would suggest that, at least normally, in order for a company to have incurred a relevant “obligation” under rule 13.12(1)(b), it must have taken, or been subjected to, some step or combination of steps which (a) had some legal effect (such as putting it under some legal duty or into some legal relationship), and which (b) resulted in it being vulnerable to the specific liability in question, such that there would be a real prospect of that liability being incurred. If these two requirements are satisfied, it is also, I think, relevant to consider (c) whether it would be consistent with the regime under which the liability is imposed to conclude that the step or combination of steps gave rise to an obligation under rule 13.12(1) (b)”
15. Lord Neuberger pointed out that a party to legal proceedings is brought within a system governed by rules of court which carry with them the potential for being rendered legally liable for costs subject to the discretion of the court. It follows that in proceedings commenced before a company went into liquidation any order for costs made against the company is provable as a contingent liability under r. 13.12(1) (b) “as the liability for those costs will have arisen by reason of the obligation which the company incurred when it became party to the proceedings.”
16. Lord Sumption agreed with this conclusion and held at para. 136:
“In the costs cases, I consider that those who engage in litigation whether as claimant or defendant, submit themselves to a statutory scheme which gives rise to a relationship between them governed by rules of court. They are liable under those rules to be made to pay costs contingently on the outcome and on the exercise of the court’s discretion. An order for costs made in proceedings which were begun before the judgment debtor went into liquidation is in my view provable as a contingent liability, as indeed it has been held to be the case of arbitration proceedings: in Re Smith; Ex p Edwards (1886) 3 Morr 179. In both cases, the order for costs is made against someone who is subject to a scheme of rules under which that is a contingent outcome. The fact that in one case the submission is contractual while in the other it is not, cannot make any difference under the modern scheme of insolvency law under which all liabilities arising from the state of affairs which obtains at the time when the company went into liquidation are in principle provable. Of course, an order for costs like many other contingencies to which a debt or liability may arise, depends on the exercise of a discretion and may never be made. But that does not make it special. It is not a condition of the right to prove for a debt or liability which is contingent at the date when the company went into liquidation that the contingency should be bound to occur or that its occurrence should be determined by absolute rather than discretionary factors.”
Discussion
17. The crucial question for determination is when was the obligation to pay the surcharge incurred? In order to answer this question, it is important to consider the scheme of self assessment and the powers of the Revenue Commissioners to examine transactions pursuant to s.811 of the TCA. Capital gains tax is paid on the basis of self assessment. The obligation is on the taxpayer to make correct returns. This includes an obligation not to claim reliefs from liability to tax to which the taxpayer is not entitled. A taxpayer is under an obligation not to rely upon a scheme which is a tax avoidance scheme within the meaning of s.811 of the TCA when submitting his or her capital gains tax return. Once a taxpayer relies upon a scheme which reduces his liability to tax, his affairs potentially fall within the scope of s.811 of the TCA. If the scheme is not a tax avoidance scheme within the meaning of s.811 then there will be no liability to pay further tax or surcharge pursuant to s.811A of the TCA. On the other hand, if the scheme is a tax avoidance scheme, it is possible that a nominated officer, within the meaning of the TCA, may investigate the transaction and form an opinion to that effect and that a tax advantage claimed should be withdrawn. It is further possible that an opinion that the scheme is a tax avoidance scheme may become final after the elapse of 30 days or, at the end of any appeals taken by the taxpayer. In this eventuality a liability to further tax and surcharge will arise. Thus, the potential liability to pay the surcharge arises from the nature of any transaction entered into by the taxpayer and his filed tax returns claiming some tax benefit based upon the transaction.
18. The Revenue Commissioners are not entitled to levy a greater amount of tax than that specified in the taxpayer’s return. So if no steps are taken, there is no liability or even potential liability to pay additional tax or surcharge. The critical provision in my opinion is s. 811(4) of the TCA 1997. This provides:
“Subject to this section, the Revenue Commissioners as respects any transaction may at any time—
(a) form the opinion that the transaction is a tax avoidance transaction,
(b) calculate the tax advantage which they consider arises, or which but for this section would arise, from the transaction,
(c) determine the tax consequences which they consider would arise in respect of the transaction if their opinion were to become final and conclusive in accordance with subsection (5)(e), and
(d) calculate the amount of any relief from double taxation which they would propose to give to any person in accordance with subsection (5)(c).”
19. It is open to the Revenue Commissioners as respects any transaction to investigate the transaction to ascertain whether or not the transaction is in the opinion of the Revenue Commissioners a tax avoidance transaction within the meaning of the section. However, if they never conduct an investigation pursuant to s. 811 then there is no further liability to pay tax on the taxpayer. The critical step is the commencement of an investigation pursuant to s. 811. Once such an investigation is commenced, a contingent outcome is that the Revenue Commissioners may form the opinion that the transaction is a tax avoidance transaction and they may determine that certain tax consequences arise in respect of the transaction if their opinion becomes final and conclusive.
20. If an opinion of a nominated officer under s. 811(5) that a transaction is a tax avoidance transaction becomes final and conclusive and, as a result, an amount of tax is payable by a taxpayer that would not have been payable if the opinion concerned had not been formed, then, pursuant to s. 811(A)(2):
“…subject to subs. (3) –
(a) the person shall be liable to pay an amount (in this section referred to as the ‘surcharge’) equal to ten per cent of the amount of that tax and the provision of the Acts, including in particular s. 811(5) and those provisions relating to the collection and recovery of that tax, shall apply to that surcharge, as if it were such tax…”
21. The combined effect of these two sections is that the Revenue Commissioners are empowered to order an investigation into any transactions. Once they commence an investigation into any transaction one possible result is the formation of an opinion by a nominated officer that the impugned transaction is a tax avoidance transaction within the meaning of s. 811 and that certain tax consequences flow, including the withdrawal of a previously claimed tax benefit. If the opinion becomes final and conclusive this entitles the Revenue Commissioners to recover additional taxes from the taxpayer pursuant to s. 811. This automatically gives rise to the imposition of surcharge liability equal to ten per cent of the amount of the tax to which the taxpayer is liable pursuant to s. 811.
22. It follows that once an investigation is commenced the Revenue Commissioners and the taxpayer are in a relationship the outcome of which is contingent on certain matters occurring. One of these is that the nominated officer may form an opinion that the taxpayer has entered into a tax avoidance transaction and that a tax benefit previously claimed is to be withdrawn resulting in a further liability to tax and to surcharge on the part of the taxpayer.
23. Applying Lord Neuberger’s test, the taxpayer in this case had taken or been subjected to some step or combination of steps which had some legal effect and which resulted in him being vulnerable to the specific liability in question such that there was a real prospect of that liability being incurred. The taxpayer had entered into a transaction giving rise to a capital gains tax liability. He also entered into the impugned transaction. He filed a capital gains tax return claiming a reduced liability to capital gains tax by reason of the impugned transaction. He therefore had taken a combination of steps which had the legal effect of declaring his liability to capital gains tax for the year 2006 to be in a certain amount when he was, in the words of Lord Neuberger, vulnerable to the Revenue Commissioners finding that the impugned transaction was in fact a tax avoidance transaction within the meaning of s. 811 if they commenced an investigation under the section. He was then subjected to a combination of steps, the investigation of the impugned transaction leading to a final and conclusive opinion that it was a tax avoidance transaction and that the tax benefit claimed should be withdrawn. These occurred prior to his adjudication as bankrupt. As the actions of the taxpayer and the Revenue Commissioners had left him vulnerable to a liability to tax under s. 811, he was also vulnerable to a liability to a surcharge pursuant to s. 811A on that tax. There was a real prospect of his liability to pay further taxes and a surcharge pursuant to ss. 811 and 811A being incurred. Thus the two requirements identified by Lord Neuberger are satisfied.
24. The liability to pay the surcharge pursuant to s.811A arose after the date of adjudication of the bankrupt but the liability to pay it arose by reason of an obligation incurred before that date. The fact that it is a contingent liability and the contingency in question is remote or might never eventuate does not alter the fact that it is a liability that is provable in the bankruptcy.
25. Lord Neuberger identified a third relevant consideration in determining the issue whether an obligation was a pre-liquidation or bankruptcy liability: whether it would be consistent with the regime under which the liability is imposed to conclude that the step or steps gave rise to an obligation under the relevant insolvency rule.
26. There can be no real debate on this question in this case. The regime under which the liability is imposed in the instant case is the Taxes Consolidation Act, 1997. The Revenue Commissioners accept that the liability to pay the additional tax in respect of capital gains tax for 2006 is a pre-adjudication debt. They accept that this is so notwithstanding the fact that the additional tax was not actually collectible by the Revenue Commissioners until the opinion of the nominated officer pursuant to s.811 became final and conclusive. The liability to pay the surcharge pursuant to s.811A is dependent upon the liability to pay the tax found due pursuant to s.811. The liability to pay the surcharge arises solely by reason of the liability to pay the charge to tax pursuant to s.811.
27. I therefore conclude that it would be consistent with the regime under which the liability is imposed to conclude that the step or combination of steps which gives rise to the liability to pay tax and surcharge pursuant to ss.811 and 811A each arise by reason of obligations incurred by the bankrupt before the date of adjudication within the meaning of s.75 of the Bankruptcy Act, 1988 and thus are pre-adjudication liabilities provable in the bankruptcy.
28. It follows that the surcharged raised by the Revenue Commissioners is a pre-adjudication debt and is provable in the bankrupcy. The discharged bankrupt is not liable to pay the surcharge.
Deering v Governor and Company of the Bank of Ireland
House of Lords.
7 December 1886
[1887] 21 I.L.T.R 1
Lord Halsbury C., Lord Blackburn, Lord Watson
Porter, M.R.—The point is a short though a very important one. The 47th section of the Bankruptcy Act of 1872 provides that “If any bankrupt at the time of adjudication, or any arranging debtor at the time of the presentation of his petition, be liable, by reason of any contract or promise, to pay premiums on any policy of insurance, or any other sums of money, whether yearly or otherwise, or to repay to or indemnify any person against any such payments, the person entitled to the benefit of such contract or promise may, if he think fit, apply to the court to set a value upon his interest under such contract or promise, and the court is hereby required to ascertain the value thereof, and to admit such person to prove the amount so ascertained, and to receive dividends thereon.” The 329th section of the Act of 1857 is as follows:—“No creditor having security for his debt, or having made any attachment in Dublin or in any other place, by virtue of any custom there used of the goods and chattels of the bankrupt, shall receive, upon any such security or attachment, more than a rateable part of such debt, except in respect of any execution or extent, served and levied, by seizure and sale of, or any mortgage of or lien upon any part of the property of such bankrupt before the filing of a petition of bankruptcy.” The 63rd section of the Act of 1872 is in these words:—“A secured creditor shall, for the purpose of voting at any meeting of creditors in any arrangement or in any composition after bankruptcy, under the said Act or this Act, be deemed to be a creditor only in respect of the balance (if any) due to him after deducting the value of his security; and the amount of such balance shall, until the security be realised, be determined in the prescribed manner. He may, however, at or previously to any such meeting, give up the security, and thereupon he shall rank as a creditor in respect of the whole sum due to him.” Now, in the case before us, the Bank are mortgagees of a policy of assurance on the life of the bankrupt, valued per se at £185. Their debt is in all £1,000 or thereabouts; and besides the policy they have other mortgaged securities amounting to about £165. They have proved, as unsecured creditors, for the difference between the value of the policy and mortgaged premises (£350) and their debt of £1,000, and have been admitted to dividend on this £650. But in the agreement pledging the policy there is a contract by the bankrupt to pay the premiums; and the bank seek to amend their proof by adding to it the value of the contract ascertained under section 47 (on the assumption of the solvency of the mortgagor) at £408; and thus, whilst holding their securities value for £350, to rank as creditors for £1,058 besides. They, of course, admit, however, that from all sources they cannot obtain more than 20s. in the pound on the £1,000 due. Now, I think it plain that the covenant to pay premiums, though contained in the mortgage deed, is not a “security.” It is the bankrupt’s own contract to provide a fund for the payment of his own debt; but it does not provide any such fund, and is no charge on any property. “Secured creditor” is defined (sect. 4) as a creditor “holding any mortgage, charge, or lien on the debtor’s estate or any part thereof as a security;” and a mere contract to pay, or to pay with the view of keeping up a security, cannot be a security, i.e., a charge on the property, &c., of the bankrupt. If it were, and if it could be valued as part of the security, then the greater the value placed upon the covenant, the less would be the proof for dividend. It will be observed that, under the 47th section, it is not the contract which is to be valued, but the creditor’s interest under the contract, which can in no case exceed the mortgage debt. If the contract were part of the security, this curious result would follow—that the larger the premium on a policy of assurance pledged, the greater would be the value of the security; whereas the opposite is obviously the case. Premiums on a policy pledged are analogous to rent on leaseholds pledged. If either be left unpaid, the security is lost, and the smaller they are, rent or premium, the better the security. In my opinion, if the creditor prove for his debt, he cannot also prove for the bankrupt’s contract to keep up policy or leasehold as security for the same debt. To do so, would be to admit a double proof; because the security cannot, for purposes of proof in bankruptcy, be deemed a debt distinct and separate from the thing secured, and the creditors’ interest in the security is the same thing as the debt itself. In substance, a covenant to pay premiums on a policy, or rent on a lease pledged for a debt, is only a covenant to pay the debt, by keeping alive something which will ultimately pay it; and to allow the creditor to prove both for the debt and for the contract to secure the debt, is to admit a double proof. The creditor can choose either, but cannot in my opinion have both. It was thrown out during the course of the argument that, as a policy with a covenant to pay the premiums is a more valuable thing than the same policy without such a covenant, the proper course would be to value the covenant; give the mortgagee a cash dividend on the amount out of the assets; credit this as part of the security; and then let him prove for the rest of his debt. Without admitting that this would be a satisfactory solution, were it a possible one, it seems to me that it is not possible consistently with the Act of Parliament. If the covenant be security, it is absurd to pay a dividend upon it. If it be not security, it must be at most a debt: and a debt only to the extent of the creditors’ interest under it; and his interest under it is confined to his claim upon the estate. If the debt were paid off, the creditor would have no interest in the covenant; and the debt is extinguished by proof and receipt of dividend in bankruptcy as effectually as by payment in full. The very same question would arise in any mortgage of leaseholds, and yet no one has hitherto contended that the mortgagee can prove for the debt, and also for the covenant to pay the rent. Further, the dividend in bankruptcy cannot be adjusted till the assets on the one hand, and the proofs on the other, are ascertained. If, then, a dividend on the value of the covenant is to be added to the security, and a proof brought in for the balance of the debt, the court must be assumed to know and decide the dividend before the proofs have been ascertained. It certainly does at first sight strike one that an assignment of a policy, with a contract by the assignor to pay the premiums, must be a more valuable security than an assignment of the same policy without any such contract, and that, therefore, in bankruptcy the holder of the better security ought to fare better than the holder of the worse. But this is really a fallacy, for the additional saleable value derived from the covenant must be measured by the supposed solvency of the covenantor, and vanishes when he is bankrupt. To take an illustration as to how the proposal would work:—Two policies for £1,000 each on the life of the bankrupt in the same insurance office are on the same day mortgaged to two creditors, A and B, as collateral securities for debts of £1,200 and £1,000 respectively; and each mortgage contains a covenant by the bankrupt to pay the premiums. But the policy mortgaged to A was effected many years ago, and is subject to a premium of £30 per annum; while B’s was recently effected, and is subject to £60. Suppose A’s policy to be worth £300 (irrespective of the covenant), and B’s worth £100. A and B are therefore creditors for the same amount (£900) over and above the policies. But, if the suggested mode of dealing were adopted, B would be far better off than A in the bankruptcy, and would receive a larger sum in cash out of the assets, since a covenant to pay £60 per annum must be twice as valuable on paper as a covenant to pay £30 during the same term: yet, apart from bankruptcy, A held a better security than B; and, as regards the unsecured margin of £900, was in as meritorious a position in bankruptcy, and ought *3 to receive equal treatment. Or, to take another case: A and B are creditors for £100 each. A holds a policy for £100 on the bankrupt’s life: premium, £3 per annum; value, £10; value of the covenant, £40. The estate pays 10s. in the pound. A receives, therefore, £20 for the covenant, £10 (being the value of the policy); and a dividend on £70, which is £35, or £65 in all. B holds a mortgage of a newly-issued policy for £300, of no selling value. But the premium is £15 per annum, and the covenant to pay it is valued at £200. The dividend on this would be £100, and thus B is paid in full. Yet A, who is a loser of £35, held what anyone would consider far better security for his debt. Further, an absolute liability to pay premiums (by absolute I mean, not by way of security, but on a sale, or by covenant with the trustees of a settlement, or the like) would, on the hypothesis of the respondents, entitle the creditor to a less dividend in bankruptcy than a precisely similar covenant made to secure any debt however small; since, in the latter case, the creditor could prove for the value of the covenant and also for the debt it secured. Surely, this is a reductio ad absurdum. If the covenant were a charge on lands or funds adequate to meet it, then the question would disappear, as there would be security; but confusion and absurdity must result from any attempt to treat a personal contract by a bankrupt as security in his bankruptcy. But whether the proposed mode of proof would or would not be an advisable change in the law, in my opinion there is no power to introduce it without legislation, and the existing statutes do not provide for it. It is said, however, that there is authority in favour of the bank’s claim as put forward here: and we are referred to the case of Warburg v. Tucker (E. B. & E. 914), which decides that a covenant to pay premiums on a policy of insurance was not a “liability to pay money on a contingency” within the English Bankruptcy Act, 1849 (12 & 13 Vict., c. 106), sec. 178: and that therefore bankruptcy is no bar to an action for breach of the covenant. It was held that the liability did not depend on any contingency within the meaning of the Act—which, however, contains no section similar to the 47th sec. of the Irish Act of 1872, or the 154th sec. of the English Act of 1861. But no question of double proof arose in Warburg v. Tucker at all. On the contrary, Baron Bramwell says in his judgment, p. 927: “The plaintiff could not have claimed for the whole amount of the debt, and also for the non-payment of these premiums. He would have been claiming against the estate for more than the entire of that for which the defendant undertook: for the covenant is made by the defendant as surety. The plaintiff might keep up the security, or the policy might have been valued and sold; he could not have this and a separate proof for the original debt. The truth is, that this is not a separate and independent claim, such as the statute contemplates. It is a security for a debt; and I much think that this affords a solution of the question. If the creditor, being entitled to payment of the debt, does not choose to prove it, he cannot be compelled to do so. But if he does prove the debt he must bring in the security to have it valued.” So far from being an authority in favour of the right to double proof, this case is, so far at least as the judgment of Baron Bramwell is concerned, an authority the other way; and it does not appear that the plaintiff had made any proof whatever in bankruptcy for his debt. I gather the contrary from the case. Again, the same question came before the House of Lords in Mitcalfe v. Hanson (L. R. 1 E. & I. Ap. 242), which, although heard after the passing of the Act of 1861, was a case under the old law. There the decision in Warburg v. Tucker is affirmed, with a clear expression of opinion that the question could not arise under the Act of 1861, which contains a section to meet the very case. Of this there can be no doubt. Though not a liability to pay on a contingency, the covenant is a liability to pay premiums on a policy of assurance, and is of course provable: so that bankruptcy is a discharge of it. But this determines absolutely nothing as to the right to prove both on the covenant and also on the principal liability which the covenant is intended to secure. The case of In re Law (10 Ir. L. T. Rep. 11) is, no doubt, a direct decision on the very question now under consideration: but this Court is not bound by that case; and indeed this appeal has been brought mainly to test the practice introduced or sanctioned by it. In coming to the conclusion (as I do) that the appeal should be allowed, I am glad to know that the learned Judge who pronounced the decision in this case, whilst he felt himself bound by In re Law, agrees with me that that decision is wrong. My ground of decision, then, is this. I regard the covenant to pay premiums as in substance only a contract to provide a means of satisfying the debt. Supposing the debt discharged by payment, the covenant to pay the premiums would in equity be gone; and at law, if sued on, would at most have given a right to nominal damages. It is not a separate debt or a debt at all per se. I cannot see my way to allowing the Bank, after realising the full value of their securities, to rank in competition with other creditors on this estate, for £1,058, when every farthing the bankrupt owed them was £650; and accordingly, I think the appeal should be allowed.
Fitzgibbon, L.J.—The puzzling character of this case may be estimated from the fact that Judge Walsh felt himself bound by the decisions of Judge Harrison to pronounce the judgment appealed from against his own opinion, that the Master of the Rolls thinks he has reduced Judge Harrison’s conclusion ad absurdum, and that I think the opposite conclusion would, in other cases which may be put, be open to the same objection. The amount for which the Bank of Ireland as creditors of the bankrupt ought prima facie to be at liberty to prove against his estate should be the same amount which the bankrupt, if solvent, would be bound to pay to them or for their benefit, but in any case the amount receivable by the Bank out of the bankrupt’s assets ought not to exceed the sum for which he could have got a receipt in full from the Bank. In other words, unless there be some statutory provision of the bankruptcy law to the contrary, the Bank ought prima facie to be entitled to prove against the estate for any sum which they could recover from the bankrupt, if solvent, or could compel him, if solvent, to pay for their benefit. I cannot treat the liability to pay the debt, and the obligation to pay the premiums which the bankrupt covenanted to pay, as the same, or as inconsistent with each other. This may, I think, be made clear by putting two cases:—A borrows £500 from X at five per cent., giving him a promissory note for the debt and interest: B borrows £500 from Y at five per cent., and assigns to him by way of mortgage a policy of insurance, covenanting to pay the debt, the interest, and the premiums. A must pay the interest until he pays the principal, and if he does not discharge it during his life, it must be paid as a debt out of his assets at his death. B must pay not only the interest but also the premiums until he pays the principal, which if still due at his death will be discharged by the policy, but if not so discharged must be paid as a debt out of his assets. It seems to me quite plain that B has more to pay year by year than A, by the amount of the premiums, and that his ultimate liability to the principal is reduced only by the amount received out of the policy. This may be the whole amount, if the policy is ultimately paid in full, or part only if the policy be sold or surrendered for value before it falls in. As principal, interest and premiums are all secured in both cases only by the personal contract of the debtor, I agree that X never has any “security” for his debt at all within the meaning of the bankruptcy laws, and that Y has, as such “security” from time to time only the present value of the policy, which present value increases as—but only as—each premium is actually paid by the debtor. This present value simply means the amount which *4 can be got by the sale or surrender of the policy, and is wholly irrespective of the debtor’s continuing liability to pay the premiums, which continuing liability, being merely personal and of the same character with the liability to the debt itself, cannot be a “security” for that debt; but the amount of that personal liability is de anno in annum greater by the amount of the premium than the liability of the debtor who has not covenanted to pay any premiums. As against this additional liability, the debtor who has agreed to pay the premiums will, if he keeps his bargain, be yearly increasing the security, and will, in the end, discharge the principal out of the policy; but if he breaks it, he can be entitled, as it seems to me, only to credit for the sum to which the value of the policy available as a security amounts when he stops payment. Now, in the case of bankruptcy, prima facie X should prove against A’s estate for the principal and interest actually due on his promissory note in full; but Y, if he goes in for a dividend, must give credit for the value of his “security,” viz., the present value of the policy, and should then prove for the balance of principal and interest actually due. But inasmuch as the covenant to pay the premiums has been broken, he should further, unless the bankruptcy law prohibits him, be entitled to prove for the amount of his loss by the inability of the debtor to continue to pay those premiums. The amount of that loss cannot be ascertained with certainty, because no one can tell when the debtor will die; but its probable amount is ascertainable by actuarial calculation, and will be such a sum as, paid down in hand, would, upon the average of life, enable the creditor to pay the premiums himself, until the life ought, on the average, to drop. But if this sum be paid, it must be assumed that, whenever the policy drops, the principal will be thereby discharged, for the assumption is that the security will be continued by keeping up the policy until its value, by its falling in, becomes sufficient to discharge the debt; and should it produce more, the surplus would belong to the debtor. Apart from authority, and in the absence of statutory prohibition, it seems to me therefore that the creditor holding a policy, with a covenant to pay premiums, should upon the bankruptcy of the debtor be admitted to prove, first, for his principal and interest, less by the present value of his policy, and secondly, in addition, for the amount of which he loses the advantage by the inability of the debtor to pay the premiums any longer—that is, the capital value of the deferred premiums during the debtor’s life; but that a maximum limit should be fixed, because the policy was but a security for the debt; and therefore that he cannot, under his two proofs, get more than the balance due on foot of his debt, after deducting the value of the policy at the date of payment. The only difference I can see between the position of a covenantee who has an absolute covenant, e.g., under a settlement, for payment of premiums, and a covenantee who has a like covenant collateral with a debt, is that the latter cannot in any event get more than his debt, but he may resort to both his proofs until his debt is discharged. For these reasons, in the present case, the bank was, in my opinion, entitled to prove for the whole balance of the debt, less by the present value of the policy, and also for the whole value of the covenant; but a proviso should be added to the order, that the bank shall in no case receive by way of dividend any greater sum than the balance which at the date of bankruptcy remained due, after deducting the then present value of the policy. I am bound to say that, according to my reading of the statutes and authorities, this right is clearly established; and, though not actually decided, has been assumed by the House of Lords to exist under sec. 154 of the English Act of 1861, from which our Act of 1872, sec. 47, was copied. Warburg v. Tucker (E. B. & E. 914) decided that under sec. 178 of the English Act of 1849, corresponding to sec. 258 of the Irish Act of 1857, a covenant to pay premiums was not a “liability to pay money on a contingency;” but it must be remembered that in deciding that it was not a liability provable in bankruptcy, the court held it to be not discharged by the bankruptcy, and the bankrupt’s future assets would de anno in annum remain liable to pay the amount. Warburg v. Tucker was considered by the House of Lords in Mitcalfe v. Hanson (L. R. 1 E. & Ir. Ap. 242) and was approved on the same ground; but in that case, if the dates are looked at, I find it assumed, if not plainly stated, that the law under the Act of 1861, and consequently under our Act of 1872, is otherwise. The adjudication in that case was in 1854; and the bankrupt obtained his certificate in 1855, under the provisions of the Act of 1849, corresponding to our Act of 1857; and the case was heard by the House of Lords in 1866, after the passing of the Act of 1861. Both in Warburg v. Tucker and in Mitcalfe v. Hanson the policy was a security for a debt, and the covenant to pay premiums was collateral to a covenant to pay the debt and interest, exactly as here. In neither case does it appear that any question was raised as to the provability of the debt less by the value of the policy, and in holding that the covenant to pay premiums did not, under the earlier Act, create a liability to pay money on a contingency, Lord Cranworth plainly expresses his opinion that the Act of 1861 did make the value of the covenant provable, and, I think, he can only mean provable in addition to the debt. He says:“I should have come to this decision even if the Act of 1861 had never passed, but the fact that in that statute there is a clause expressly directed to meet the present case is strongly confirmatory of the view I have taken. No doubt, the legislature may have mistaken the law as to the effect of the former statute, but the introduction of the 154th sec. into the recent Act is strong to show the view taken by the framers of it.” Lord Chelmsford speaks of the covenant as an “undertaking which created a distinct and different liabilily;” and Lord Westbury says that when the Act of 1861 was in course of preparation the question was much considered, and clause 154, which he regards as “a declaration of the opinion of the legislature,” was added to the Act, “providing for the occurence of such questions in future.” This case is, therefore, a decision that the reason why a proof could not be admitted was because “the words of the Act of 1847 were inadequate, and its machinery inapplicable,” but it contains, to my mind, a conclusive declaration, that the subsequently enacted section from which our Act of 1872, sec. 47, was copied did directly apply and provided the necessary machinery. No doubt, it does not appear from the report either of Warburg v. Tucker or of Mitcalfe v. Hanson, that there had been a proof on the debt, or on the balance above the value of the policies; but it does not appear that there was not; and possibly, the creditors may have declined to prove, and remained out as secured creditors on their policies. If they proved, however, the decision would carry the present case on the change in the law made in 1861; and if they did not prove, it must have been because the value of the security was treated as increased by the existence of the covenants to pay the premiums; and this increase would be attributable to the fact that the covenants were not discharged by the bankruptcy under the Act of 1847; and in this view the change in 1861, which made the value of the covenant provable and at least when it was proved for, discharged the liability, would make the case to my mind an authority to sustain the present decision. There is, however, a passage in Baron Bramwell’s judgment on which it is necessary to observe; for I admit that, if it be correct, it goes far to show that, in the opinion of that high authority, the proof could not be made both on the debt and on the collateral covenant to pay premiums on a policy to secure it. With every respect I am unable to accept the passage in question as an authority. It is put as “a further difficulty;” it is not the ground of the judgment, and it is no part of the decision; and I *5 cannot believe it is correct. He says the plaintiff could not have “claimed for” the whole debt and also for the non-payment of the premuims. “He would have been claiming against the estate for more than the entire of that for which the plaintiff undertook; for the covenant is made by the defendant as surety.” Of course, he could not claim to receive more than his debt; but there are many cases in which a creditor can prove on a larger sum than his debt, subject to the limit of only receiving 20s. in the £1; and, among others, the very case in which proof is made against a bankrupt’s estate for a full debt, and afterwards the same sum is proved for in full against a surety, until the limit of 20s. is reached. But Bramwell, B., says (1): “The plaintiff might keep up the policy.” I ask—if he went to that expense, why should he not prove for the loss incurred by the default of the covenantee who was bound to have done it for him: or (2), “the policy might have been valued and sold: be could not have this and a separate proof of the original debt.” With every respect, this seems a mistake; for he clearly could value or sell the policy, and make a separate proof for so much of the original debt as was not discharged by the value or sale of the policy. But he next says: “The truth is, that this is not a separate and independent claim such as the statute contemplates. It is a security for a debt; and I much think that this affords a solution of the question.” The creditor cannot be compelled to prove; but, “if he does prove the debt, he must bring in the security and have it valued.” This does seem to me to show that, if it could be valued, there must be some “value” in the covenant as a security—which it is in one sense, though not in my opinion in the sense of the bankruptcy code. But, if the covenant increased the value, it must follow that there must be some means of obtaining that value; and the only possible mode would be by admitting the creditor to prove on it in addition to his proof on his unsecured balance. The decisions of Judge Harrison in Re L. (8 Ir. L. T. Rep. 92) and in Re Law (10 Ir. L. T. Rep. 11), have recognized the right of the creditor to prove for the value of the covenant even after he has surrendered the policy, and no English decision since 1861 has thrown any doubt upon that position. Ex parte Bates (L. R. 11 Ch. D. 914) merely decides that when these so-called “values” of policies or contingent liabilities to pay premiums have been ascertained, they must be taken for better or worse, and cannot be re-opened if the creditor turns out by the early-dropping of the life to have got a good bargain. Re Miller (L. R. 6 Ch. D. 700) went as far as it was possible to go in stopping payment of the dividend on the value of the covenant to pay the premiums when the life dropped before the dividend had been actually paid, but it shows that the proof may be made for the full value of the covenant: it would, however, not be fair to treat either of these cases as conclusive of the present case, because it does not appear that the policies in those cases were securities for debts otherwise provable. This was, however, the case both in Warburg v. Tucker (E. B. & E. 914), and in Mitcalfe v. Hanson (L. R. 1, E. & Ir. Ap. 242). For these reasons I am of opinion that the order appealed from is right in principle, is in accordance with the statute, and is sanctioned by the authorities. A declaration should, however, be added, though I believe the state of the assets makes it of no practical importance, that the bank shall not be entitled to receive upon their two proofs for £632 19s. 8d., and for £407 16s., any greater sum in the whole than £632 19s. 8d. I should add that if any mistake was made in valuing the security too low, the assignees could have taken advantage of it by redeeming, and that on the face of the order they have expressly admitted the value of the covenant to have been rightly fixed, if provable at all, at £407 16s., and furthermore, when the first proof was admitted the right to put forward the second was expressly reserved. The case of leaseholds seems to me to give an illustration which, perhaps, raises the same question, but certainly does not, to my mind, displace the claim. A mortgages one leasehold to X by assignment, leaving X to pay the rent, and another to Y, covenanting to indemnify him against the rent. Surely, if the leaseholds per se be of equal value, X and Y must each credit the same sum against their debts on valuing their securities, but Y will also lose, and so ought to prove in addition for, the amount of the future rents which he must continue to pay. If this be not a reductio ad absurdum, it is Q. E. D. There is a view of the case which was not put in argument, and which I wish to mention, lest if it should be hereafter raised it might be supposed that we had rejected it. I express no opinion and do not base my judgment upon it, because it is always dangerous and very seldom leads to the true solution of any question to base a decision on matter not argued. The policy and covenant, taken together, were collateral of the whole debt, and were, in the popular sense, a security for it. It may be that on the discharge of part of the principal debt by the valuation and taking over of the policies, the obligation to perform the covenant might be treated as pro tanto released, and that the proof on the value of the covenant ought to be limited to such a proportion of that value as the uncovered balance of the debt bore to the whole; in short, that a rule-of-three sum should have been worked out—£982 19s. 8d.: £632 19s. 8d.:: £407 16s.: the proportion of value admitted to proof; but, as I have said, I think the safer limit is that of 20s. in the £1 on the original debt.
Barry, L.J.—Throughout the argument of the case, and ever since, my mind has been and still is in the utmost doubt and hesitation, and I am sure that anyone who has heard the judgments just delivered will readily understand this, perceiving what perplexities and difficulties have been presented for consideration. Now, at an early stage of the argument I was struck by the very same view as that taken by the Master of the Rolls, namely, that the bank had somehow or other been admitted to a double proof. On the other hand, I cannot ignore the argument of the respondents, that if that view be taken, they would be in no better position than a creditor having the security of the policy without the benefit of any covenant to pay the premiums at all. Whatever conclusion is arrived at, considerable difficulties will arise; but on the whole, though with considerable doubt, I think it right to follow the view of Lord Justice Fitzgibbon. I cannot but be glad, in a case of such difficulty, that I am deciding in accordance with the judgment of the very able judge, Mr. Justice Harrison, and in accordance with the settled practice of the court. I have had the advantage not only of hearing the Lord Justice Fitzgibbon’s judgment in court, but reading it beforehand. In that judgment I think everything has been said which can be said in support of the opinion which I have adopted. For me to repeat feebly what he has so lucidly and forcibly expressed would be a waste of time, which, in the present stage of the list in this court, I shall not be guilty of. With reference to the case of Mitcalfe v. Hanson and the case of Warburg v. Tucker, I confess I do feel some great difficulty in attaching any conclusive weight to these cases, for I think a very important fact does not appear distinctly, namely, whether in these cases there had been a proof by the creditor on his debt independently of his admitted proof on the covenant to pay the premiums. I think all substantial difficulty in the case will be avoided by, as Lord Justice Fitzgibbon has stated, putting on the face of the order that in no case is the bank to get more than their original debt.
The assignees in bankruptcy having appealed to the House of Lords:
Madden, Q.C. (of the Irish Bar) for the appellants.—The covenant to pay premiums is, in this case, not a security, nor is it an independent obligation. It is attached to the policy so long, and only so long, as *6 the policy is retained as a security. When the policy is realised or surrendered by the mortgagee it ceases to be held by him as a security, and he has no further interest in the covenant than the mortgagee of a house has an interest in the mortgagor’s covenant to keep it insured after he has realised his security by sale. The covenant to pay premiums in this mortgage is not in itself a security. It is a covenant to provide a further security. The effect of the order under appeal is to cast upon the fund available for equal distribution among the unsecured creditors the obligation of fulfilling such a covenant, in favour of a particular secured creditor, although that creditor is allowed to rank for dividend among the unsecured creditors against the same fund for the balance of his entire debt after deducting the present value of his security. The 47th section of the Bankruptcy Act of 1872 does not give any right of proof except to a person having an interest in the contract. A mortgagee who holds by his security, and does not claim for the balance of his debt, may possibly, under that section, claim under the covenant, because by retaining the security he retains an interest in the covenant annexed to it, and the words of the section, “may, if he think fit, apply to the Court,” point to some option to be exercised by the applicant, being plainly that of retaining or giving up his security. But if he, after realising the security, proves for the remainder of the debt, the entire debt is gone, and with it that which is its security, and that which is incidental to the security—namely, the covenant to keep the security alive.
T. P. Law, Q.C. (of the Irish Bar), for the respondents.—Previously to the Irish Bankruptcy Act of 1872 a secured creditor, with whom the bankrupt had covenanted to pay premiums, would have been entitled to realise his security, and afterwards to sue the bankrupt upon his covenant to pay premiums: Warburg v. Tucker, E. B. & E. 914; affirmed by the House of Lords in Mitcalfe v. Hanson, L. R. 1 E. & Ir. Ap. 242. The Legislature cannot have designed to take away from a creditor this right to sue without giving him some equivalent right to obtain the benefit of such a covenant. This has been done by the 47th section of the Act, which was framed to enable the creditor who had obtained the security of a life policy with a covenant to pay premiums to realise the value of such a covenant, by proving for the computed value of the covenant against the estate of the bankrupt. As the creditor loses the right of suing the bankrupt subsequently upon the covenant, he is given the right of proving on the covenant. This was the view taken of the effect of the section by the Irish Court of Bankruptcy in Re L., 8 Ir. L. T. Rep. 92, and Re W. Law, 10 Ir. L. T. Rep. 11, and acted upon for upwards of twelve years.
Madden, Q.C., in reply.—In none of the cases cited by the other side is it shown that the creditor proved for the balance of his debt in addition to proving upon the covenant to pay premiums.
Lord Watson
My lords, before the Bankruptcy (Ireland) Act, 1872, came into operation, the statute law of Ireland with regard to the rights and remedies of secured creditors in bankruptcy was identical with the law eatablished in England by the Consolidation Act of 1849.
It has been authoritatively settled under the English statute that a covenant by a debtor to pay the annual premiums necessary in order to keep up a life policy which he had assigned as security for a debt did not fall within his bankruptcy, inasmuch as his liability on such a covenant was not a contingent liability within the meaning of section 178, and, consequently, that the bankrupt’s certificate did not afford a good defence to the creditor’s demand for performance. It was so held by the Court of Exchequer Chamber in Warburg v. Tucker (El. Bl. & E. 914), and that decision was approved and followed by this House in Mitcalfe v. Hanson (L. R. 1, E. & I. App. 242). The ratio of these decisions equally applies to a covenant by the bankrupt to pay premiums on a policy belonging to a third party. It is necessary to observe that in neither case did it appear that the secured creditor had proved his debt (after valuing and deducting his security) in the bankruptcy, and in Warburg v. Tucker (El. Bl. & E. 914), Lord Bramwell, who concurred in the judgment, expressed an opinion that, if the creditor had done so he would not have been entitled to enforce the collateral contract to pay premiums against the bankrupt. That point does not appear to me to have been decided either directly or by implication, but what was actually decided is not, in my opinion, any authority for the proposition that, as the law stood in Ireland before the Act of 1872, a secured creditor had the right to prove and draw dividends, and also to sue the bankrupt for performance of his engagement to keep alive the policy assigned in security.
The Act of 1872 made an important alteration in the law of Ireland, which had previously been effected in England by the Bankruptcy Act of 1861. Section 47 of the Irish Act, which corresponds with section 154 of the English statute, provides that if the bankrupt, at the time of adjudication, be liable by reason of any contract or promise, to pay premiums on a policy, or any other sums of money, whether yearly or otherwise, or to repay or indemnify any person against such payments, the person entitled to the benefit of such contract or promise may, if he think fit, apply to the court to set a value on his interest, and the court is required to ascertain the value and to admit the creditor to prove the amount so ascertained, and to receive dividends thereon.
If a bankrupt has contracted to pay premiums upon a policy of insurance belonging to a third party, it is clear that, in terms of section 47, the creditor is entitled to prove the value of the obligation as fixed by the court and to receive dividends thereon. In that case the liability is simply an existing debt solvendum in futuro, and it would be difficult to suggest any reason why the creditor for such a debt ought not to rank pari passu along with the ordinary creditors of the bankrupt in the same way as a creditor for an annuity. Section 47 makes provision for estimating the amount of the debt, which is not susceptible of precise calculation, seeing that it depends upon the uncertain event of the death of the insured.
The respondents have, in compliance with the general orders framed under the provisions of section 124 of the Act of 1872, put a value upon the mortgaged policy, and have proved for the sum of £632 19s. 8d., being the balance of their debt after deducting that value. They also assert their right to prove, and the courts below have admitted them to prove, the value of the bankrupt’s covenant to pay premiums upon the mortgaged policy, which has been fixed at £407 16s. by the court in accordance with the provisions of section 47.
It was argued for the respondents that the legislature, in depriving them of their right to proceed against the bankrupt upon his personal covenant, must necessarily have intended to give them an equivalent in the shape of an absolute right to prove in the bankruptcy for the value of the liability. I venture to doubt whether the assumption of right upon which the argument proceeds is well founded. The respondents did not produce any authority for saying that before the Act of 1872 they would have had the right to value and deduct their security and prove for the unsecured balance of their debt, and then to sue the bankrupt upon his covenant *7 to pay premiums. I am by no means satisfied that they could have done so, but it is unnecessary to decide the point, because this case must be decided under the bankruptcy law as established by the Act of 1872, and I am of opinion that under that law the respondents’ claim cannot be maintained.
The bankrupt’s covenant to pay premiums, which is a personal obligation to make the security effectual, might in ordinary language be correctly described as an incident or as part of the security. But it is not part of the security within the meaning of the Act of 1872. By section 4 a “secured creditor” is defined to be a creditor “holding any mortgage, charge, or lien on the debtor’s estate, or any part thereof, as security for a debt due to him.” These words, by plain implication, define, for the purpose of the Act, the meaning of “a security” as well as of a “secured creditor,” and they exclude a personal obligation to make a security effectual, just as they exclude a personal obligation to give a security. It, therefore, appears to me that, in valuing their security for the purpose of proving the balance of their debt, the respondents were neither bound nor entitled to include in the valuation the estimated value of the personal covenant, and they have not done so.
The substance of the respondents’ claim upon the covenant in question is to have part of the fund, available for distribution among ordinary, as distinguished from preferred and secured, creditors of the bankrupt, set aside, in order to constitute and be available as a security for their debt. It is, to my mind, a startling proposition that a creditor, who is permitted to prove the balance of his debt against that fund, and to receive dividends from it, on the footing that such balance is unsecured, has also the right to draw, from the same fund, a sum which he can only claim as an equivalent for the security which he has lost through the bankrupt’s failure to perform his personal covenant. The provisions of section 47, with respect to covenants and promises to pay premiums of insurance, are, no doubt, expressed in very general terms, but whilst they obviously apply to cases where the bankrupt’s liability is of the nature of a proper debt, I cannot conceive that the Legislature intended to enable a creditor, in the position of the respondents, to rank with ordinary creditors, not only for the unsecured balance of his debt, but for a sum representing a security for that unsecured balance.
I am confirmed in that opinion by a reference to the general scheme established by the Act of 1872, and relative statutory rules for disposing of the claims of secured creditors. If he desires to prove against the estate, the creditor must value his security as defined in the Act, that being in the present case the policy of insurance, without the personal covenant to pay premiums. If not satisfied with his valuation, the general body of creditors or their representatives may insist on the security being realised. The amount of the valuation or the realised proceeds, as the case may be, is then deducted from the debt, and the creditor admitted to prove the balance. In my opinion, the footing upon which that deduction is made and proof of the balance allowed is this, that the security is either realised, and the proceeds of realisation, or the creditor’s valuation paid or imputed in payment pro tanto of his debt. So far as concerns the proceedings in bankruptcy, the security is dealt with as having been realised and paid to the creditor, and his debt to the extent of its valuation or actual proceeds is extinguished, the balance unpaid being then treated as unsecured, and therefore admitted to proof.
Such being, according to my view, the plain import of the statute and rules, to give effect to the respondents’ claim would be utterly inconsistent with the scheme which they enact. To do so would, in effect, be to enforce the maintenance of a policy which has been realised and imputed in payment of the debt, in order to create a security for a balance which must be treated as unsecured.
For these reasons I am of opinion that the order of the Court of Appeal must be reversed, and the order of the judge in bankruptcy, admitting the proof, discharged, and that the appellants ought to have their costs in the courts below as well as in this House, and I move accordingly.
Lord Blackburn.
My lords, in this case the decision turns upon the true construction of a few words in section 47 of an Act of Parliament (the Bankruptcy (1reland) Amendment Act, 1872), and I can only say that they seem to me very obscure; but I have perused my noble and learned friend’s judgment and considered it, and I have come to the conclusion, which I may state without going into full particulars, that the effect of the judgment below is such that it cannot possibly stand as it is, because it gives at once the amount resulting from the proof for this debt, and it also concurrently gives the right to the creditor to prove upon the concurrent covenant which has been made. I cannot think that that is correct; and taking the whole facts of the case together, it seems to me that in this particular case (I do not wish to go further than that), where a person who has entered into a covenant under section 47 is the same person who is the holder of a policy, the decision of the court below which is appealed against cannot be supported, and should be reversed.
The Lord Chancellor (Lord Halsbury).
My lords, I entirely concur in the judgment which has been moved, and for the reasons which have been given by my noble and learned friends. I would rest my opinion upon the reasoning of the Master of the Rolls in Ireland. I only wish to add that it would be a strange result if in that country a bankruptcy creditor should be permitted to prove and to claim, so as to get more than 20 shillings in the pound; and accordingly, under the order of the Court of Appeal, it is arranged that the creditor shall not get more than 20 shillings in the pound. In fact, the logical result of the reasoning which leads to his being entitled to more than 20 shillings in the pound, seems to me to be to support the case of the other side.
Law, Q.C.—Before your lordships give the final judgment, will you allow me to interpose in reference to the costs. This decision, as your lordships are aware, will have the effect of altering a practice which has obtained in Ireland for twelve years. The case was sent forward to your lordships’ house practically as a test case. Your lordships will remember, from the facts which have been laid before you, that we brought this case in the first instance before the court, and that it was adjourned on motion, and then it was brought up again as being one of the best cases to test the matter. Following upon what was so done, I would submit to your lordships that, this case coming up as a test case, you would, as in the case of Walton v. Edge, (10 App. Cas. 44) allow the costs to come out of the estate.
[The Lord Chancellor. —You do not suggest that it was arranged between you that this should be a test case].
It was not actually arranged certainly; I concede that. But still this was brought up undoubtedly as a test case.
Order appealed from reversed.
Order admitting the respondents to the second proof discharged.
The respondents to pay the costs in the courts below and in this house.
In re W. Law; ex parte The Bank of Ireland
Court of Bankruptcy.
14 January 1876
[1876] 10 I.L.T.R 11
Harrison J.
Monroe. —There is no cross-appeal, and it is not competent to the Bank now to argue that the proof cannot be retained for the amount fixed by the Chief Clerk.
Harrison, J.
[Without a cross-appeal the Bank cannot so argue, but by consent an appeal can now be lodged, and the case can be fully heard on both sides.]
Monroe having consented, a cross-appeal was then taken as lodged.
Porter, Q.C.
The right to prove for premiums on policies of insurance did not exist before the section, and the terms of the section are peculiar. The words are:—“The person entitled to the benefit of such contract or promise, may, if he think fit, apply to the Court to set a value upon his interest under such contract or promise.” Some meaning must be given to the words “if he think fit,” and the meaning of it would appear to be that the person with whom the covenant or contract is made has an option. He may, if he please, take the market value of the policy; or he may, as an alternative, “if he think fit,” have his covenant valued by the Court and prove on that; but he cannot take both. The reason of the thing would appear to require this construction If the secured creditor surrender the policy it is there and then destroyed, and the covenant to keep it alive is no longer a subsisting liability. The policy, once surrendered, and the surrender value accepted for it, cannot be kept alive, and the mortgagor is released from his covenant by the act of the mortgagee, who makes it impossible that the covenant can be performed. The assignment of the policy and the covenant are one security, and, unless there is no meaning in the words “if he think fit,” the Bank should not be permitted first to destroy the policy and then to prove for the value of a covenant to keep it alive.
Harrison, J.
[Probably, the words “if he think fit” simply mean that the person is not bound to come to the Court, or to prove for his interest in the value of the contract, but if he does so there is this bonus held out to him.]
If the doctrine is pushed to the full length contended for, a creditor might get thirty shillings in the pound for his debt, for, after receiving the amount of the surrender value, he could prove for and receive dividends on the value of his interest in the covenant. There are no restrictive words. The Court is required to ascertain the value of his interest, and to admit him to prove the amount so ascertained, and to receive dividends thereon. It is possible to conceive a case, therefore, in which a creditor would thus be overpaid. But, if it should be held that the Bank were entitled to prove for their interest in the value of the covenant, what would the covenant be? The policy is for £3,000, the secured debt is £1,000, and therefore the Bank are interested only to the extent of one-third of the premium, and no more. If the life had dropped they could only hold one-third of the sum insured, and would be trustees for W. Law’s administrators of the remaining £2,000. Under those circumstances can they be permitted to extinguish the policy by surrendering it, and yet to prove on a contract to pay premiums three times the amount of the secured debt? If the proof is admitted on the value of the interest in the covenant, then let the Bank keep the policy alive.
Monroe, in reply.—The Bank does not seek to be paid more than twenty shillings in the pound on their debt. Under the Act of 1857 they could have surrendered the policy, and though they could not prove for the value of their interest in the covenant, still the bankrupt would not be discharged from the covenant by his certificate. There must be a distinction between the case of a policy mortgaged without any covenant to pay premiums and a case like this; but, if the Bank were not permitted to prove on the covenant, the cases would be treated as identical.
Harrison, J.
I have no reasonable doubt as to what my decision should be in this case. I cannot agree with the ruling of the Chief Clerk, for I see no sound reason why the Bank of Ireland, if permitted to prove for their interest in the covenant to pay the premiums, as well as to receive the surrender value of the policy, should be limited to an amount measured at the difference between the surrender value and the amount of the secured debt. What is the security which a creditor obtains who has a policy of insurance deposited or mortgaged with him, and has, also, the covenant of the person who mortgages the policy that he will pay the premiums? It is plainly something more than a mere deposit or mortgage of a policy, for it gives the mortgagee a right of action against the mortgagor if he should neglect, or refuse to pay the premium. The covenant would, therefore, have been an additional security if Mr. Law never became a bankrupt. How can it cease to be an additional security because a bankruptcy has supervened? Before the Act of 1872, no doubt, it was a security which could not be valued for the purpose of making a proof upon it; but a security is a security until the creditor is paid in full, and the 47th section enables the creditor to have his interest in the covenant valued, and requires the Court to admit him to prove and to receive dividends upon it. That section was intended to give an advantage to the secured creditor, who before it would have had the right to hold his policy or to receive the surrender value of it. Therefore, the Bank of Ireland is entitled to call upon the Court to ascertain the value of the interest of the Bank in this covenant, and to prove and receive dividends upon it. That being so, the value of the interest cannot be arbitrarily fixed at the difference between the surrender value of the policy and the amount of the secured debt. Under no circumstances, however, could the Bank be allowed to receive more than twenty shillings in the pound. If they received more, they would be trustees for the assignees for the balance above the amount of the debt. I shall, therefore, allow the appeal and disallow the cross-appeal, but, as the case is one of first impression, there will be no costs. The value of the interest of the Bank in the covenant can be ascertained by a notarial estimate.
In re An Arranging Debtor
Supreme Court of Judicature
Court of Appeal
27 June 1912
[1912] 46 I.L.T.R 226
Barry L.C., Holmes, Cherry L.JJ.
J
Barry, L.C.
The question has been submitted to us in the net form whether or not the Court has authority to make such a preference as has been indicted in this case. I do not think it has. The decision of Judge Berwick in 1866 does not weigh in the balance against the decision of the Court of Appeal in In re Montgomery in 1880. Lord O’Hagan in the latter case says:—“The case is important as it enforces the legislative provision essential to the maintenance of the cardinal principle of the law of bankruptcy, which requires that no creditor shall have any unfair preference before others, or exclusively obtain advantages which others do not share.” And Deasy, L.J., says:—“The object of the legislature is that all creditors entering into a composition should stand on the same footing as regards the debtor and as regards each other, and it was in order to enforce the carrying out of that policy that the penalty was imposed.” That is the plain policy of those Acts, and that being so, the settlement should be on the same basis as between the various creditors; and I think the meaning of s. 353 is, that if, in the circumstances of the cases, the learned Judge comes to the conclusion that the actual proposal is not reasonable and proper to be executed, it is then open to him to turn the case into bankruptcy. I do not think it was the intention of the Act to give him jurisdiction to draw any distinction between creditors who, in the eye of the law, stand in the same position entitled as between themselves to equal treatment. One could not conceive a greater danger to the administration of the Bankruptcy law than to suppose that a preference could be given to any of the creditors who were all regarded as perfectly equal. The statutes most decidedly provide against any discrimination while the decision in In re Montgomery is overbearing on the point. I say nothing as to what the creditors and debtor may be able to arrange amongst themselves. I hold that the Court has no jurisdiction to grant the application made in this case, and that the appeal ought to be dismissed.
Holmes, L.J.
I understand that the appeal has arisen from the circumstance that the Recorder was applied to, to pay portion of the debt due to one creditor in full, and that he declined to do so, although he was told there was a practice of the Court to that effect, because he believed he had not jurisdiction to make the order. I entirely concur with the Recorder in holding that he had not jurisdiction to make an order of that character. An order of that character would seem to me to violate the principle and the provision of the Bankruptcy Acts which rest upon an equal distribution among the various creditors, and that one creditor should not be placed in a better position than another. As to the question of fraud, I do not enter upon it at all, because the Statute, both in the case of bankruptcy and arrangement, enables a person who has been deprived of his goods by fraud to have a certain remedy against either the arranging debtor or the bankrupt.
Cherry, L.J., concurred.
Bell Lines Ltd -v- Companies Acts
[2006] IEHC 188 (28 April 2006)
U
JUDGMENT of Ms. Justice Dunne delivered on the 28th day of April, 2006
The above entitled companies (the companies) formed a substantial Irish owned shipping business based in Waterford. On 4th July, 1997, David Hughes (the liquidator) of Ernst and Young, Accountants, was appointed official liquidator of the companies. By an amended composite notice of motion dated 25th July, 2005, the liquidator has sought, inter alia, the following reliefs:
c. An order confirming that French creditors of the French branch of Bell Lines Limited are permitted to claim in the Irish liquidation of Bell Lines Limited notwithstanding the appointment of a liquidator in France, and an order that the official liquidator deduct from dividends in respect of amounts due to French creditors in the liquidation of Bell Lines Limited (in liquidation) any payment which such creditors may have received from the French insolvency fund or from the French liquidator in respect of such amounts.
d. An order that the English Insolvency Service (DTI) be admitted subject to adjudication as a creditor in the liquidation of Bell Lines Limited in respect of payments lawfully made to employees of that company from the English equivalent of the Redundancy and Employers Insolvency Fund, as a preferential creditor insofar as such payments were in respect of Irish preferential debts due to employees of Bell Lines Limited and as an unsecured creditor insofar as such payments were in respect of Irish unsecured debts due to employees of Bell Lines Limited; and a similar order in favour of the Northern Ireland Department of Employment and learning in respect of payment of a debt due to a Northern Ireland employee of Bell Lines Limited.
h. An order that in principle the English Insolvency Service (DTI) and the Northern Ireland Department of Employment and Learning (DEL) have preferential claims to the extent to which payments made by them are preferential under Irish Law in respect of wages, holiday pay and pension but that their claims for payments relating to redundancy and minimum notice are not preferential.
Affidavits were sworn by the liquidator herein on 17th June, 2005, 11th July, 2005, 19th July, 2005, 28th September, 2005 and 18th November, 2005, relating to the issues referred to above. I propose to deal with the issues raised in respect of paras. (d) and (h) of the notice of motion. It was not necessary to deal with para. (c). Written submissions were furnished to me on behalf of the liquidator and on behalf of the notice party herein, the Port of Waterford (the notice party).
In his oral submission Mr. Shipsey, on behalf of the liquidator, indicated that at the time of the liquidation there were two hundred and nine employees of the companies based in the UK. Those employees made claims for sums due in respect of minimum notice, holiday pay, preferential wages, redundancy and pension to the relevant insolvency agency where they were based, namely the English Insolvency Service (DTI) in respect of UK employees based in England and Wales and to the Northern Ireland Department of Employment and Learning (DEL) in respect of payment of a debt due to a Northern Ireland Employee of Bell Lines Limited. Initially the DTI and DEL refused to pay the amounts due and following proceedings before an industrial tribunal in Bristol the matter was referred to the European Court of Justice. The European Court of Justice found that the UK employees were entitled to claim in the UK from DTI. The judgment of the European Court was delivered on 16th December, 1999, in a matter entitled Everson and Barrass v. Secretary of State for Trade and Industry and Bell Lines Limited [1999] EC C-198/98, in which it was held “where the employees adversely affected by the insolvency of their employer were employed in a Member State by the branch established in that State of a company incorporated under the laws of another Member State, where that company has its registered office and in which it was placed in liquidation, the competent institution, under Article 3 of Directive 80/987 on the approximation of the laws of the Member States relating to the protection of employees in the event of the insolvency of their employer for payment to those employees of outstanding claims is that of the State within whose territory they were employed.” Accordingly on the basis of that decision the DTI and DEL made payments in respect of wages, holiday pay and pension together with redundancy and minimum notice to the relevant employees.
Mr. Shipsey submits that the monies paid by the DTI and DEL insofar as the monies concerned relate to categories of payment referred to in s. 285 of the Companies Act, 1963 should be treated as preferential claims arising under s. 285. He argues that this is so by virtue of the wording of s. 285 itself or alternatively, it arises out of the interpretation of s. 285 read together with EU Directive 80/987/EEC. It is also submitted that the payments should be treated as preferential claims by operation of law from a restitutionary right of subrogation to the position of the person whose debt has been discharged.
Section 285 of the Companies Act sets out the provisions in relation to preferential payments in a winding up.
Subs. 2 In a winding up there shall be paid in priority to all other debts
(a) The following rates and taxes…
(b) All wages or salary…
(c) All accrued holiday remuneration…
(i) Any payments due by the company… for the provision of superannuation benefits to or in respect of employees…
Subs. 3 provides for a monetary limit in respect of the amount to which priority is given in the case of any one claimant.
Subs 6, Where any payment has been made –
(a) To any clerk, servant, workman or labourer in the employment of a company, on account of wages or salary; or
(b) To any such clerk, servant, workman or labourer or, in the case of his death to any other person in his right, on account of accrued holiday remuneration; or
(c) To any such clerk, servant, workman or labourer while he is absent from employment due to ill health or pursuant to any scheme or arrangement for the provision of superannuation benefit to or in respect of him;
out of money advanced by some person for that purpose, the person by whom the money was advanced shall, in a winding up, have a right of priority in respect of the money so advanced and paid up to the amount by which the sum, in respect of which the clerk, servant, workman or labourer or other person in his right, would have been entitled to priority in the winding up have been diminished by reason of the payment having been made.
Subsection 7 is a pari passu provision.
Mr. Shipsey submits that on a construction of s. 285 there is nothing to prevent the DTI or the DEL from claiming preference in respect of the debts due to them. He emphasised that under s. 285 it is the debt which is given priority as opposed to the person per se who is preferential. In support of this contention he stated that this is shown by the fact that any further debt due to the individual employee will be unsecured. He also pointed out that under s. 285(6) it is clearly provided that claims may be brought other than by the employee and that accordingly monies may be paid to persons other than the employee concerned in respect of preferential debts. He accepted that this section is most often relied on by someone who advances monies such as a banker prior to a winding up to pay wages. He argued that on a proper construction of s. 285 there is nothing to prevent DTI or DEL claiming preference. He contended that it is the debt that gains the priority not the person to whom the debt is due. If the debt in this case is one which would be a preferential debt then DTI and DEL should be able to step into the shoes of the person to whom the debt was originally due.
Mr. Shipsey further submitted that if he was wrong on the construction to be placed on s. 285 then, he argued, EU Directive 80/987/EE7 provided some support for his contention and he referred to the preamble which states:
“Whereas it is necessary to provide for the protection of employees in the event of the insolvency of their employer, in particular in order to guarantee payment of their outstanding claims, while taking account of the need for balanced economic and social development in the community; whereas differences still remain between the Member States as regards the extent of the protection of employees in this respect; whereas efforts should be directed towards reducing these differences, which can have a direct effect on the funding of the common market.
Whereas the approximation of laws in this field should, therefore, be promoted while the improvement within the meaning of Article 117 of the Treaty is maintained;…”
He then referred to Article 2 and 3 of the Directive. He went on to refer to the judgment in the Everson decision and in particular paras. 20, 22 and 23 thereof. He pointed out that as can be seen from that judgment the result of the operation of the Directive makes clear that where a company incorporated in one Member State has a branch in another Member State the regulatory authority in that State has a duty to meet claims of employees in that State. This relieves other entities in the present situation, such as the Irish Guarantee Institution (Department of Enterprise, Trade and Employment) of meeting such a claim. He argued that in the absence of the Directive it would have been an obligation for the equivalent Irish body to discharge the payments due to the UK employees. Thus he contended that s. 285 on its own should be sufficient to enable the DTI and DEL to claim as preferential creditors and if not on its own, then s. 285 should be read in the light of the EU Directive. So doing would have the effect of ensuring that the foreign guarantee institution such as the DTI or DEL once it has paid in accordance with the EU Directive is then subrogated to the position of the employee in the Member State where the winding up is taking place in accordance with the ranking of those debts subject to the provisions of s. 285. In other words they would be in the same situation as would be the Irish guarantee institution in respect of debts paid by that guarantee institution, namely the Department of Enterprise Trade and Employment.
The next point raised by Mr. Shipsey related to the remedy of restitution. He argued that DTI and DEL should be entitled to make a claim in the same way (with preferential status) as the employee would be able to on the basis of restitutionary remedies or subrogation or the right of recoupment. He argued that the view of the notice party that subrogation is a concept which arises in the context of a principle/surety relationship only is incorrect. Subrogation can arise to prevent unjust enrichment in a variety of circumstances. In this instance someone benefits at the expense of another, that is to say other creditors benefit at the expense of the person who is obliged as a guarantee institution to make a payment. He referred to Goff and Jones on the Law of Restitution where it is stated in chapter 3:
“But as these examples show, it is in essence a remedy, fashioned to the particular facts, and designed to ensure ‘a transfer of rights from one person to another…by operation of law’ in order to deprive B of a benefit gained at A’s expense.”
He also referred to the judgment of Millett L.J. in Boscawen v. Bajwa [1995] 4 All ER 769, 777 where he stated:
“Subrogation…is a remedy, not a cause of action… it is available in a wide variety of different factual situations in which it is required in order to reverse the defendant’s unjust enrichment. Equity lawyers speak of a right of subrogation or equity of subrogation, but this merely reflects the fact that it is not a remedy, which the court has a general discretion to impose whenever it thinks it just to do so. The equity arises from the conduct of the parties on well settled established principles and in defined circumstances which make it unconscionable for the defendant to deny the propriety interest claimed by the plaintiff. A constructive trust arises in the same way. Once the equity is established the court satisfies it by declaring the property in question is subject to a charge by way of subrogation in the one case or a constructive trust in the other.”
He also referred to the decision of the Supreme Court in the case Highland Finance (Ireland) Limited v. Sacred Heart College of Agriculture Limited & Others [1998] 2 I.R. 180 in which both Murphy J. in the High Court and Blayney J. in the Supreme Court referred to the following passage by Lord Salmon’s judgment in Orakpo v. Manson Investments Limited [1978] A.C. 95:
“The test as to whether the court will apply the doctrine of subrogation to the facts of any particular case is entirely empirical. It is I think impossible, to formulate any narrower principle than that the doctrine will be applied only when the courts are satisfied that reason and justice demands that it should be.”
On the basis of those authorities Mr. Shipsey argued that the claim for debts due for wages, holiday pay, pension are an encumbrance on the assets of the company by virtue of s. 285 and where a person such as the DTI has paid off that encumbrance they are entitled to a charge by way of subrogation to the amount recoverable under s. 285. He argued that to hold otherwise would be to unjustly enrich the general body of creditors in circumstances where the intent of the legislation is that the general body of creditors stands behind the debts identified in s. 285. He contended that there is no circumstance which precludes the general application of the general right of subrogation. He pointed out that no issue is taken by the notice party to the position of the Irish equivalent of the DTI or DEL in respect of the Irish employees.
He also referred to the case of Re Downer Enterprises Limited [1974] 1 WLR 1460. In that case a lease was signed to D. Limited, which later collapsed with rent unpaid: a prior assignee was forced to pay the landlord. The right to rent had the status of a preferential debt in the insolvency. It was held that the prior assignee had a right obtained by subrogation to the landlord’s preferential status and thus Mr. Shipsey argued that this was a similar analogy to the facts of the present case. In other words there is a primary liability on the company to pay certain debts of employment and a secondary liability, arising by virtue of statute in Britain and Northern Ireland and the operation of the EU Directive 80/987/EEC on the DTI in Britain and the DEL in Northern Ireland to pay the employee’s wages, holiday pay and so on. He conceded that the existence of a statutory remedy may preclude a right of subrogation depending on the wording of the statute concerned but argued that the fact that legislative decisions relevant to English and Northern Ireland insolvency funds do not refer to preferential status in the insolvency proceedings of other jurisdictions it did not follow that this omission that no subrogation should arise. The omission is, he argued, more readily explained in terms of respect of the laws and sovereignty of other States. The question of whether and to what extent the doctrine of subrogation will arise in any jurisdiction is a question for the law of that jurisdiction allowing for rights which may be conferred on a claimant from another jurisdiction under their local law. He also referred to a decision of this court in which the DTI was allowed to be subrogated for unpaid wages and holiday pay on a preferential basis but he indicated that there was no objection made in that case by any creditor and accordingly this point was not argued in those proceedings.
Finally Mr. Shipsey dealt with an argument based on the right to recoupment. He pointed out that the payments made by the DTI and DEL were made under compulsion by virtue of statute having regard to the requirement on Member States to abide by the decision of the ECJ in Everson and Barrass v. Bell Lines in respect of the Directive 80/987. Thus he argued that as the payments were made under compulsion and resulted in the discharge of another’s (the company in liquidation) liability the payments made by DTI and DEL should be regarded as payments within s. 285. He referred to Goff and Jones and quoted:
“In general, any body that has under compulsion of law made a payment whereby he has discharged the primary liability of another is entitled to be reimbursed by that other.”
Goff and Jones then quoted the common law principle stated in Moule v. Garrett [1872] LR 7 EX. 100:
“Where the plaintiff has been compelled by law to pay, or being compellable by law, has paid money which the defendant was ultimately liable to pay, so that the latter obtains the benefit of the payment by the discharge of his liabilities; under such circumstances the defendant is held indebted to the plaintiff in the amount.”
Based on those authorities Mr. Shipsey submitted that the DTI and DEL are compelled to pay and therefore the company in liquidation should have to answer for the benefit it received. If the manner in which that is done is simply to treat the debt discharged by the DTI and DEL as unsecured then the company in liquidation benefits unjustly. The only just way of dealing with the matter is to allow the DTI and DEL the status accorded to the debt which they were compelled to discharge.
Ms. Marshall on behalf of the notice party submitted that the principles of subrogation do not apply in the context of the claims of DTI and DEL. She pointed out that in Northern Ireland and in Britain there is a statutory scheme for the payment of employee entitlements as there is in this jurisdiction. Such schemes are not for the purpose of applying subrogation but rather excluding the concept of subrogation by creating a separate statutory scheme for the transfer of claims from the individual to the particular guarantee institution. In such circumstances it is unnecessary for the court to find that there is an equitable remedy open to a guarantee institution given that there is a statutory scheme. She pointed to similarities in relation to the statutory scheme in Northern Ireland, Britain and Ireland and contrasted the effect of subrogation with the effect of the statutory scheme. In the case of subrogation she stated that the party who has paid is “entitled to step into the shoes of the creditor” and is entitled to exercise all the creditor’s rights and remedies. In the case of the statutory scheme the relevant guarantee institution does not seek to step into the shoes of the employee and exercise all the employee’s right but rather has the benefit of a statutory transfer of rights from the employee to the relevant body. She argued that such a transfer operates to exclude equitable principles which might otherwise apply. Further she argued that it is for this reason that it was necessary in each jurisdiction to provide separate preferential status for the transferred claim.
Ms. Marshall also raised the issue of the rule against double proof. She pointed out that certain difficulties would be created under that rule in circumstances where the creditor had not been paid in full. She submitted that the purpose of the statutory scheme was to enable the guarantee institution to claim in competition with the employees and thus to avoid the effects of subrogation and the rule against double proof.
So far as preferential status is concerned she argued that under Irish law preferential status is exclusively a matter of statute by virtue of s. 285 of the Companies Act, 1963, as amended. There is no provision giving preferential status to debts due to the guarantee institutions save for that provided for in respect of the Irish guarantee institution. Further she submitted that a transfer of a preferential debt does not carry with it a right to preferential status. She referred to the provisions of s. 10(1) and (2) of the Protection of Employees (Employer’s Insolvency) Act, 1984. It would be useful to look at the precise wording of the provision.
“Section 10(1). Where, in pursuance of section 6 of this Act, the Minister makes any payment to an employee in respect of any debt to which that section applies, any rights and remedies of the employee in respect of that debt (or, if the Minister has paid only part of it, in respect of that part) shall, on the making of the payment, become rights and remedies of the Minister.
(2) Without prejudice to the generality of subsection (1) of this section, where rights and remedies become, by virtue of subsection (1) of this section, rights and remedies of the Minister, there shall be included amongst them any right to be paid in priority to all other debts under –
(a) section 4 of the Preferential Payments in Bankruptcy (Ireland) Act, 1889; or
(b) section 285, as amended by section 10 of the Companies (Amendment) Act, 1982, of the Companies Act, 1963,
and the Minister shall be entitled to be so paid in priority to any other unsatisfied claim of the employee concerned being a claim which, but for this subsection, would be payable to the employee in such priority; and in computing for the purposes of any of the provisions of the said section 4 or the said section 285, as so amended, any limit on the amount of sums to be paid, any sums paid to the Minister shall be treated as if they had been paid to the employee.”
She argued that if the transfer of the claim at subs. 1 was sufficient to transfer the preferential status of the claim, the insertion of subs. 2 would be unnecessary. She referred to the fact that in Northern Ireland and in Britain similar provisions effect the transfer of rights and the granting of preferential status in respect of those transferred rights. On that basis she argued that the provisions of s. 285(6) of the Companies Act, 1963 as amended should not be construed as applying to monies advanced after the relevant date as defined in s. 285 subs. 1 because if that subsection applied it would have been unnecessary to include s. 10 in the Protection of Employees (Employers Insolvency) Act, 1984.
Ms. Marshall referred to the case of Food Controller v. Cork [1923] AC 648. In that case it was claimed that the Food Controller was entitled to be paid in priority to other creditors on the basis that the sum involved constituted a crown debt. It was held by the House of Lords that under the Companies (Consolidation) Act, 1908 the combination of s. 186 which contained the pari passu rule and s. 209 which provided for certain preferential debts govern the entire application of the assets of a company. Those provisions had the effect of abolishing the general crown priority in the case of liquidations of companies. Relying on that authority Ms. Marshall submitted that in the absence of express statutory authority there is no entitlement of a debt to preferential status.
It should be noted again that there is no dispute whatsoever that DTI and DEL are entitled to claim in the liquidation in respect of the sum paid by them to employees of the companies. The issue is whether or not DTI and DEL are entitled to claim as preferential creditors. It is interesting to note that in Northern Ireland and in Britain specific legislation similar to the provisions of s. 10 of the Protection of Employees (Employers Insolvency) Act, 1984 put the DTI and DEL in the same position as the Department of Enterprise Transport and Employment in this jurisdiction vis à vis preferential debts.
Decision
The argument made by Mr. Shipsey in regard to this particular case seems to me to be, at first sight, very attractive. In essence he submits that the wording of
s. 285 identifies the type of debt which is to have preference on the assets of the company. While this is an attractive proposition it seems to me to be a misinterpretation of s. 285. Without the benefit of s. 285 all unsecured creditors of the company would have to be paid on an equal basis among themselves. However, the legislature by s. 285 has given certain types of creditors priority over other unsecured creditors. A cursory examination of the list of debts referred to in s. 285 show that priority was given by the legislature firstly to rates, taxes and wages and salaries, holiday remuneration and pension contributions. Therefore in this context the identity of the person to whom the debt is due is clearly crucial. Mr. Shipsey and Ms. Marshall in the course of their submissions referred to the social aims of the legislation and the EU Directive. It is clear that the legislature in enacting s. 285 had regard to the importance of protecting employees of a company in priority to other unsecured creditors. Mr. Shipsey referred to the importance of s. 285(6) in that it provided a statutory form of subrogation to a lender who advanced money to the company for the purpose of paying wages or salary in priority to other creditors in respect of the money so advanced. It is significant to note that this right of subrogation is reinforcing the legislature’s view of the importance of protecting the employees of the company.
A further example of statutory subrogation is provided for by s. 10 of the Protection of Employees (Employers Insolvency) Act, 1984. By virtue of that section the relevant Minister is empowered to make payments to employees out of the redundancy fund in respect of debts owed by an insolvent employer to his employees. The Minister is given by s. 10 the same right as the employee in respect of such debt. It is important to note that in each of these situations i.e. the provisions of s. 285(6) of the Companies Act as amended and s. 10 of the Protection of Employees (Employers Insolvency) Act, 1984, the legislature has chosen to apply a form of statutory subrogation to the class of those who were identified in s.285 as of such importance that special protection was required for them in priority to the remainder of the unsecured creditors.
Mr. Shipsey has said that if he is not entitled to treat the DTI and DEL as being entitled to similar subrogation in respect of the sums paid by those guarantee institutions to employees in their respective jurisdictions that that will amount to unjust enrichment of the body of unsecured creditors. I take the contrary view. Far from being unjust enrichment in the sense contended for by Mr. Shipsey, the body of unsecured creditors are not postponed to any creditor of the company other than those expressly provided for by statute. In the course of her submissions, Mrs. Marshall submitted that in the absence of express statutory authority there is no entitlement of a debt to preferential status. I agree with that submission. Notwithstanding the very careful arguments of Mr. Shipsey to the contrary, it does not seem to me to be possible to obtain on foot of subrogation preferential status. If that were possible, one would have to question the need for s. 285(6) of the Companies Act, 1963 and
s. 10 of the Protection of Employees (Employers Insolvency) Act, 1984. Further I do not see how s. 285(6) could be interpreted as in some way being capable of being interpreted as covering payments made by bodies such as the DTI and DEL. In essence it seems to me that the category of creditors entitled to priority has been carefully and narrowly drawn by the legislature.
There is no doubt in this case that DTI and DEL are entitled to claim as creditors in respect of the sums paid by them to the employees of the companies. That much is not in dispute. However I cannot conclude from any of the authorities cited by Mr. Shipsey that that right of subrogation extends to an entitlement not just to seek to have the debt repaid but also to step into the status that the employee would have had directly against the companies. Preference has been given to certain categories of creditors in respect of certain types of debt. That priority is delimited by reference to the statutory provisions. There is no provision within the legislation for guarantee institutions from outside the jurisdiction. In the absence of such legislation I have come to the conclusion that the DTI and DEL cannot have preferential status.
Mr. Shipsey also referred to the right to recoupment. He referred to a number of passages from Goff and Jones in that regard. Undoubtedly the DTI and DEL have been compelled by law to pay in their jurisdiction money which the companies were under a liability to pay; again it is difficult to see how the undoubted liability of the companies to DTI and DEL is advanced to preferential status as a result. I do not accept that the authority cited by him in support of his contention goes that far. I am of the view that in considering the applicable principles of law I must have regard to the manner in which the legislature has provided for the payment of debts in an insolvency. The body of unsecured creditors rank equally among themselves. A limited number of unsecured creditors in respect of certain types of debt have been given preferential status. In the absence of express statutory authority a debt does not acquire preferential status by reference to equitable principles of restitution, whether by way of subrogation or recoupment. If that were not so, there would have been no need to enact s.285 (6) or s. 10 of the Protection of Employees (Employers Insolvency) Act, 1984. In the circumstances I cannot accept the arguments made by Mr. Shipsey in this regard.
I should add briefly that in the course of his submissions, Mr. Shipsey referred to the decision in the English case of Re Downer. I think that whilst he correctly identified in that case the right of a prior assignee to be entitled to the landlord’s rights by way of subrogation, that right of subrogation in that case did not amount to the grant of a preferential status. On the facts of the case, it was held that the landlord would have been entitled to be paid as an expense of the liquidation, rent from the date when agents were instructed to find a purchaser to the date when the leasehold interest was sold. Thus, the prior assignee having paid the rent was entitled to be paid in full out of the assets of the company, as an expense in the liquidation. Accordingly, that decision was not of any assistance.
For the reasons outlined above I am refusing the relief claimed herein.
Re: Lisa Parkin
(a debtor)
[2019] IEHC 56 (04 February 2019)
JUDGMENT of Mr. Justice Denis McDonald delivered on 4 February, 2019
Introduction
1. Ms. Parkin, the debtor in this case, was born in 1972. She is married but separated from her husband, who is now living in the United Kingdom. She has one dependent child (a daughter) who is now fifteen. Her daughter is obviously very talented. The evidence before the court shows that she is an excellent student and is particularly proficient in Irish. She is expected to do sufficiently well in her Leaving Certificate examinations to qualify to study veterinary medicine at UCD.
2. Ms. Parkin and her daughter live in the family home on Ballyfermot Road, Dublin 10. They have lived there since September 2005 when it was acquired, with the benefit of a bank loan, in the names of Ms Parkin and her husband.
3. In circumstances described in more detail below, Ms. Parkin’s husband moved to the United Kingdom in 2015. According to the evidence of Ms. Parkin, he makes no contribution, financial or otherwise, to the household. He does not contribute to the mortgage repayments, nor does he make any payment in respect of child maintenance.
4. As noted above, the family home was acquired by Ms. Parkin and her partner in 2005 with the assistance of a loan (secured in the usual way by a mortgage) from Permanent TSB (PTSB). Ms. Parkin is described in the papers before the court as a finance manager employed by the HSE. Her net monthly income from her employment is €2,909.47.
5. Ms. Parkin fell into financial difficulty for the first time in 2007. She explains in her affidavit that her husband developed an addiction to gambling and borrowed €7,000 from “loan sharks” which he used to place bets. This debt was simply too much to repay on top of the ordinary expenses of the household and Ms. Parkin says that, as a consequence, she and her husband began to fall behind on various bills. In para. 8 of her affidavit sworn on 9 January 2017, she says: –
“The people who provided the loan were unsurprisingly persistent to be repaid and we were coming under pressure to pay off the debt in full. The harassment was becoming worse and I borrowed a sum of money from my sister . . . in order to discharge the debt. My husband’s departure did not negatively impact [my financial situation] . . . as he was not contributing”.
6. Ms. Parkin also explains that, notwithstanding the episode with the loan sharks, her partner’s gambling problem became worse. At that stage, she first fell into arrears with the mortgage repayments to PTSB. It is clear from the summary estimated statement of affairs at Appendix 1 to the proposed Personal Insolvency Arrangement (“PIA”) that, in addition to the home loan liabilities to PTSB and the liability to her sister, she also incurred borrowing costs in respect of a loan obtained from her staff credit union at the HSE (“the credit union”) and she ran up a significant bill on her PTSB credit card.
7. In the meantime, in common with many other properties, the value of Ms. Parkin’s home fell significantly. The current debt due to PTSB and secured on the home is in the order of €333,785 while the value of the home has dropped to €160,000. This value has been agreed between PTSB and Ms. Judy Mooney, the Personal Insolvency Practitioner (“the practitioner”) acting in this case on behalf of Ms. Parkin.
8. There is no dispute between the parties that, as of 1 January, 2015, Ms. Parkin was in arrears with her payments in respect of the PTSB home loan. Ms Parkin’s indebtedness on foot of the loan is therefore a relevant debt for the purposes of s 115A(18) of the Personal Insolvency Act 2012 (“the 2012 Act) such as to satisfy the gateway requirement of s. 115A. In the Circuit Court, Ms Parkin sought and obtained an order under s 115A(9) confirming the coming into effect of proposals for a Personal Insolvency Arrangement (“PIA”) notwithstanding that the proposals have been rejected by a majority (in value) of her creditors.
9. It should be noted, at this point, that the home loan (and the relevant mortgage in favour of PTSB) are in the joint names of Ms. Parkin and her husband. The family home (which is clearly a principal private residence for the purposes of the Personal Insolvency Acts 2012 – 2015) is also in joint names.
10. Ms. Parkin has not taken any steps against her husband to require him to make any contribution to the mortgage repayments or to the maintenance of their daughter. In para. 6 of her affidavit sworn on 9 January 2017, Ms. Parkin says that her partner: –
“. . . does not communicate with me and I do not know the address at which he currently resides nor do I have any forwarding address for him. I say that [he] has deliberately not provided me with any contact details lest he is pursued for child maintenance or other financial obligations. My daughter visits her grandmother in Yorkshire and has met her father there. . . .”
The application under the 2012-2015 Acts
11. Proceedings under the 2012 – 2015 Acts were commenced in the Circuit Court in 2016. In accordance with the requirements of the Acts, the practitioner formulated proposals for a PIA which were considered by Ms. Parkin’s creditors at a meeting of creditors held on 7 November, 2016. Under the proposals, the secured debt on foot of the mortgage granted to PTSB will be written down to €160,000 (which is the agreed market value of the principal private residence). The balance of €173,785.39 will be treated as unsecured debt and will share with the credit union a dividend of 8 cent in the euro. At the end of the PIA, the balance of the unsecured element of the debt will be written off.
12. The creditors’ meeting was attended by two creditors namely PTSB and the credit union. PTSB voted against the proposal. The credit union voted in favour. The total debt due to PTSB (including the sum of €9,948 due on foot of Ms. Parkin’s credit card and the sum of €20 due on foot of a personal loan) amounted to €343,753.00. In percentage terms this represents 98.9% of the total debt voted at the meeting. The amount due to the credit union is €3,752.43 which represents 1.1% of Ms. Parkin’s total indebtedness. Thereafter, an application was made to the Circuit Court by the practitioner under s. 115A(9) seeking an order confirming the coming into effect of the proposed PIA notwithstanding that it had been rejected in the manner outlined above. For the purposes of satisfying the requirements of s. 115A(9)(g), the practitioner argued that the credit union comprised a separate class of creditor from PTSB. For this purpose, s. 115A(17)(a)(i) enables a court to consider a single creditor as a separate class.
13. PTSB filed a Notice of Objection in the Circuit Court. In that Notice, PTSB raised a number of issues as follows: –
(a) It was contended that the credit union could not be said to constitute a separate class of creditor;
(b) It was contended that it was not appropriate for the court to approve the arrangement in circumstances where an alternative had been put forward by PTSB which, it was contended, was ” fairer and /or more appropriate (including to unsecured creditors by reason of providing a better return for them of 10.11% as opposed to 5.51%)”. At this point, I should record that on 3 and 7 November 2016, PTSB put forward an alternative proposal that would have split the mortgage debt into two parts namely (a) a live balance of €236,000 which would continue to accrue interest at 3.25% per annum and (b) the ” warehousing ” of the balance of €97,785 at zero interest ” with a 30% LTV write down upon maturity, if applicable “. The counterproposal also proposed an extension of the term to 312 months. At the end of that term, the warehoused balance would become due subject to the possibility of the partial LTV write-down mentioned above. In, the meantime, Ms Parkin would have a monthly mortgage bill in the order of €1,121.
(c) It was contended that the position adopted by the practitioner that the warehousing of a debt did not comply with the 2012 – 2015 Acts was an ” error of law “;
(d) It was argued that the PIA will not enable creditors (and in particular PTSB) to recover debts due to them to the extent that the means of the debtor reasonably permit. It was contended that this was a breach of s. 115A(9)(b)(ii).
(e) Reliance was also placed on s. 115A(9)(e) and (f) of the 2012 Act, (as amended). In support of this proposition, the notice stated that PTSB ” will rely, in particular, on the fact of the sizeable upfront write-down proposed in the PIA”.
(f) The fact that the debt was a joint debt with Ms. Parkin’s husband was also a ground of objection. It was submitted that, to grant the order sought, would be to reduce the debt in respect of which Ms. Parkin’s husband is jointly and severally liable and that this would breach s. 115A(9)(b)(ii) of the 2012 Act (as amended). In particular, it was argued that the terms of the proposed PIA did not address the joint borrowings in a manner that would preserve the rights of PTSB as against Ms. Parkin’s husband.
14. A hearing subsequently took place before Her Honour Judge Susan Ryan in the Circuit Court at which PTSB and the practitioner were represented by counsel. On 9 August 2017, the learned Circuit Court Judge delivered a written judgment in which she rejected the grounds of objection and expressed the view that the proposed PIA does not unfairly prejudice PTSB.
15. Since the decision of the learned Circuit Court Judge, Ms Parkin has complied with the terms of the PIA.
The appeal
16. PTSB has appealed the decision of the learned Circuit Court Judge. Since an appeal from the Circuit Court to the High Court is an appeal by way of rehearing, a full rehearing of the application took place before me on Monday 3 December, 2018 at which the practitioner was represented by junior counsel and PTSB was represented by both senior and junior counsel.
17. Very helpful written and oral submissions were made which have assisted in crystallising the issues that now fall for determination by me. PTSB drew attention to the far reaching nature of s. 115A and submitted (correctly in my view) that the onus of proof lies on the practitioner to demonstrate that all of the requirements of s. 115A have been satisfied. PTSB relies in this context on the observations of Baker J. in Laura Sweeney [2018] IEHC 456 at para. 60 where she emphasised that the court can only approve a PIA where all of the statutory tests are met. PTSB also relies on the observation of Baker J. in Siddhartha Varma [2017] IEHC 218 at para. 23 where Baker J. drew attention to the impact which relief under s. 115A can have on the contractual and property rights of a creditor.
18. PTSB also contends that the onus lies on the practitioner to justify why the counter-proposal made by it (summarised in para. 13(b) above) ought not to be adopted.
19. PTSB strongly urges that the means of Ms. Parkin permit a greater recovery for PTSB than is proposed under the PIA. In this context, PTSB complains that, even if the practitioner was justified in not accepting the PTSB counter-proposal, the PIA should nevertheless have provided for some level of warehousing under which more extensive payments could be made in the future.
20. Having regard to Ms Parkin’s means, PTSB also argues that the proposed write-down of the PTSB mortgage debt to the current market value of the principal private residence of Ms. Parkin is unnecessary and unjustified. PTSB submits that, in cases of this kind, it is incumbent on the practitioner to objectively justify a write-down of this nature.
21. In light of the manner in which the 2012-2015 Acts engage the constitutionally protected property rights of secured creditors, PTSB submits that, having regard to the approach taken in Heaney v. Ireland [1994] 3 I.R. 593, the court is required to consider, insofar as possible, whether there is an alternative proposal which is less intrusive to the rights of the creditor. In this context, PTSB argues that this requires that the practitioner must conduct a real and substantiated analysis as to what level of postponed or “warehoused” debt would be affordable.
22. PTSB also contends in this regard that the future pension entitlements of Ms. Parkin are relevant and must be taken in account.
23. PTSB complains that the PIA makes no provision for contributions from Mr. Parkin and PTSB argues that Ms Parkin should have made attempts to pursue Mr Parkin.
24. Furthermore, PTSB submits that the practitioner has failed to substantiate the claim that the credit union constitutes a separate class of creditors for the purposes of s. 115A.
The credit union as a separate class of creditor
25. It seems to me that, logically, I should deal with the last of those issues first. If no class of creditor has accepted the proposed arrangement by a majority of more than 50% of the value of the debts owed to that class, the court could not make an order confirming the coming into effect of the proposed PIA. Section 115A(9)(g) makes that clear.
26. In the papers before the Circuit Court the practitioner had contended that the credit union formed a separate class of creditor on the grounds that the credit union was: –
“… A mutual organisation owned by the members with profit being shared between the members and operating in the interests of those members. A mutual lender must be formed for one or more objects and that the members must have a “common bond”. A member must also have at least one fully paid-up share in the credit union. Further, the creditor is regulated under distinct regulatory frameworks and under law. In that regard, I consider the credit union to be in a separate class as their rights are so dissimilar that it would be impossible for them to consult together with any other creditor with a view to their common interest. …”.
27. PTSB, in its submissions, relied on the judgment of Baker J. in Sabrina Douglas [2017] IEHC 785 where Baker J, at paras. 37-38, held that a credit union could not be characterised as a separate class of creditors ” merely on account of the rules governing membership of the society “. Baker J. explained that the rules of a credit union, while relevant to the nature or legal status of such an entity, do not provide any support for treating a credit union as a separate class. Baker J. emphasised that what s. 115A is concerned with is the nature or claim of a creditor as against the debtor.
28. In Sabrina Douglas , Baker J. followed the same approach that is traditionally taken in the context of the constitution of classes for the purposes of voting on a scheme of arrangement under the Companies Act. In particular, Baker J. followed the approach taken by Laffoy J. in Re: Millstream Recycling [2010] 4 IR 253 where Laffoy J. applied the classic test laid down in Sovereign Life Assurance Company v. Dodd [1892] 2 Q.B. 573 where Bowen L.J. said:
“It seems plain that we must give such a meaning to the term “class” as will prevent [the statutory provision] being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest”.
29. In the Circuit Court, the learned Circuit Court Judge did not accept the basis for the characterisation of the credit union as a separate class which had been suggested by the practitioner (as outlined in para. 26 above). Nevertheless, she took the view that, given the composition of the liabilities due and owing to PTSB (which involve both secured and unsecured elements), it could not be said that the credit union and the PTSB shared a common interest. In contrast, the debt due to the credit union was entirely unsecured. For that reason, Judge Ryan held that the credit union constituted a separate class.
30. In my view, the approach taken by the learned Circuit Court Judge was entirely correct. There were only two creditors who participated in the meeting – namely the credit union and PTSB. The credit union was solely an unsecured creditor. However, PTSB was both an unsecured creditor (in respect of the credit card and loan accounts) and a secured creditor in respect of the mortgage account. The fact that PTSB held a mortgage over the family home in respect of the bulk of the debt due to it shows very clearly that its rights were markedly different to those of the credit union. Because such a significant element of the debts due to PTSB were secured by the mortgage, PTSB’s interest was in securing an outcome that best preserved its rights under the mortgage. In contrast, the credit union was solely concerned as an unsecured creditor. Its interests were in securing an outcome which maximised the return to unsecured creditors. In these circumstances, it seems to me that the rights and interests of PTSB and the credit union were so dissimilar as to make it impossible for them to consult together with a view to their common interest. In short, they had no common interest.
31. In the course of argument, it was suggested by counsel for PTSB that, in circumstances where the practitioner had relied solely on the credit union’s mutual status in his statement given under s. 115A(2)(a)(ii), he could not now seek to put forward a different basis for his contention that the credit union should be treated as a separate class. I reject that argument. In my view, it is clear from s. 115A(17) that it is for the court to form a view as to whether any individual creditor or group of creditors should be treated as a class of creditor for the purposes of s. 115A. The role of the court in relation to this issue is not circumscribed by the approach taken by the practitioner. The court is free to reach its own view.
32. For the reasons discussed in para. 30 above, I hold that the credit union is to be treated as a separate class for the purposes of s. 115A. I appreciate that, on an overall basis, the debt due to the credit union represents no more than 1.1% of Ms Parkin’s indebtedness. I must, of course, bear in mind s. 115A(17)(b)(ii) which requires the court to have regard (inter alia) to the proportion of the debtor’s debts due to the creditor forming a separate class. Nonetheless, in the context of Ms Parkin’s means, a debt of €3,816 is not insubstantial. It represents more than one month’s income after tax. The credit union is also the only totally unsecured creditor to vote and, in those circumstances, its voice is important. Accordingly, I am of the view that it is appropriate that it should be regarded as a separate class.
33. In light of the findings made in paras. 30 and 32 above and in circumstances where the credit union has voted in favour of the proposed PIA, I find that the provisions of s. 115A(9)(g) have been compiled with in this case.
Warehousing
34. At the time the proposals for the PIA were formulated by the practitioner in this case, it was understood by the practitioner that warehousing of debt was not permitted under the 2012-2015 Acts. However, this view was rejected by the learned Circuit Court Judge who referred in her judgment to the decision of Baker J. in Paula O’Callaghan [2018] 1 IR 335 where Baker J. dismissed an argument that the statutory scheme of the 2012-2015 Acts precluded warehousing as an element of proposals for a PIA. For this purpose, Baker J considered the different ways in which s 102 of the 2012 Act envisages that a PIA can address secured debt. At para. 45 of her judgment in Paula O’Callaghan Baker J. said:
“I agree with the argument of KBC that the list contained in s. 102(6) is not intended to be exhaustive. The section is permissive and does not mandate the means by which a secured debt may be restructured, and neither s. 100 nor s. 102(6)(d) preclude a proposal by which a warehoused amount becomes payable after the expiration of the term of a PIA.”
35. During the course of the hearing before me, it was argued on behalf of the practitioner that Baker J. had subsequently taken a different approach in Jacqueline Hayes [2017] IEHC 657. In particular, it was submitted that, in para. 46 of her judgment in Jacqueline Hayes, Baker J. had stressed the difference in language between s. 102(6)(d) of the 2012 Act on the one hand and the provisions of s. 102(6)(e) on the other. In the case of the latter, no temporal limitation is placed on a proposal to fix an interest rate under a PIA. In the same paragraph, Baker J. stressed that this is quite different to s. 102(6)(d) (dealing with a deferral of secured debt payments). Section 102(6)(d) imposes a temporal limitation on proposals to defer payment of secured debt. In particular, it provides that any such deferral is not to ” exceed the duration of Personal Insolvency Arrangement” . Counsel argued that, since warehousing involves deferral of part of a debt, s 102(6)(d) must therefore mean that warehousing is not permissible in the context of a PIA. Counsel argued that the fact that Baker J had adverted, in Jacqueline Hayes , to the provisions of s. 106(2)(d), must mean that she was adopting a different view to that previously taken by her of the same subsection in Paula Callaghan .
36. Notwithstanding the very able arguments of counsel for the practitioner, I do not believe that I can construe what was said by Baker J. in her judgement in Jacqueline Hayes as overruling or departing from the ratio of her previous decision in Paula Callaghan . If Baker J. had intended to overrule her previous decision in Paula Callaghan , I believe she would have made that clear in her judgment in Jacqueline Hayes . It is noteworthy that in her judgment in Jacqueline Hayes , she expressly refers to her previous decision in Paula Callaghan and does not call it into question in any way. Furthermore, Baker J, in Laura Sweeney [2018] IEHC 456, having cited her decision in Paula Callaghan , reiterated in para. 56 of her judgment that it may be appropriate in certain cases to split or warehouse part of a debt. In these circumstances, I believe that I must treat the decision of Baker J. in Paula Callaghan as authority for the proposition that proposals for a PIA which include a proposal to warehouse part of a mortgage debt are not per se contrary to the provisions of the 2012 – 2015 Acts. Given that the decision of Baker J. in Paula Callaghan is a relatively recent decision by a judge with unparalleled experience and expertise in personal insolvency matters, I do not believe that it would be appropriate for me to do anything other than to follow that decision. The decision of Clarke J (as he then was) in Worldport Ireland Ltd. (in liquidation) [2005] IEHC 189 makes this very clear. In that case, Clarke J. said at pp 7 – 8: –
“I have come to the view that it would not be appropriate . . . for me to revisit the issue so recently decided by Kearns J. . . . It is well established that, as a matter of judicial comity, a judge of first instance ought usually follow the decision of another judge of the same court unless there are substantial reasons for believing that the initial judgment was wrong. . . . Amongst the circumstances where it may be appropriate for a court to come to a different view would be where it was clear that the initial decision was not based upon a review of significant relevant authority, where there is a clear error in the judgment, or where the judgment sought to be revisited was delivered a sufficiently lengthy period in the past so that the jurisprudence of the court in the relevant area might be said to have advanced in the intervening period In the absence of such . . . circumstances it seems to me that the virtue of consistency requires that a judge of this court should not seek to second guess a recent determination of the court which was clearly arrived at after a thorough review of all of the relevant authorities . . .”
37. In the course of the hearing before me, counsel for the practitioner did not identify that any of the additional circumstances discussed by Clarke J. in Worldport could be said to apply here. Accordingly, it would be quite wrong for me to revisit the approach taken by Baker J. in Paula Callaghan . Unless and until a different decision is given by the Court of Appeal or the Supreme Court, I believe that I should follow and apply the law in relation to warehousing as explained by Baker J. in Paula Callaghan and reiterated in Laura Sweeney .
38. I must therefore find that, there is no reason in principle why proposals for a PIA might not include a proposal for warehousing of part of a secured debt.
39. That is not to say that warehousing will be appropriate in any particular case. On the contrary, the decision in Paula Callaghan illustrates that, while warehousing is permissible in principle, it may not work in practice. The decision in Paula Callaghan demonstrates this very well. In that case, the secured indebtedness amounted to €285,647. The value of the principal private residence was agreed under s. 105 at €105,000. In the proposals for a PIA, it was proposed that there should be a debt write-off of €165,647 leaving a live mortgage balance of €120,000. KBC Bank had made a counterproposal to write off €15,000 and then to split the remaining mortgage debt of €270,000 into two moieties of €135,000 each. The first moiety was to be paid by instalments in the traditional way. KBC proposed that the second moiety would carry interest at 0%; that the security would not be enforceable until after the debtors had died which meant that the debtors would be permitted to occupy their principal private residence for the rest of their lives. I agree with the submission made by counsel for the practitioner in this case, that the warehousing proposal in Paula Callaghan was significantly more beneficial to the debtors there than the proposal made by PTSB here. Nonetheless, Baker J. refused to accept that the counterproposal was appropriate. At paras. 79-81 of her judgment, she said: –
“[79] However, the fact that a court will not require that a PIA would guarantee solvency into the future has the corollary that a court will equally not make assumptions regarding the likely financial or other circumstances of a debtor far into the future. In the present case whilst the counterproposal does make provision for the continued occupancy by the debtors of their principal private residence for their respective lives, it is predicated on assumptions and conjecture regarding the living arrangements of the debtors far into the unknown future to a time at the expiration of the mortgage term, when Mr. Callaghan will be 62 years of age and his wife close to that age.
[80] In addition I am not satisfied that the reasonableness of the counterproposal is to be tested in the light of an assumption that the couple will wish to remain living in their present home for the rest of their lives, or even for the rest of their working lives. Many life events could mean that they will wish or need to live elsewhere.
[81] It is crucial in this context that s. 90 of the 2012 Act precludes a debtor entering into more than one personal insolvency arrangement in his or her lifetime. This means that the legislation envisages an arrangement which will deal with all present insolvency of the debtors or at least the achieving of solvency within five years. While the counterproposal made by KBC may seem attractive and to some extent benevolent, it is capable of creating circumstances amounting to insolvency at the end of the mortgage term in approximately 23 years’ time. Because a PIA is a once in a lifetime solution it would be wrong to test the reasonableness of a proposal in the light of a preferred solution or counterproposal that could on its terms result in insolvency at a future date. The discussion above with regard to speculative proposals is also relevant in regard to this proposition. A warehousing solution should on present or known figures offer a solution to indebtedness that is likely to be achieved. Neither of the debtors has the benefit of a pension which might provide a lump sum on retirement to deal with the warehoused amount. The repayment of the inactive [moiety] therefore is not predicated on any anticipated ability to pay in the future, and is entirely on the hazard. This results in unfairness [to the debtor] at a level which I consider material.”
40. Counsel for the practitioner in this case relied very strongly on these observations by Baker J. He submitted that the PTSB counterproposal here is essentially predicated on a future sale at a time when Ms Parkin will be at an advanced age. This is because the warehoused amount of €97,785.00 will become due upon maturity (following the expiry of the proposed extension of the term of the PTSB mortgage loan to 312 months). While there is the possibility of a 30% loan-to-value write-down, this is not guaranteed. Thus, unless Ms. Parkin is in a position to pay €97,785.00 on maturity, she will be left with no alternative but to sell her home. By that stage, Ms. Parkin will be 71 years of age. While it is likely that her retirement age will be 68, and while it appears that she will be entitled to payment of a pension, counsel for the practitioner urged that the observations of Baker J. in Paula Callaghan (quoted in para. 39 above) apply with even greater force here given that the KBC proposal in that case at least gave the debtors security of tenure in their home for their lifetime. In contrast, in the present case, counsel submitted that Ms. Parkin would be facing a very significant liability in her old age, and would very likely have to sell her home in order to meet the liability that would crystallise at age 71. Counsel also submitted that the warehousing of part of the debt would effectively mean that Ms. Parkin would remain insolvent even after the termination of a PIA. In this regard, he drew attention to the observation of Baker J. in Laura Sweeney , where she said at para. 46: –
“. . . .it must be recalled that a person may avail of a PIA only once in a lifetime, and that must mean that the court ought not to make an order which, on known figures, is likely to lead to insolvency at an identifiable time in the future, even if that time is far into the future”.
41. On the other hand, counsel for PTSB stressed that the observations of Baker J in Paula Callaghan suggest that she had in mind that a different conclusion might have been open, in that case, had the debtors there had the benefit of a pension arrangement which would have given rise to a lump sum payment on reaching retirement age. This is an issue that I consider further below when I address the arguments of the parties in relation to Ms Parkin’s pension entitlements.
42. In light of the approach taken, on the facts, in Paula Callaghan , it is understandable that warehousing does not regularly feature in proposals for PIAs. The observations of Baker J. in that case (as quoted above) make very clear that even a relatively benign warehousing proposal may encounter difficulty for the reasons explained by Baker J. – namely that it is capable of creating circumstances amounting to insolvency at the end of the mortgage term. In this context, it is important to bear in mind that, between now and the end of the mortgage term, Ms Parkin will continue to have to incur the ordinary expenses of life. For example, money will inevitably be required from time to time for expenses such as medical and dental treatment and for the upkeep and maintenance of the family home; and relatively large sums may need to be spent when the roof springs a leak or the windows need to be replaced or the central heating irretrievably breaks down.
43. That is not to say that there may not be cases where warehousing may be appropriate on the facts. It will always depend on the particular facts of an individual case. In order to properly evaluate its potential applicability here it is necessary to consider the evidence in more detail and to address the underlying issue of affordability. I will therefore return to the issue in the concluding section of this judgment.
Affordability
44. In the course of the hearing before me, it was strongly urged by counsel for PTSB that, even if the practitioner was not obliged to incorporate the PTSB warehousing proposal into the terms of the PIA, the practitioner had an obligation to consider what was affordable for Ms. Parkin. PTSB makes the case that the means of Ms. Parkin permitted a greater recovery for PTSB than is proposed under the PIA. PTSB contended that the approach taken by the practitioner was highly conservative, and that the practitioner has wholly failed to justify why, under the proposals made by her, the mortgage debt is written down to market value notwithstanding the level of Ms Parkin’s income. PTSB lays emphasis on the observation made by Baker J. in Laura Sweeney at para. 56 where she said: –
“The determination as to whether a mortgage debt is to be written down is to be made by reference to the affordability of payment”
That observation must be seen in the context of s. 115A(9)(b)(ii) of the 2012 Act which makes it clear that the court must be satisfied that there is a reasonable prospect that confirmation of the proposed PIA will enable the creditors of the debtor to ” recover the debts due to them to the extent that the means of the debtor reasonably permit .”(emphasis added).
PTSB complains that, in circumstances where the practitioner proposes the maximum possible write-down, (i.e. a write-down to market value), the practitioner ought to be required to satisfy the court as to why a permanent write-down of debt should take place rather than a postponement of some of the debt pending a further payment in the future (i.e. warehousing). PTSB further submits that, in the present case, the evidence suggests the availability of additional and ascertainable income which has not been properly addressed by the practitioner. In addition, PTSB contended, in the course of the hearing before me, that the practitioner has failed to explain the rationale for the write-down of the mortgage debt to market value. PTSB highlights what it characterises as a bald averment made by the practitioner at para. 9 of her affidavit sworn on 18 May 2017 where she says: –
“I say and believe that the write-down is based on the current affordability of the Debtor in a fair and equitable treatment between the Creditors including both secured and unsecured Creditors in the personal insolvency arrangement proposal. Indeed, it is the case that there are few certainties in personal insolvency and bankruptcy and rather there be (sic) an arbitrary write-down wherein I would pick a figure I have grounded the restructure (and write-down) on the certainties of the PIA, being the agreed s. 105 valuation and the proven and accepted income and expenditure, and thus the agreed capacity”.
45. PTSB says that this passage is not easy to understand but that what it appears to suggest is that the write-down amount here was selected on the sole basis that the relevant figure was said to be one of the ” certainties of the PIA ” namely the agreed valuation under s. 105 (which represents the maximum permissible write-down under s.103). According to PTSB, it is familiar with similar averments by practitioners which invariably state that a write-down, often to current market value, has been determined on the basis of ” affordability ” with no other supporting detail being provided whatsoever. PTSB seeks to make the case that such ” bland averments ” are entirely inappropriate. As noted above, PTSB suggest that this issue has to be viewed against the background where, as Clarke J. acknowledged in Re: McInerney Homes [2011] IEHC 4 at para 3.10 that: –
“. . . in assessing whether a scheme is fair or “unfairly prejudicial” the court must have regard to the secured status of . . . [secured] creditors and the fact that that enhanced status places those creditors in an advantageous position in any alternative scenario such as liquidation or receivership”.
46. PTSB also anchors its argument by reference to the manner in which s. 115A impinges on its constitutionally protected property rights. PTSB relies on the well-known passage in Heaney v. Ireland [1994] 3 IR 593 at p. 607 where Costello J. (as he then was) said: –
” . . .The objective of the impugned provision must be of sufficient importance to warrant overriding a constitutionally protected right. It must relate to concerns pressing and substantial in a free and democratic society. The means chosen must pass a proportionality test. They must: —
(a) be rationally connected to the objective and not be arbitrary, unfair or based on irrational considerations;
(b) impair the right as little as possible, and
(c) be such that their effects on rights are proportional to the objective . . .”
47. Against a background where (as the judgments of Baker J. in a number of cases make clear) s. 115A adversely affects the constitutionally protected property rights of secured creditors, PTSB submits that its rights should be impaired to the smallest extent possible by any proposed PIA. Thus, PTSB argues that the court should very carefully scrutinise the evidence as to affordability particularly in circumstances where the practitioner proposes to reduce the mortgage debt to the maximum extent permitted under s. 103 – namely to the agreed market value of the underlying security.
48. In order to address the case made by PTSB in relation to affordability, it is necessary to consider the evidence before the court in relation to this issue. As noted above, the affidavit evidence filed by the practitioner has been heavily criticised by PTSB. In addition to the principled criticisms outlined above, PTSB also makes a number of specific criticisms about (a) the failure of the proposals to take account of the full extent of the income which will be available to Ms Parkin after the PIA comes to an end; (b) the failure of the proposals to address the likely pension entitlements of Ms. Parkin; (c) the likelihood that her salary will increase over time; (d) the fact that Ms. Parkin’s daughter will not be a dependent once she obtains her primary university degree; and (e) the manner in which the PIA makes no provision for any contributions at all from Mr. Parkin, the estranged husband of Ms. Parkin.
The evidence before the court
49. In light of these criticisms, it is necessary to carefully analyse the evidence before the court. While significant criticism has been made by PTSB of the affidavit evidence of the practitioner there is a significant level of detail relating to the means of the debtor contained in the proposals for the PIA and the accompanying appendices. Appendix 2 to the proposed PIA shows that, for the proposed six-year duration of the PIA, the entire of the net employment income of Ms. Parkin will be utilised. Her net income per month is €2,909.47. Out of this, the reasonable living expenses of Ms Parkin and her daughter will be met, €924.06 will be paid in respect of mortgage repayments to PTSB, €53.33 will be paid in years 1-5 in relation to Irish Language courses for Ms. Parkin’s daughter (i.e. while she remains at secondary school), €26.25 will be paid in respect of local property tax each month and from year 6 onwards (until the daughter secures her degree in veterinary medicine) a sum of €549.91 per month will arise in respect of third level education costs. This figure of €549.91 is based upon the amount allowed by the official assignee in a bankruptcy for a child in third level education. Appendix 4 shows that the remaining balance will be applied in discharge of the fees of the practitioner over the six-year term of the PIA.
50. It is true that the terms of the proposed PIA might suggest that the employment income of Ms. Parkin will remain static at €2,909.47 net per month. Given Ms Parkin’s employment with the HSE, this seems to me to be inherently unlikely. However, para. 10 of Part IV of the PIA makes clear that in the event that Ms. Parkin receives additional income in excess of the amount listed in Appendix 2, she will be required to contribute additional income in accordance with Clause 12 of the standard terms of the PIA. Similarly, if the debtor becomes entitled to a windfall at any time during the lifetime of the PIA, this will be dealt with in accordance with Clause 11 of the standard terms and Ms. Parkin will be required to introduce an amount not less than 50% of the net proceeds of any inheritance received during the term of the PIA. Thus, in the event that Ms. Parkin is entitled to increases in her employment income (whether by way of incremental increases in salary or increases awarded under public pay guidelines) which exceeds €100 per month, Ms. Parkin will be required to account to the practitioner for such payments and the creditors of Ms. Parkin (including PTSB) will benefit in accordance with paras. 11 and 12 of the standard terms.
51. Thus, insofar as PTSB complains about the lack of information in relation to likely salary increases available to Ms. Parkin, I do not believe that this is a significant concern. In making that observation, I stress that I do not wish in any way to suggest that it is appropriate for practitioners, in moving an application under s. 115A, to overlook expected salary increases. In my view, on an application of this kind, the proposals for the PIA should expressly address both known future salary increases and any likely increases. Furthermore, in any application to the court under s. 115A, I believe that the practitioner and the debtor should place full information before the court in relation to any entitlement to salary increases or pension entitlements (the latter issue is addressed in more detail below). It is plainly unsatisfactory that creditors or the court should be left in the dark in relation to such issues. The averment made by the practitioner in para. 18 of her affidavit sworn on 18 May 2017 is particularly unhelpful to the court in this context. There, the practitioner says: –
“I have discussed the Debtor’s income and any increments that may be applicable in the coming years. I say that I am informed that the debtor is not in a position to confirm what, if any increments she will receive in the coming years. It is also worth noting that public service pay has in fact reduced over the last number of years”.
52. In my view, this is patently unsatisfactory. It suggests that the issue was not adequately investigated by the practitioner. In my opinion, the practitioner should have set out exactly the debtor’s entitlements to any increases in salary over the next number of years and in particular over the six-year lifetime of the proposed PIA. It is impossible to accept that Ms. Parkin (as a finance manager with the HSE) would not be in a position to obtain details from her employer as to any increases that are due to be paid to her over the next number of years or any increases that are likely to be made.
53. Nonetheless, I do not believe that the failure to provide details of any increases in salary is, of itself, fatal to the present application. As a public servant, any increases to which Ms. Parkin may be entitled in the future are likely to be extremely modest and, therefore, I do not believe that they would make a substantial difference to the overall affordability of any PIA proposals. Moreover, as set out above, any such increases will have to be accounted for in accordance with the standard terms of the PIA and therefore PTSB will obtain the benefit of them by a proportionately larger payment of dividend in respect of the unsecured element of the debt for the duration of the PIA.
54. The next point made by PTSB is that, quite apart from any increases in salary which may accrue to Ms. Parkin, the information contained in the appendices to the proposed PIA shows very clearly (so it is argued) that Ms. Parkin will be able to afford more by way of payments in the future than is currently provided for under the proposed PIA. In the written submissions delivered on behalf of PTSB the case is made, by reference to appendix 2 to the PIA, that Ms. Parkin will have a ” surplus ” of €358.77 per month. PTSB says that this equates to a surplus of €4,305.24 per annum. If Ms. Parkin worked until age 66 this would generate an overall ” surplus ” of €60,273.36 (this is calculated by multiplying the annual ” surplus ” by the period of fourteen years that would elapse between the end of the PIA and Ms. Parkin’s 66th birthday in 2038).
55. PTSB says that if Ms. Parkin worked until she was 68 (which will occur in 2040) she will have accumulated a ” surplus ” of €68,883.84. On this basis, PTSB argues that it is clear that Ms. Parkin can afford significantly higher payments than the figure of €924.06 which will be the monthly sum payable under the mortgage under the terms of the proposed PIA.
56. As noted above, the argument made by PTSB in this context is predicated upon appendix 2 to the PIA which shows that in year 6 of the PIA and in the first year after the PIA, Ms. Parkin will have a monthly ” surplus ” of €358.77 after payment of the “set costs”, the mortgage repayment, the local property tax and college costs at €549.91. In reality, however, when one takes the fees of the practitioner into account together with the payment of the dividend to the unsecured creditors, the ” surplus ” will not arise in year 6 but will arise for the first time after the expiry of the 6-year period. It also has to be said that Ms Parkin would be doing very well if she can manage to keep her daughter’s monthly college costs to €549.91.
57. In response to this part of the PTSB case, counsel for the practitioner stressed that the ” set costs ” of €1,506.06 are based on the Insolvency Service of Ireland (” ISI “) reasonable living expenses. Counsel argued that a debtor who successfully completes a PIA has earned the right to return to some semblance of normal life and should not be confined to such living expenses once the PIA comes to an end.
58. However, PTSB submits that, in addition to the ” surplus ” of €358.77 per month, there would be a further ” surplus ” arising in the future in circumstances where the college costs allowed at €549.91 per month will not continue indefinitely. PTSB suggests that it is reasonable to take the view that they will not continue after Ms. Parkin’s daughter reaches the age of 23 years. If that figure per month is factored into the equation, PTSB suggests that this will increase the overall surplus available to Ms. Parkin at age 66 to €146,059.32 or, were she to work until aged 68, this will increase by a further €21,908.32 to €167,867.64. PTSB makes the case that this is considerably higher than the sum of €97,785 which PTSB proposed should be warehoused and PTSB submits that, accordingly, Ms Parkin could well afford to pay them the warehoused amount or a significant part of it.
59. At first sight, this submission by PTSB appears to have significant force particularly in relation to the period after Ms. Parkin’s daughter will be able to support herself. It is clear from the judgments of Baker J. that affordability is key in determining what is an appropriate write-down of secured debt. This was emphasised by her in Laura Sweeney at para. 56. If the PIA is approved, the result will be that, even if Ms. Parkin’s net salary were to be frozen at €2,909.47 for the rest of her life, only €924.06 of that sum would have to be paid in mortgage costs every month leaving Ms. Parkin with a figure of almost €2,000 per month available to meet her ordinary living expenses and to cover the occasional emergency expense that arises from time to time in everyone’s life. That might appear to be an overly generous margin but it has to be borne in mind that, out of that sum (or any enhanced sum in the event that Ms Parkin secures an increase in salary) her ordinary expenses of life will have to be discharged. The Guidelines issued by the ISI envisage that the reasonable living expenses of a single adult with a car will be €1,050.48 per month. That might appear to leave Ms Parkin with a very generous cushion even after her reasonable living expenses are taken into account. However, it must be borne in mind that those guidelines are intended to be applied for the duration of a bankruptcy, a PIA, or a debt settlement arrangement. They are not intended to be a measure of the expenses likely to be incurred over the course of a longer period and they are certainly not designed to apply for a lifetime. For example, they envisage an exceptionally modest sum of €0.97 per month for personal costs and an extremely modest sum of €31.34 per month for health. They are also based on very modest provision for contingencies and savings of no more than €43.38 per month. That figure for contingencies seems to me to be manifestly insufficient on a long term basis to deal with the costs every home owner incurs on a recurring basis in the upkeep and maintenance of property (even leaving aside the emergencies that occasionally arise requiring more substantial outlay such as roof repairs). Moreover, while the PTSB analysis has proceeded on the basis that Ms. Parkin’s daughter will no longer be dependent after age 23, experience shows that parents continue to have to support children after that age and this is particularly so in the years where a child is trying to establish a new career or where, as sometimes happens, a bright student will remain in university at post-graduate level for a number of years after obtaining a primary degree. In those circumstances, I believe that PTSB is taking an overly optimistic approach in suggesting that Ms Parkin will no longer have to support her daughter once she reaches 23.
60. In addition, counsel for the practitioner submitted that the very fact that PTSB was proposing to warehouse a part of the debt for a lengthy period shows very clearly that PTSB itself recognises that the debt is not affordable in the period between now and maturity of the loan. Counsel also argued strongly that one must always keep in mind the bankruptcy comparison. He acknowledged that the figures given in appendix 5 to the PIA are incorrect. However, he said that even when one takes account of the true comparison between the outcome in a bankruptcy as against the outcome under the proposed PIA, PTSB will fare significantly better under the PIA. In the case of a bankruptcy, the total assets available would be €144,000 (made up of the value of Ms Parkin’s home at €160,000 less 10% for realisation costs, 10% being the usual estimate allowed by the official assignee in bankruptcy). This would generate a dividend to the secured creditor of 43 cents in the euro. In contrast, under the terms of the PIA, the bank will recover not only the sum of €160,000 but also a further sum by way of dividend in respect of what would be treated as the unsecured element of its debts. It would also recover €14,483 in respect of the mortgage, €2 in respect of the very small loan account and €829 in respect of the credit card liabilities of Ms. Parkin. In that way, PTSB will recover a total of €175,314 which equates (on an overall basis) to a dividend of 52.5 cents. This dividend of 52.5 cents is on the basis that the total mortgage debt (€333,784) is used as the denominator rather than the entire PTSB debt of €343,785. In the context of the comparison with bankruptcy, it seems to me that, arguably, the mortgage debt is relevant as the denominator given that, in a bankruptcy, none of the unsecured debt would have any prospect of being paid. By my calculations, the relevant dividend would be 48 cents in the euro if one were simply to measure the secured indebtedness allowed under the PIA of €160,000 against the overall indebtedness to PTSB on foot of the mortgage account of €343,785. For the purposes of the bankruptcy comparison, however, it seems to me that the appropriate comparator is not 48 cents in the euro but 52.5 cent in the euro. This is almost 10 cents in the euro higher than the amount which PTSB would recover in the event of the bankruptcy of Ms. Parkin. In absolute terms, the most that PTSB would recover in a bankruptcy is €144,000 whereas, under the PIA, the bank will recover €175,314 in total. This means that the bank would recover €31,314 more under the proposed PIA than it would recover in a bankruptcy. This is a factor which must, in my view, also be borne in mind in considering the overall fairness of the proposals for a PIA here and in addressing the complaint made by PTSB in relation to the extent of the proposed write-down of the debt (which I address further in the concluding section of this judgment).
The position of Ms Parkin’s husband
61. The next point made by PTSB is that there is no evidence that Ms. Parkin has taken any steps to require her estranged husband to make payments towards the mortgage or towards the maintenance of their daughter. PTSB accepts that the fact that there are no interlocking proceedings involving Mr. Parkin is not, of itself, fatal to the application. PTSB has very properly accepted that, in JD [2017] IEHC 119, Baker J. held that a debtor is not precluded from seeking relief under s. 115A where he or she does not own the entire interest in the principal private residence or is not the sole mortgagor. Nonetheless, PTSB makes the case that there has been a failure on the part of Ms. Parkin to properly engage with Mr. Parkin such that the proposal amounts to unfair prejudice in all of the circumstances. PTSB distinguishes the present case from JD on the basis that, in that case, efforts had been made by the debtor to bring income or contribution on the part of her co-debtor into play. PTSB draws attention to what was said by Baker J. at para. 12 of her judgment in JD where she said:
“Ms. D. made application against her former husband, and a maintenance order in respect of the dependent children was made in the District Court … in the sum of €120 per fortnight, and in December, 2014 after he had ceased making payments she sought and obtained an attachment of earnings order in respect of the maintenance liability.”
62. In the same case Baker J., at para. 82, said that she could not ignore the fact that the debtor in that case had obtained an order for maintenance and an attachment of earnings order. Baker J. said that the debtor had taken “all rational steps to secure the payment of maintenance on an ongoing basis “.
63. However, in my view, it is essential to understand why it was that the issue of maintenance payments arose in JD . In that case (in common with some other cases which have recently been heard by me) a secured creditor argued that the fact that the debtor was partly dependent on maintenance payments in order to fulfil her obligations under the PIA, meant that the PIA was not sustainable. Thus, in para. 80 of her judgment in JD , Baker J. records that the secured creditor, in that case, argued that, because there was no certainty that the maintenance payments would be honoured by the debtor’s husband, there was insufficient evidence of the ability of the debtor to meet her obligations under the proposed PIA. In para. 81, Baker J. notes the point made by the creditor in that case that the debtor had previously fallen into arrears in her mortgage repayments after her former spouse ceased to pay maintenance and that there was a risk that this would happen again. It was in those circumstances that Baker J. made the observation (quoted above) in para. 82 of her judgment. Baker J was not laying down any general requirement that, in all cases involving an estranged spouse and co-debtor, the debtor is obliged to first make a claim against the co-debtor before seeking relief under the 2012 Act.
64. I do not see anything in JD to support the contention that a debtor in the position of Ms. Parkin must, if she is to seek approval of a proposed PIA, take steps against a co-debtor or seek to obtain maintenance payments for a child. Moreover, it is perfectly understandable why Ms. Parkin has not sought to pursue Mr. Parkin. It was his gambling debts that caused the insolvency of Ms. Parkin. His gambling addiction is such that he resorted to loan sharks which in turn led to the problems described by Ms Parkin in her affidavits (which I have sought to summarise in the introductory section of this judgment). He has now returned to the United Kingdom and, on the evidence available, there is nothing to suggest that he has reformed himself or that he would be a mark for a maintenance order.
65. In addition to raising the issue in relation to the non-pursuit of Mr. Parkin, PTSB has also suggested that the proposed PIA requires PTSB to ” upfront write off debt for a debtor not party to any proposed arrangement” to quote from the email from PTSB to the practitioner of 3 November 2016 (which in turn is quoted in para. 93 of the written submissions delivered on behalf of PTSB). It was not clear to me at the hearing on 3 December 2018 that PTSB was persisting with this aspect of its case. It was not pressed at the hearing. In any event counsel for the practitioner argued that there is nothing in the 2012 Act that will prevent PTSB from proceeding against Mr. Parkin, should they choose to do so. Counsel relied in this regard on s. 116 of the 2012 Act. S. 116 deals with the effect of a PIA once it has been registered in the register of PIAs maintained by the ISI. S. 116(2) makes clear that the PIA binds the debtor and also, ” in respect of every specified debt”, the creditor concerned. S. 2(1) of the 2012 Act explains what is meant by a ” specified debt “. There, it is defined in the following terms: –
“‘specified debt”, in relation to a protective certificate, means a debt that is specified in that protective certificate as being subject to that certificate;”
66. The only protective certificate that was issued in this case was the certificate issued in respect of Ms. Parkin. There was never any application made in relation to Mr. Parkin. In those circumstances, and having regard to the requirement to interpret the 2012 Act in a manner that is consistent with the Constitution, it seems to me to be clear that the effect of s. 116(2) of the 2012 Act is that the creditor (here PTSB) would only be bound by the terms of the PIA insofar as the indebtedness of Ms. Parkin is concerned. S. 116(2) would not appear to me to have any impact on the indebtedness owed by Mr. Parkin. Therefore, the PIA cannot have had the effect of reducing Mr. Parkin’s liability to the bank.
67. Furthermore, s. 116(6) makes very clear that the PIA will not in any way impede the ability of PTSB to pursue Mr. Parkin. In this context, I should explain that under s. 116(3), once a PIA is in effect, a creditor bound by it is prevented from taking any legal proceedings or enforcement steps against the debtor. Likewise, under s. 116(4) the creditor is prevented from taking bankruptcy proceedings against the debtor. However, s. 116(6) provides that neither subs. (3) nor (4) will operate in respect of a joint debtor. S. 116 (6) provides as follows: –
Nothing in subsections (3) and (4) shall operate to prevent a creditor taking the actions referred to in that subsection as respects a person who has jointly contracted with the debtor or is jointly liable with the debtor to the creditor and that other person may sue or be sued in respect of the contract without joining the debtor”.
68. In light of these statutory provisions, I can see no reason why PTSB would not be entitled to pursue a claim against Mr. Parkin, including a claim to enforce the mortgage against him. It may well transpire that if such steps are taken by PTSB, there will be an issue as to the extent of the beneficial interest of Mr. Parkin in the principal private residence. That is not an issue on which I can or should express any view at this stage. What is clear is that, even if an order is made affirming the order of the Circuit Court, PTSB will not be prevented from pursuing Mr Parkin in respect of his ongoing indebtedness to it and will not be prevented from taking enforcement proceedings in respect of any interest he may have in the family home. It will be a matter for the court in any such proceedings to determine what relief might appropriately be granted and I can neither prejudge nor predict the outcome of any such proceedings.
Ms Parkin’s pension entitlements
69. The next issue raised by PTSB relates to the pension entitlements of Ms. Parkin. PTSB makes the very valid point that it is improbable that Ms. Parkin, as an employee of the HSE does not have valuable pension entitlements. PTSB draws attention to the way in which the pay slips exhibited by Ms. Parkin to her affidavit (at Exhibit “LP 1”) include deductions for “Supern-1” which would appear to relate to superannuation. In addition, at p. 4 of the Prescribed Financial Statement (“PFS”) reference is made to deductions for “mandatory pension ” as well as income tax.
70. PTSB complains that in the Circuit Court, the learned Circuit Court Judge took the view that Ms. Parkins’ pension is: –
“For the purpose of providing her with an income on her retirement”.
71. PTSB submits that the Circuit Court was in error in taking that approach. In the first place, PTSB suggests that, taken to its extreme, any insolvent debtor could assert that any source of income is intended for one specific purpose only and so should not be taken into account. PTSB contends that insolvency: –
“..imposes particular responsibilities which cannot be skipped over in this manner”.
72. Secondly, PTSB suggests that, after retirement, it would appear that Ms. Parkin will have the benefit of both the old age pension and a separate pension associated with her HSE employment. PTSB submits that the regular old age pension adequately addresses the reasonable living expense of a single person.
73. Notwithstanding the provisions of s. 51 of the 2012 Act (dealt with in more detail below), PTSB argues that it is appropriate to have regard to pension entitlements particularly for the purposes of considering whether a debtor could afford to discharge a warehouse balance in the future. PTSB also observe that, in Paula Callaghan , Baker J. appears to have accepted the potential relevance, for warehousing purposes, of a pension payable in the future. As noted previously, at para. 81 of her judgment in that case, Baker J. said: –
“Neither of the debtors has the benefit of a pension which might provide a lump sum on retirement to deal with the warehoused amount. The repayment of the inactive account therefore is not predicated on any anticipated ability to pay in the future, and is entirely on the hazard.”
74. PTSB argue (again on the basis of what was said by Baker J. in para. 81 of her judgment in Paula Callaghan ) that a pension should not be regarded as some hypothetical source of income in the future. PTSB also strongly complains that neither Ms. Parkin nor the practitioner placed any details of Ms. Parkin’s pension entitlements before the court. PTSB argues that since Ms. Parkin has peculiar knowledge of her own pension rights, and PTSB has no such knowledge, it was incumbent on Ms. Parkin to place appropriate evidence before the court in relation to her pension entitlements.
75. In response, counsel for the practitioner strenuously argued that the approach proposed by PTSB is contrary to s. 51 of the 2012 Act. He also argued that s. 51 is consistent with the approach taken under the Bankruptcy Act 1988 where a pension will only be treated as an asset of a bankrupt if it falls into payment within a period of five years from the date of adjudication.
76. In these circumstances, it is necessary to consider the provisions of section 51. Insofar as relevant, s. 51(1) provides as follows:-
“(1) Subject to subsection (4), in relation to … Personal Insolvency Arrangements, where a debtor has an interest in or an entitlement under a relevant pension arrangement, such interest or entitlement of the debtor shall not be treated as an asset of the debtor unless subsection (2) applies.” (emphasis added)
77. S. 51 thus provides that, where a debtor has an interest in or an entitlement under a relevant pension arrangement, it is not to be treated as an asset of the debtor unless s. 51(2) applies (dealt with further below). This is stated to be the case “in relation to” a PIA. Those words “in relation to” appear, on their face, to be capable of wide application. That was the view of the Supreme Court in an arbitration context in Gulliver v Brady [2003] IESC 68. Murphy J took a similar view of the somewhat similar words ” in connection with” in the context of s. 60 of the Companies Act 1963 in Eccles Hall v Bank of Nova Scotia (High Court, unreported, 3 February, 1995).
78. “A relevant pension arrangement ” for this purpose is defined in s. 2(1) of the 2012 Act as including a range of pension entitlements such as retirement benefit schemes approved by the Revenue Commissioners, PRSA contracts, a qualifying overseas pension plan, a public service pension scheme, a statutory pension scheme other than a public service scheme and also such other pension arrangements as may be prescribed by the Minister for Justice and Equality in consultation with the Ministers for Finance, Social Protection and Public Expenditure and Reform.
79. It will be seen, therefore, that a pension scheme applicable to an employee of the HSE will readily fall within one or other of the schemes outlined in section 2(1). Section 51(1) will thus apply to Ms. Parkin’s pension entitlements.
80. It is next necessary to consider s. 51(2) which is in the following terms:-
“(2) Where this section applies and a debtor has an interest in or entitlement under a relevant pension arrangement which would, if the debtor performed an act or exercised an option, cause that debtor to receive from or at the request of the person administering that relevant pension arrangement—
(a) an income, or
(b) an amount of money other than income,
in accordance with the relevant provisions of the Taxes Consolidation Act 1997, that debtor shall be considered as being in receipt of such income or amount of money.”
81. It is clear that s. 51(2) applies where the debtor is entitled to some form of immediate access to a pension entitlement either upon exercising an option or taking some other step.
82. Section 51(2) must be read in conjunction with s. 51(3) which identifies the relevant time range during which s. 51(2) will apply. I do not believe that it is necessary to set out the text of that sub-section in full. In my view, the effect of s. 51(3) is that s. 51(2) will apply where the debtor:-
(a) is entitled to exercise an option or take some other step to obtain access to pension payments at the date of the making of the application for a protective certificate;
(b) the same applies where the entitlement arose before the date of that application; and
(c) section 51(2) will also apply where the entitlement arises within seven years and six months from the date of making an application for a protective certificate in relation to a PIA.
83. For completeness, it should be noted that under s. 51(4), there is, notwithstanding the provisions of s. 51(1)(3), an obligation on a debtor, when making an application for a protective certificate, to disclose in his or her Prescribed Financial Statement (“PFS”) any relevant pension arrangements.
84. The question which arises is whether, having regard to the provisions of s. 51, there is any scope to take the view that, when assessing the issue of affordability (and the related question of the extent of a write down of secured debt), regard can be had to future pension entitlements (i.e. entitlements that will arise more than seven years and six months from the date of application for the protective certificate). I have not been referred to any authority directly in point. As noted above, PTSB has referred to an observation by Baker J. in Paula Callaghan , but that observation does not address this specific issue. Moreover, the judgment in that case does not address the effect of s.51 of the 2012 Act. There was no need for Baker J to do so because, in that case, the debtors did not have an entitlement to a private or public service pension at any point.
85. There is also a brief reference to pension payments in my judgment in Richard Featherston [2018] IEHC 683. Ironically, in that case, counsel for the practitioner there suggested that one aspect of future means that might potentially be brought into account is where the debtor has a pension provision which will be payable at retirement age. In that case, as para. 51 of my judgment records, counsel distinguished such an asset (which was relatively certain) from hypothetical receipts at some stage in the future which were entirely uncertain. However, as in the case of Paula Callaghan , s. 51 was not addressed in the course of argument in that case and was not considered by me in my judgment.
86. In the written submissions delivered on behalf of PTSB, the case is made that s. 51 should be read as confined to the period of the PIA itself. PTSB submits that, for the purposes of assessing affordability, s. 51 was not intended to exclude pension payments payable in the future long after the PIA has come to an end. PTSB argues that s. 51 does not affect the issue as to whether discharging a warehouse balance in the future would be affordable. Its case is that a future pension pot is only excluded in relation to payments which are to be made during the course of the PIA. I have to say that, while this argument was advanced by PTSB, it was not supported by any detailed analysis of the Acts or of the provisions of s 51. Nor did it address how those provisions should be construed against the backdrop of the scheme of the Acts as a whole. It is crucially important to consider the Act as a whole. For example, it would be necessary to hear submissions in relation to the interplay between s. 51 on the one hand and s 121 on the other. Under s 121, the court is given power in certain circumstances, to reverse excessive payments made into a pension fund in the three year period prior to the grant of a protective certificate. At first sight, it is difficult to see why that provision would have been considered to be necessary if proposals for a PIA were required to take into account the value of future pension payments payable long after the term of the PIA.
87. PTSB also drew attention to the obligation under s. 51(4) requiring a debtor to disclose, in his or her PFS, any pension entitlements and argued that this must mean that there is no blanket prohibition on taking such entitlements into consideration on the issue of future affordability (i.e. after expiry of the PIA and after the expiry of the periods prescribed by s. 51(3)). At first blush, it may appear curious that such a provision should exist if pension entitlements payable outside the time periods prescribed by s 51(3) are not to be treated as assets of a debtor. Nonetheless, I do not believe that much reliance can be placed on s 51(4). On reflection, it is understandable that a debtor should be required to disclose pension arrangements in the PFS. This is important so that, for example, an assessment can be made as to whether the arrangements in question could be said to fall within the ambit of a ” relevant pension arrangement ” as defined. It is also important to bear in mind that not all pension arrangements are excluded by s 51(1). It is accordingly necessary that all pension arrangements should be disclosed so that appropriate enquiries can be made as to whether any of the provisions of s 51(2) could be said to apply.
88. Furthermore, although counsel for the practitioner at the hearing argued strongly that the language of s. 51(1) contained a clear prohibition on any attempt to treat a pension entitlement as an asset of a debtor (unless s 51(2) applied), there was no significant engagement with that argument on the part of PTSB. This causes me concern particularly in circumstances where, as noted above, the words ” in relation to ” as used in s. 51(1) are on their face of wide import. On their face, those words tend to suggest that, even in the context of the affordability requirement contained in s. 115A(9)(b)(ii), Ms Parkin’s future pension entitlements are not to be treated as her assets. After all, the question of affordability is an issue that must be considered in relation to a PIA.
89. On the basis of the limited arguments heard by me, I have come to the conclusion that the submissions of the practitioner are correct and that, on the basis of the language of s 51(1), a pension arrangement is excluded from the court’s consideration under s 115A unless s 51(2) applies. Given Ms Parkin’s age, there is no basis on which s 51(2) could be said to apply here. In my view, if a different view is to be taken, it would be necessary to have more extensive and detailed argument addressed to this issue than I have heard in this case. I wish to make it very clear that I do not rule out the prospect that the court could be persuaded to take a different view. There may well be cogent arguments that could be made. If no regard whatever can be had to pension entitlements payable in the future (i.e. outside the period prescribed by s. 51(3)), there could, conceivably, be grotesque consequences in a particular case. For example, it would mean that no regard could be had to a very large pension pot (for example, one predicted to reach, by retirement age, the maximum value permitted for tax purposes by Revenue).
90. The proper interpretation of s 51 is therefore a question of very significant importance that, in my view, calls for more comprehensive consideration and debate than I have heard in this case. All that I can say at this point is that I have not been persuaded on the basis of the arguments made by PTSB in this case that I am entitled to have regard, in assessing affordability, to Ms Parkin’s pension entitlements. On the face of it, s. 51(1) appears to me to have that effect.
The Constitutional dimension
91. As noted above, PTSB has emphasised the constitutional dimension. PTSB contends that the write-down of the secured debt to the current market value of the principal residence is draconian. As noted above, PTSB submits that, consistent with Heaney v. Ireland , the court must consider whether the write-down impairs the rights of PTSB as little as possible. It is also submitted that the court must consider whether an alternative exists which is less intrusive.
92. However, it is important to bear in mind that the proportionality test formulated by Costello J (as he then was) in Heaney arose in the context of a challenge to the constitutionality of a legislative provision. There is no such challenge here. I must also bear in mind that the Oireachtas in enacting the 2012 Act has expressly invoked the interests of the common good. This is clear from the long title to the 2012 Act and the express objectives set out in the recitals. The recitals make clear that the Oireachtas considers that it is in the interest of the common good that:
(a) the difficulties experienced by debtors as a consequence of insolvency should be ameliorated. It is clear from the recitals that the amelioration of such difficulties is regarded as being important for the purpose of minimising the adverse consequences of significant indebtedness for economic activity in the State.
(b) The needs of creditors to recover debts due to them by insolvent debtors is also recognised in the recitals to be in the interests of the common good. This is expressly stated to be subject to “the extent that the means of those debtors’ reasonably permits” which seems to me to show very clearly that the Oireachtas was attempting to balance potentially conflicting rights in a proportionate way.
(c) The recitals also acknowledge the necessity to enable insolvent debtors to resolve their indebtedness (including by obtaining a determination that they stand discharged from their debts in certain circumstances) in an orderly and rational manner without recourse to bankruptcy. Again, the objective of such measures is to facilitate the active participation of persons in economic activity in the State.
93. Insofar as s. 115A is concerned, it was inserted by the 2015 Act. The 2015 Act does not contain any long title. However, since it is inserting new provisions into the 2012 Act, it must follow that the Oireachtas, in enacting the 2015 Act, believed that it was still acting with a view to promoting the common good objectives expressly invoked in the 2012 Act. The underlying purpose of s. 115A was identified as follows by Baker J. in JD at para. 32:
“… the amending legislation by which was added s. 115A, affords the far-reaching power of the court to approve a PIA notwithstanding its rejection by creditors. The public interest is in is the maintenance of a debtor’s occupation and ownership of a principal private residence. That social and common good is concretely referable to the continued occupation by a debtor of a principal private residence, and the power contained in the section is limited by the fact that only those persons who had a relevant debt secured over his or her principal private residence which was in arrears as defined by s. 115A(18) on 1st January, 2015 could avail of this exceptional remedy. The statutory provision then must be seen as a limited protection of persons whose mortgage payments on their principal private residence fell into arrears at the height of the financial crash. Absent a ‘relevant debt’, a debtor may not seek to engage the jurisdiction of the court to overrule the result of a creditors’ meeting …”
94. In para. 34 of her judgment, Baker J. clarified that s. 115A does not have, as its focus, the continued ownership or a debtor of the family home, but is concerned with the continued occupation of the home. She also said in the same paragraph:
“… the section is concerned with enabling a debtor not to dispose of an interest in a property, rather than positively stated as enabling the debtor to continue to own the property. Thus, the perceived public interest in the continued occupation of a premises is not a focus on the acquisition of a capital asset, but rather the preservation of a right to live in a premises.”
95. Those observations of Baker J. have particular resonance in present circumstances where homelessness has become all too prevalent.
96. In circumstances where the Oireachtas, in enacting the 2012-2015 Acts, was acting in the interests of the common good, and in circumstances where the Oireachtas has also sought to balance the interests of the common good against the rights of creditors, I do not believe that it would be appropriate for the court (in the absence of a constitutional challenge to the provisions of the Acts) to add some new test to s. 115A which is not there already. In this context s. 115A already contains very significant statutory checks and balances to ensure that the interests of creditors are appropriately considered in any application under s. 115A. Thus, for example the court is required under s. 115A (9)(b) (ii) to be satisfied that there is a reasonable prospect that confirmation of the proposed PIA will ” enable the creditors to recover the debts due to them to the extent that the means of the debtor reasonably permit”. In addition, the court is not permitted to make an order under s. 115A unless it is satisfied (as required by s. 115A (9)(e)(f)) that the proposed PIA is fair and equitable in relation to each class of creditors that has rejected the proposals and the court must also be satisfied that the arrangement is not unfairly prejudicial to the interests of any interested party (which would, of course, include the creditors).
97. Furthermore, save in cases involving a single class of creditors, the court is required by s. 115A (9)(g) to be satisfied that at least one class of creditors has accepted the arrangement. This is a very important provision because it provides a measure of reassurance to the court that at least one class of creditors regarded the arrangement as commercially acceptable.
98. In addition, as Baker J. has already highlighted in JD , the section only applies to a very limited class of debtor – namely those debtors who were in arrears with payments on a home loan mortgage as of 1st January, 2015 (or who had been in arrears prior to that date but had entered into an alternative repayment arrangement with the secured creditor concerned). As Baker J. explained, this is clearly intended to cover debtors who fell into arrears at the height of the financial crash.
99. It therefore seems to me that, when considering an application under s. 115A, the court is confined to a consideration of the specific provisions of s. 115A which include, within them, a number of important safeguards for the protection of creditors including an overall requirement of fairness, a prohibition on unfair prejudice to any individual creditor, and also a requirement that the claims of creditors should be met to the extent that a debtor’s means permit. Of course, as the decisions of Baker J. make clear, the court must always bear in mind that s. 115A represents a significant intrusion into the property rights of creditors and that, in those circumstances, the court must be careful, on an application under s. 115A, to ensure that all of its provisions have been appropriately complied with. The court has no power to dis-apply any of the provisions of s. 115A.
Conclusions
100. I have already set out my conclusions in relation to a number of the issues which were debated in the course of the hearing, namely (a) the treatment of the credit union as a separate class of creditor; (b) the position of Mr Parkin as a joint and several debtor; (c) Ms Parkin’s pension entitlements; and (d) the Heaney v Ireland argument. I set out, below, my conclusions in relation to the balance of the issues that arise.
101. As noted above, PTSB makes complaint in relation to the extent of the write-down of the secured debt to the current market value of the principal private residence of the debtor and also strongly argues that Ms Parkin’s circumstances show that she can afford to pay more than the amounts contemplated under the proposed PIA. In addition, PTSB contends that warehousing is appropriate here given Ms Parkin’s expected future means especially after her daughter moves from college to employment.
Conclusion on warehousing
102. I deal, in more detail below, with the issues that arise in relation to the write-down of the secured debt. In so far as the warehousing issue is concerned, I have come to the conclusion that warehousing would not be appropriate in this case. I have formed that view for a number of reasons. In particular, I am concerned that the form of warehousing proposed by PTSB here envisages a very large debt crystallising at Ms Parkin’s retirement age. I believe that counsel for the practitioner is correct in his submission that, as in the Paula Callaghan case, this has the capacity to result in Ms Parkin’s insolvency as of the date of her retirement. That seems to me to undermine a very important goal of the 2012-2015 Acts namely the objective to resolve indebtedness and restore a debtor to solvency. It would also put Ms Parkin’s ability to remain in her home in serious jeopardy.
103. I am, of course, mindful of all of the submissions which have been made in relation to Ms Parkin’s means (which I accept are relevant in a warehousing context). However, for reasons which I address further below, I am concerned that, in the course of the proceedings in the Circuit Court, neither the practitioner nor Ms Parkin had adequate notice of the extent of the case now made by PTSB in relation to the issue of Ms Parkin’s means.
104. I have also come to the conclusion that PTSB, in the detailed calculations set out in its written submissions in this court, has failed to take account of the fact that the “surplus” (which it is suggested is likely to arise in the future) is based on the assumption that everything above the ISI reasonable living expenses can be treated as surplus to Ms Parkin’s needs. In my view, it is a fallacy to suggest that the ISI reasonable living expenses can be treated as a reliable indicator of the expenses that an adult is likely to incur over the course of a lifetime. As explained in para. 59 above, those guidelines are designed to address the position of a debtor over the course of a limited time period. They do not address the more extensive lifetime expenses that arise over longer periods in the life of an adult. Thus, the approach advocated by PTSB fails to take account of expense items such as the examples cited in paras. 42 and 59 above.
105. Nor does the approach suggested by PTSB pay sufficient attention to the uncertainties that inevitably arise when seeking to predict what may happen in the future. As Baker J emphasised in Paula Callaghan , a warehousing solution would only be appropriate where the court can be satisfied that there is sound evidence available that it is likely to be achieved.
106. I have therefore come to the conclusion that, in this particular case, warehousing would not be appropriate. I have also come to the conclusion that, in the circumstances, the practitioner was justified in ruling out a warehousing proposal (even though the practitioner was mistaken in thinking that any form of warehousing was impermissible under the Acts).
The proposed write down
107. In the context of the write-down, PTSB makes the point that, in common with many other cases, too little detail is provided by the practitioner regarding Ms Parkin’s future means and expenditure. I share that concern. Based on my experience to date in dealing with these case, I am of the view that, too often, much of the affidavit evidence is in standard form and does not concentrate (as it should) on the individual circumstances of the debtor. PTSB refers in this context to para. 9 of the practitioner’s affidavit sworn on 18th May, 2017 which I have quoted in para. 44 above.
108. I agree with the observation made in para. 49 of PTSB’s written submissions where they say that this passage is not easy to understand. If anything, that observation is an understatement. With due respect to the practitioner, para. 9 is entirely lacking in clarity. Regrettably, it is in similar form to averments which I have seen in several other cases. It appears to proceed on the basis that any write down to a figure greater than market value is, in some unspecified way, arbitrary or uncertain. In my view, that is based on a mistaken understanding of the legal position. As Baker J explained in Laura Sweeney , at para. 54, the appropriate capital mortgage figure is to be assessed in the light of the repayment capacity of the debtor. In the same case, at para. 56, Baker J made clear that a write-down of a mortgage debt to market value is not mandated by the Acts and that the extent of any write-down is to be measured by reference to the affordability of payment. There is nothing arbitrary or uncertain involved in working out, by reference to a debtor’s net income and recurring and expected expenses (including an appropriate allowance for contingencies), the level of monthly mortgage payment which that debtor can reasonably afford. Once that figure is identified, it should be a relatively straightforward exercise to assess the capital sum which can be paid over the term of the mortgage and this, in turn, will provide a reliable basis on which to calculate the extent of any write-down. Thus, in the present case, Ms Parkin’s net monthly income provided the base line against which the relevant calculation can be made.
109. I also agree with PTSB that there can be no question of any automatic write-down of a mortgage debt to the value of the underlying security. Section 102(2) makes clear that the value of the security is a “floor” beneath which the proposals must not go. It provides that, where a proposed PIA envisages the retention by a secured creditor of security and also a reduction in the principal sum due in respect of the secured debt, then, in the absence of agreement on the part of the secured creditor, the principal sum cannot be reduced below the value of the security determined in accordance with s. 105. That is an extremely important protection for secured creditors and is undoubtedly informed by respect for the property rights of such creditors.
110. Nor is s.102(2) intended to be a ceiling. As the judgments of Baker J make clear, the extent of any write down of secured debt is related to affordability. If one can predict that, on the conclusion of a PIA, the debtor will have sufficient means to continue to make significant mortgage repayments to a level beyond the current value of the secured property, it is difficult to see that it could be appropriate to write down the quantum of the secured debt to the current value of the property. It is important that practitioners should not use the s. 105 value as some unofficial rule of thumb that can be applied in all cases without a proper analysis of a debtor’s means.
111. Counsel for the practitioner rejected the suggestion that the proposed write-down was the most draconian outcome for PTSB here. He emphasised that, as Appendix 6 to the proposal clearly shows, bankruptcy would represent a worse outcome. In a bankruptcy, the costs of the forced sale would reduce the net receipts from the secured property to €144,000. He also said that, in reality, PTSB is no more than an unsecured creditor in relation to the balance over and above the current market value. This is for the very simple reason that if there was a forced sale of the property now, the most that PTSB could in fact recover is the market value (less the costs of sale). Even if there was no bankruptcy and PTSB were to take proceedings to enforce its mortgage over the property, it would ultimately receive less than market value given the costs of such proceedings and the costs of sale.
112. Counsel for the practitioner also stressed that, under Clause 37 of the PIA, PTSB will remain protected in the event of a sale of the home in the future at a value greater than €160,000. Clause 37 essentially provides that a secured creditor is entitled to a clawback in the event that the secured property is sold within twenty years from the date the PIA comes into effect for an amount greater than the reduced principal sum (written down pursuant to the PIA). The secured creditor will get the benefit of an increase in value notwithstanding that, in the meantime, the secured debt has been written down to the market value of the property at the time of the PIA.
113. In my view, the arguments that have been made by the practitioner are more relevant to the issue of fairness and unfair prejudice than to the issue of the write down. On the other hand, as explained in paras. 103-104 above, the arguments that have been advanced on behalf of PTSB are based on the mistaken premise that Ms Parkin will have substantial surplus income after her daughter finishes college. PTSB has failed to appreciate that the ISI reasonable living expenses are not an appropriate measure of living costs on a long term basis. PTSB also failed to appreciate that recurring expenses must also include an allowance for contingencies. I accept that it may not be possible to scientifically assess what should be allowed for contingencies. On the other hand, saving or setting aside an amount on a monthly basis to provide for larger expense items that may arise in the future is a normal feature of life and I do not believe that it should give rise to any significant difficulty, in practice, in estimating what would be reasonable. What is clear is that the figure for savings and contingencies measured by the ISI would not be appropriate on a long term basis.
114. I recognise and fully understand that PTSB feels aggrieved that the affidavits filed on behalf of the practitioner and Ms Parkin in the course of the Circuit Court proceedings could have provided more detail about Ms Parkin’s likely income and expenditure in the future. Nonetheless, I have come to the conclusion, with some hesitation, that there is just about enough evidence available in the terms of the PIA itself to allow the court to extrapolate that Ms Parkin is unlikely to be in a position to afford a larger monthly mortgage payment and to accordingly conclude that the proposed write-down is not excessive.
115. In expressing this view, I wish to make it very clear that, in future cases, it will be important that practitioners should not rely on general or template averments and should instead provide clear evidence as to how the write-down has been calculated. That is likely to require a practitioner to carry out an exercise of the kind suggested in para. 108 above.
116. In arriving at my conclusion on this issue, I am also concerned that the practitioner and Ms Parkin may not have properly understood, in advance of the hearing in the Circuit Court, the extent to which PTSB was exercised about the nature of the evidence as to her means. Certainly, the foundation for the argument made on behalf of PTSB at the hearing before me was not comprehensively laid down in the materials which PTSB put in evidence in the Circuit Court.
117. In this context, while I am very definitely of the view that the practitioner, in a case of this kind, has the obligation to demonstrate that a proposed write-down of secured debt is objectively justifiable, I have come to the conclusion that it would be inappropriate to hold that the practitioner has failed to discharge that obligation in this case.
118. It seems to me that, in the notice of objection filed on behalf of PTSB in the Circuit Court on 9th December, 2016, the focus of the objections related, not to the write-down of the debt, but to the alleged failure to address the warehousing proposal made by PTSB. This is clear from a consideration of paragraphs 3 and 4 of the notice of objection. This is reinforced by a consideration of the grounding affidavit of Terence Smith. The warehousing proposal made by PTSB is the subject of paragraphs 12-18 of that affidavit (which is the longest individual section of the affidavit).
119. It is true that, in paragraph 6 of the notice of objection, the write-down of the debt is signalled as an issue in the context of the fairness of the proposed PIA. However, the issue is not addressed in Mr Smith’s affidavit in the way in which the issue has been canvassed in this court. There are 25 paragraphs in that affidavit. As noted above, paras. 12-18 deal with warehousing. Paras. 7-9 deal with the creditor class issue; paras. 5-6 deal with the timing of PTSB’s notice of objection; and paras. 19-10 dealt with Ms Parkin’s employment. The write-down was addressed in paras. 10-11 but, as explained in paras. 121-122 below, the objection was focused on a contention that the market value was out of date, not on a failure to show that Ms Parkin did not have the means to afford any lesser write-down.
120. Paragraph 7 of the notice of objection (which also addresses the question of means) concentrates on the joint borrowings issue and does not contain any hint of the argument now so strongly and comprehensively made in this court in relation to the alleged failure of the practitioner to address, in a meaningful way, Ms Parkins means in the period after the termination of the PIA.
121. In the affidavit of Terence Smith, sworn subsequently in March 2017, the write down is dealt with in two paragraphs (namely paragraphs 10-11). Crucially, the objection is framed in the following terms in paragraph 11: –
“While it is not apparent that any evident justification has been furnished for a write-down in this quantum, the reason for choosing the figure would appear that the PIP proposed that the mortgage be written down to the current negative equity value of €160,000. The valuation of the security was agreed with the objecting creditor. Given recent developments in the property market in Dublin, it is likely that this sum is very conservative and a valuation undertaken today, would probably exceed this sum. Furthermore, the Rejected Arrangement envisages this upfront write-down, unfairly prejudices the Objecting Creditor and is unfair and inequitable, in circumstances where the write-down contained therein, would now have the effect that the live balance leftover is likely to be less than the current market value for the property, given the recent uplift in values. This would be particularly unfairly prejudicial to the Objecting Creditor and I am advised that this provision may be contrary to the legislation, in particular Section 103 of the Act”.
122. It will be observed that para. 11 is focused not on a principled objection to the write-down or on a failure of the practitioner to justify the write-down, but instead is focused on a contention that property prices have risen since the valuation of the security was agreed between the practitioner and PTSB. In my view, that does not signal in any way the contentions now made by PTSB in the course of the hearing before me. In fact, when one reads paragraphs 10-11 in conjunction with paragraph 12 and the following paragraphs of the affidavit, it would appear that PTSB was linking the argument in relation to the write-down with the case it made that warehousing was the appropriate course to take.
123. My concern is that, when the notice of objection is read with the affidavit of Terence Smith, the practitioner in the course of the Circuit Court proceedings would have had no proper understanding of the nature of the case that PTSB subsequently made. Had such a case been signalled appropriately in the notice of objection and grounding affidavit of Mr. Smith, the practitioner would then have been in a position to place more extensive evidence before the Circuit Court to demonstrate more clearly that the write-down of the secured debt to current market value was appropriate in Ms Parkin’s circumstances. On the basis of Mr. Smith’s affidavit, the practitioner would have been led to believe that the focus of the objection in relation to the write-down was the unsubstantiated suggestion made in paragraph 11 of Mr. Smith’s affidavit that recent developments in the property market in Dublin meant that it was likely that the valuation of €160,000 represented an undervalue as of March, 2017. Given the very general and unsubstantiated way in which this was put forward by PTSB (without any reference to the specific market in the Ballyfermot area), it is unsurprising that the practitioner did not respond to it in detail. More importantly, the practitioner is likely to have been lulled into thinking that PTSB’s concern in relation to the alleged rise in property values was the basis for its objection to the write-down.
124. The affidavit evidence provided by PTSB also fell short of making the case (now made so strongly in the course of the submissions before me) that the practitioner was relying on wholly unsupported and general averments of a template nature. Had such a case been signalled by PTSB in its notice of objection and affidavit evidence, the practitioner would have had an opportunity to deal with that case in the course of the Circuit Court hearing and to place appropriate evidence before the Circuit Court in response.
125. In making these observations, I do not wish, in any way, to suggest that the onus of proof lies on PTSB. For the reasons already addressed above, I am of the view that the onus lies on the practitioner in an application of this kind to satisfy the Court that all of the requirements of Section 115A have been met (including the requirement that the Court must be satisfied that the terms of the PIA are not unfairly prejudicial to the interest of any interested party and that the proposed arrangement is fair and equitable to each class of creditor). My concern is with basic procedural fairness. The 2012 Act envisages that an objecting creditor will lodge a notice of objection. This is made clear by Sections 112(3) and 115A(3) of the Act. In my view, the submissions which PTSB have addressed to me in relation to the obligation of the practitioner to make out his case are also relevant to a notice of objection on the part of an objecting creditor. To my mind, the objecting creditor must set out its objection with clarity so that it can be appropriately addressed by the practitioner (or the debtor as the case may be) in advance of the first instance hearing. It is unsatisfactory that arguments are subsequently made which have not been appropriately and fully signalled in advance so that all sides will be in a position to place appropriate evidence before the Court to address the issues in an informed way.
126. In the circumstances outlined above, I have come to the conclusion, on the issue of the write-down of the debt and the related issue of the extent of Ms Parkin’s means, that it would not be appropriate in this case to hold that there is insufficient evidence before the court to justify the write-down proposed. As explained in para. 114 above. I believe that there is just about enough evidence available to the court to permit me to reach the view that the write-down is not excessive in Ms. Parkin’s particular circumstances.
Fairness and unfair prejudice
127. In circumstances where (a) the outcome for PTSB, as a secured creditor, is significantly better under the proposed PIA than in a bankruptcy; (b) PTSB will have the protection of clause 37 (in the event that the home is sold at a value that exceeds the agreed market value); and (c) PTSB will remain free to take action against Mr Parkin, I am satisfied that the proposed PIA will not be unfairly prejudicial to PTSB. I am also satisfied that the proposed PIA is fair and equitable in relation to each class of creditor.
Decision
128. I do not propose here to separately enumerate each of the other requirements of s 115A. I confirm that, having considered all of the material before me, I have reached the conclusion that all of the requirements of s. 115A have been satisfied. I will accordingly dismiss the appeal of PTSB and affirm the order of the learned Circuit Court Judge. I will hear the parties in due course as to any consequential orders that may be required.
Flynn
(A Debtor) Personal Insolvency Acts [2019] IEHC 752 (11 November 2019)
JUDGMENT of Mr. Justice Denis McDonald delivered on 11 November, 2019The issue before the court1. This judgment addresses a preliminary issue which has arisen in the context of anapplication by Eugene McDarby, personal insolvency practitioner (“the practitioner”)pursuant to s. 115 (A) of the Personal Insolvency Act, 2012 (“the 2012 Act”) as amendedby the Personal Insolvency (Amendment) Act, 2015 (“the 2015 Act”). The practitionerhas proposed a personal insolvency arrangement on behalf of the above named debtor,Mr. James Flynn. The proposal for the arrangement was, however, not supported by amajority of the creditors of Mr. Flynn. In those circumstances, the practitioner hasbrought an application under s. 115A which permits the court (subject to satisfaction of asignificant number of conditions) to confirm the coming into effect of such a proposedarrangement notwithstanding that it has not been supported by the requisite majority of adebtor’s creditors. One of the conditions which must be satisfied for this purpose is setout in s. 115A (9) (g) namely that at least one class of creditors has accepted theproposed arrangement by a majority of over 50% of the value of the debts owed to thatclass. In this case, the practitioner contends that this condition is satisfied incircumstances where one creditor, Carley & Connellan Solicitors, voted in favour of theproposed arrangement. The practitioner contends that Carley & Connellan constitute aseparate class for the purposes of s. 115A (9) (g). This is disputed by the objectingcreditor namely Everyday Finance DAC (“Everyday”). Everyday advances the simpleproposition that the firm of Carley & Connellan is one of a number of unsecured creditorsof Mr. Flynn and that the firm cannot be treated as a separate class. According toEveryday, the firm should be treated as falling within the general pool of the unsecuredcreditors of Mr. Flynn. This is the issue that requires to be determined on a preliminarybasis. If the practitioner fails on this issue, the requirements of s. 115A (9) (g) will notbe satisfied and the entire application under s. 115A will fail without having to considerany of the other issues which would otherwise require to be addressed.2. For completeness, it should be noted that a single creditor is capable of constituting aclass of creditor for the purposes of s. 115A (9) (g). This is made clear in s. 115A (17)under which the court may consider (subject to certain conditions) that one creditorconstitutes a separate class. It is unnecessary for present purposes to analyse theprovisions of s. 115A (17). The issue which arises is focussed solely on the questionwhether Carley & Connellan can be differentiated from the other unsecured creditors ofMr. Flynn so as to validly constitute a separate class of creditors for the purposes of s.115A (9) (g).Relevant facts3. Mr. Flynn has debts of €5,404,102.21. Of this, €265,906.71 is owed to EBS DAC, asecured creditor. The balance of Mr. Flynn’s indebtedness (in the sum of €5,184,102.21)is comprised of unsecured debt owed to the following:-Page 2 ⇓(a) €2,603,054.84 is owed to Everyday as successor in title to Allied Irish BanksPlc (“AIB”);(b) €1,656,143.59 is owed to Promontoria Aran Ltd;(c) €564,157.78 is owed to Havbell DAC;(d) €360,745.00 is owed to Carley & Connellan Solicitors.4. With the exception of Carley & Connellan, each of the unsecured creditors identified inpara 3 above voted to reject the proposed arrangements. Carley & Connellan voted infavour. The debt owed by Mr. Flynn to Carley & Connellan represents 6.96% of hisunsecured indebtedness or 6.62% of his overall indebtedness.5. In the notice of motion issued pursuant to s. 115A (9) of the 2012 Act, the practitionerdescribed Carley & Connellan as the “Professional Services Class of Creditors”. He set outhis grounds for doing so in the following terms:-“The grounds for defining the ‘Professional Services Class of Creditors’ as same is due totheir position as a professional service provider previously retained by the Debtorwith a fixed sum invoice due and owing. In that regard, I consider the professionalservices creditor to be in a separate class as their interests are so dissimilar that itwould be impossible for them to consult together with any other creditor with aview to their common interest. …”.6. At the hearing which took place in July, 2019, a number of additional arguments weremade seeking to justify the treatment of Carley & Connellan as a separate class ofcreditor. It was contended that Carley & Connellan should be differentiated from theother unsecured creditors in circumstances where, as a firm of solicitors, they would beentitled to exercise a lien over deeds and documents held by them on behalf of Mr. Flynn.It was also suggested that, in contra-distinction to the other unsecured creditors, Carley &Connellan provided services to Mr. Flynn whereas all of the other unsecured creditors hadadvanced moneys to him or to a company in respect of which he stood as guarantor. Itwas further submitted that there was a distinction to be made between Carley &Connellan, on the one hand, and Everyday, on the other, in circumstances whereEveryday held security over property of a company controlled by Mr. Flynn (as describedin more detail below). Finally, it was argued that the unsecured creditors other thanCarley & Connellan shared an animus against Mr. Flynn (which was absent in the case ofCarley & Connellan).7. In support of these contentions, reliance was placed by counsel for the practitioner on theaffidavit of Mr. Flynn sworn on 3rd July, 2019. In that affidavit, Mr. Flynn set out some ofthe background to his long running dispute with AIB (the predecessor in title toEveryday). At para. 6 of his affidavit he explained that the debt due to Carley &Connellan arose in respect of legal fees accrued during litigation that took place with AIB.Mr. Flynn explained:-“I say that this was not and is not a commercial loan and there were no agreedrepayment terms, but rather a fixed invoice. I say that the firm is not aPage 3 ⇓commercial lender and they provided work and services for the debt. I say thatthey retain security in that they have a lien over my file”.8. In the same affidavit, Mr. Flynn explained that his financial difficulties arose on foot of aguarantee given by him in respect of a company called Fortberry Ltd (“Fortberry”) and, asa consequence, so he says, of the wrongful conduct of AIB. For the purposes of thisjudgment, it is unnecessary to set out the nature of the allegations that are made by Mr.Flynn in relation to AIB’s conduct. In para. 27 of his affidavit, Mr. Flynn refers toproceedings that were commenced by AIB against Fortberry and him. In para. 28 heexplains that, in April 2016, both he and Fortberry consented to judgment being enteredin favour of AIB. The judgment against Fortberry was in the sum of €5,182,308.06. Thejudgment against Mr. Flynn was in the sum of €2.5 million on foot of the guarantee thathe had given in relation to the indebtedness of Fortberry. A stay was granted on thejudgment until October 2016 subject to a number of conditions including a requirementthat Fortberry should procure the execution of legal mortgages in favour of AIB over anumber of properties in Dublin. Mr. Flynn says, in para. 30 of his affidavit, that theexplicit purpose of the stay was to allow him to procure a reduction in the debt owed byFortberry to AIB through the intended refinancing or sale of properties. This is supportedby the observations of Gilligan J. recorded in the transcript of the proceedings before thecourt on 20th April, 2017.9. Mr. Flynn says that, thereafter, Carley & Connellan made significant efforts to obtain thetitle deeds to effect sales of the properties but without any success. An application wasmade on his behalf on 11th October, 2016 to extend the stay but that application wasrefused. Mr. Flynn and Fortberry appealed that refusal to the Court of Appeal on thegrounds that (so they alleged) the bank had deliberately obstructed the attempts by himto comply with the order made on April 2016. That appeal was not successful. A receiverwas appointed by the bank over the properties in question in October 2016. Theproperties in question have yet to be realised by the receiver.The constitution of classes of creditor for the purposes of the 2012-2015 Acts10. Much of the debate in this case centred around the legal principles which are applicable tothe constitution of classes of creditors for the purposes of the 2012-2015 Acts. Theprincipal authority in this context is the decision of Baker J. in Sabrina Douglas[2017] IEHC 785. In that judgment, Baker J. applied, by analogy, the principles which apply in acorporate setting to the constitution of classes of members or creditors of a company forthe purposes of schemes of arrangements under the Companies Acts. In particular, shehad regard to the decision of Laffoy J. in Re. Millstream Recycling Ltd [2010] 4 IR 253which, in turn, applied the well-established principles dating back to the decision of theCourt of Appeal in Sovereign Life Assurance v. Dodd [1892] 2 QB 573 and the morerecent decision of the same court in Re. Hawk Insurance Co. Ltd. [2001] 2 BCLC 480.11. In Sabrina Douglas, Baker J. commenced her analysis of the issue by quoting from thewell-known judgment of Bowen L.J. in the Sovereign Life Assurance case at p. 583 wherehe said:-Page 4 ⇓“The word ‘class’ is vague and to find out what is meant by it we must look at the scopeof the section, which is a section enabling the Court to order a meeting of a class ofcreditors to be called. It seems plain that we must give such a meaning to theterm ‘class’ as will prevent the section being so worked as to result in confiscationand injustice, and that it must be confined to those persons whose rights are not sodissimilar as to make it impossible for them to consult together with a view to theircommon interest”.12. Counsel for Everyday stressed that, in accordance with this test, the question for thecourt is whether the rights of the persons said to constitute a class of creditors aresimilar. He also argued that the consultation which is required is in relation to how thecreditors should respond, or vote upon, the proposed arrangement. Counsel for Everydayargued that, in this case, all of the unsecured creditors (including Everyday itself andCarley & Connellan) are treated in the same way. They each have the same rights againstMr Flynn and also under the terms of the proposed arrangement and, accordingly, mustbe treated as falling within the same class.13. Counsel for Everyday submitted that this was supported by what is said by Baker J. inpara. 34 of her judgment in Sabrina Douglas. At para. 34 of her judgment in that case,Baker J. referred to the judgment in Millstream Recycling where Laffoy J. had said that aclass is to be ascertained by reference to the following question:-“are the rights of those who are affected by the scheme proposed such that the schemecan be seen as a single arrangement; or ought to be regarded, on a true analysis,as a number of linked arrangements?”.14. At this point, it is necessary to deal with an argument made by counsel on behalf of thepractitioner in this case. Counsel submitted that the test applied by Laffoy J. inMillstream Recycling was based on a scheme of arrangement in a corporate setting. Hesubmitted that such a setting must be distinguished from the typical personal insolvencyarrangement (of which the arrangement proposed in this case is one) where there isnever (so he submitted) a number of linked arrangements involving different groupings ofunsecured creditors. He said that, in contrast to the corporate scheme of arrangement,the unsecured creditors, under a personal insolvency arrangement, are invariablyaddressed in the same way. Against that backdrop, counsel for the practitionerquestioned the feasibility of applying the Millstream Recycling principle to what hecontends is the rather different regime put in place under the 2012-2015 Acts. I haveserious reservations as to whether it is open to counsel for the practitioner to make thisargument. In particular, having regard to the judgment of Clarke J. (as he then was) inRe. Worldport Ireland Ltd [2005] IEHC 189, it is difficult to see how this argument is opento counsel. By reference to the principles established in Worldport, it seems to me thatthe court is bound to follow the decision of Baker J. in Sabrina Douglas. Nonetheless, lestI am wrong in that conclusion, I will address the argument made by counsel for thepractitioner which, for all of the reasons set out below, I believe, in any event, to bemistaken.Page 5 ⇓15. There are a number of reasons why I must reject this argument on the part of counsel forthe practitioner. Not only is it contrary to the principal authority on the issue in thespecific context of personal insolvency arrangements (namely the decision of Baker J. inSabrina Douglas) but it is also wrong as a matter of fact. There have been cases whereunsecured creditors have been dealt with in different ways under a personal insolvencyarrangement. While I acknowledge that such arrangements are relatively rare, therehave been some cases where arrangements have provided for different treatment. Anexample is to be found in a case which was also argued in July 2019 namely Frank &Teresa McNamara [2019] IEHC 622 where the Revenue Commissioners were dealt withon a different basis to the other unsecured creditors of the debtors. However, although itis rare to find an arrangement which treats some of the unsecured creditors differently toothers, it is not uncommon to find that a particular category of unsecured creditor istreated as a separate class from the remaining unsecured creditors. A relatively commonexample is where a creditor holding both secured and unsecured debt is treated asconstituting a different class (in respect of the unsecured element of the debt owed to it)to those unsecured creditors whose claims are wholly unsecured. In such cases, thecreditor who holds both secured and unsecured debts can be said to have different rightsto those creditors whose claims are purely unsecured. The creditor with the benefit ofsuch security will have different rights under an arrangement than the creditor withoutany. In assessing a proposed arrangement and in deciding how to vote on thatarrangement, the creditor holding security will, naturally, be influenced by the rightsgiven to it in respect of its security which are likely to be more valuable than the rightsgiven to it as an unsecured creditor. Such a creditor may also have very particularconcerns, peculiar to it, in relation to the manner in which its security is to be treatedunder the arrangement. The additional rights available to it, in its capacity as a securedcreditor, will thus make it more difficult, in the context of the unsecured element of itsclaim, to satisfy the second limb of the Sovereign Life Assurance test (i.e. to be in aposition to consult together with the remaining unsecured creditors with a view to acommon interest). In contrast, the wholly unsecured creditors will view the scheme froma different perspective and in particular will not be influenced by the rights available to acreditor who also has the benefit of security or by the manner in which those rights willbe affected by the arrangement.16. It is true that, in a corporate setting, the relevant scheme of arrangement will usuallyexplicitly classify creditors into specific categories. That is not done to the same extent inthe case of a proposed personal insolvency arrangement under the 2012/2015 Acts. Inthe latter case, the relevant arrangement will identify secured creditors. It will alsoidentify unsecured creditors. Depending on the circumstances, it may also identifyexcluded creditors or excludable creditors. However, it will not usually break down theclasses any further. Furthermore, there will not be separate class meetings as such.Sections 106 and 109 of the 2012 Act envisage that a single creditors’ meeting will becalled. Usually no physical meeting of creditors will take place. The votes of creditors willbe submitted through the mechanism of proxies in writing. On the day fixed forsubmission of proxies, the practitioner will count the votes (and the value of those votes)by reference to the proxies which he or she has received. The practitioner will thenPage 6 ⇓assess whether the requirements of s. 110 have been met. Under s. 110 (1) of the 2012Act, if a proposal is to be considered as having been approved by the creditors of adebtor, not less than 65% of the total amount of the debts due by that debtor to thecreditors participating in the meeting must have voted in favour of the proposal. Of thosecreditors who vote at the meeting, the proposals must be supported by more than 50% invalue of the secured creditors and a similar proportion in value of the unsecured creditors.If those thresholds are not met, the proposed arrangement will fail unless the practitioneris in a position to successfully invoke the provisions of s. 115A and to satisfy all of therequirements of that section including s. 115A (9) (g) which is in issue here. While s. 110envisages that the practitioner will, at the very least, have to divide creditors into twoclasses (namely the secured creditor class and the unsecured creditor class) the 2012 Actprovides no guidance as to how the practitioner should further sub-divide these twocategories of creditor into separate classes for the purposes of s. 115A (9) (g) or s. 115A(17). That is a process that only takes place after the practitioner has addressed thequestion whether the proposed arrangement has been approved by the creditors under s.110. If the arrangement is not approved by the requisite majority of secured andunsecured creditors, the practitioner will then turn to consider whether there is a basis tomake an application under s. 115A (9). In considering that issue, the practitioner willhave to assess whether the provisions of s. 115A (9) (g) and s. 115A (17) are capable ofbeing satisfied. At that point, it becomes necessary to identify whether there is a class ofcreditors which has approved the arrangement. Such a class will usually be found by asub-division of the secured or unsecured creditors. The provisions of s. 115A (9) (g) ands. 115A (17) demonstrate that the legislature envisaged that such a sub-division may,depending on the circumstances, be required.17. Notwithstanding the particular statutory regime put in place by the 2012-2015 Acts (assummarised in para. 16 above), I can see no basis to suggest that it was intended by thelegislature that a new or different test should be adopted (i.e. a test other than theMillstream Recycling test) when it comes to the constitution of classes for the purposes ofs. 115A (9) (g) or s. 115A (17) of the 2012 Act. The very fact that the legislation is silentas to how classes should be constituted for those purposes strongly supports thisconclusion. The 2012 Act was enacted against the backdrop that there was already awell-established test in place in an analogous setting under the Companies Acts. The testlaid down in the Sovereign Life Assurance case had been universally accepted andapproved not only in Ireland (as illustrated by the decision of Laffoy J. in MillstreamRecycling) but also in many common law jurisdictions around the world as the judgmentof Chadwick L.J. in Hawk Insurance (at p. 518) demonstrates. If the legislature intendedthat a different approach should be taken in the context of the 2012-2015 Acts, onewould expect that it would have set that out in specific terms in the provisions of thoseActs. The legislature did not take that course. As noted previously, the Acts are entirelysilent on the issue. In these circumstances, it is inconceivable that any other test shouldbe adopted when there is already a well-established test to apply and which is wellcapable of being applied. Thus, even if it were open to me to depart from the principlesestablished in Sabrina Douglas, there is, in my view, no basis to take a different approachto that taken by Baker J. in Sabrina Douglas.Page 7 ⇓18. At para. 35 of her judgment in Sabrina Douglas, Baker J. drew attention to what had beensaid by Laffoy J. in Millstream Recycling that it is necessary to ensure:-“not only that those whose rights really are so dissimilar that they cannot consulttogether with a view to a common interest should be treated as parties to distinctarrangements and have their own separate meetings.”but also to ensure that those:-“whose rights are sufficiently similar to the rights of others that they can properly consulttogether should be required to do so.”19. It is clear from these observations by Laffoy J. that a minor dissimilarity in rights asbetween one creditor and another will not be sufficient to require that they should betreated as separate classes. There must be a dissimilarity of substance before the courtwill be prepared to accept that different classes should be constituted. The corollary isthat, where the rights of the relevant parties are similar (even if not identical), theyshould be required to consult together.20. In para. 36 of her judgment in Sabrina Douglas, Baker J. quoted from the final conclusionof Laffoy J. in Millstream Recycling where she said:-“While there are inevitably distinctions in the detail of the claims of the contaminationcreditors (such as their precise value, procedural progress and so forth), in theirbasic form, these claims are characterised by an overriding similarity: the claimsthemselves are of a similar nature; they fall to be determined on similar bases;they arise from the same incident; and, in all cases, the creditors have sufferedconsiderable hardship”.21. Counsel for the practitioner argued that this observation by Laffoy J. highlights asignificant difference of substance between the circumstances considered by Laffoy J. inMillstream Recycling and the present case. Here, in contrast to Millstream Recycling, theclaims of the unsecured creditors do not arise from the same incident. On the contrary,they arise from different contractual relationships. In addition, counsel again highlightedthe fact that, alone of all of the unsecured creditors, Carley & Connellan were a providerof services. All of the other unsecured creditors had a creditor-debtor relationship withMr. Flynn under which monies had been advanced either to Mr. Flynn personally or to acompany controlled by him.22. Again, I must reject this argument of counsel for the practitioner. In my view, nosignificant emphasis can be placed on the reference by Laffoy J. to the fact that, inMillstream Recycling, the claims of the “contamination creditors” all arose from the sameincident. There is nothing in the case law dealing with the constitution of creditor classesto suggest that classes should be constituted by reference to whether or not the claims ofthe relevant creditors all arose from a similar incident. That observation by Laffoy J. wasmade in the very particular circumstances of the Millstream Recycling case where thePage 8 ⇓claims of the creditors in issue had all arisen out of the same incident of contamination.However, I can see nothing in the judgment of Laffoy J. in that case which suggests thatshe considered that this was a necessary requirement in order to treat the “contaminationcreditors” as a single class for the purposes of a scheme of arrangement underconsideration there. On the contrary, it is quite clear from a consideration of herjudgment as a whole that she was applying the classic sovereign Life Assurance test.23. The approach taken by Laffoy J. is also consistent with the approach taken by the EnglishCourt of Appeal in Re. Hawk Insurance. In that case, Chadwick L.J. very helpfullyidentified the analysis that should be undertaken by a court confronted with a question ofthis kind. At p. 518 he said:-“In each case, the answer to [the] question will depend upon analysis (i) of the rightswhich are to be released or varied under the scheme and (ii) of the new rights (ifany) which the scheme gives, by way of compromise or arrangement, to thosewhose rights are to be released or varied”.24. In this case, it is therefore necessary to consider the rights which each of the unsecuredcreditors have against Mr. Flynn. It is also necessary to consider the manner in whichthose rights are released or varied under the proposed arrangement. Thirdly, it isnecessary to consider the new rights which the scheme gives the unsecured creditors. Atpresent, each of the unsecured creditors (listed in para. 3 above) have a right to claimagainst Mr. Flynn for the full amount of the debt due to them. None of the unsecuredcreditors has any right to realise any property of Mr. Flynn. In the case of Carley &Connellan, it is argued on behalf of the practitioner that they are in a different positionbecause they are entitled to exercise a lien over the documents of Mr. Flynn which areheld by them. However, in contrast to the EBS, Carley & Connellan have no right torealise any property of Mr. Flynn in exercise of such a lien should they choose to exerciseit. The nature of their right is possessory only over the relevant documents of Mr. Flynn(if any) held by them. In Wylie “Irish Land Law”, 5th ed. at para. 12.15 the nature ofsuch a lien is described as follows:-“A lien is a concept which has been recognised at common law and in equity. A commonlaw lien confers on the holder a mere right of retention of another person’s propertyuntil such time as a debt is paid, e.g., the right of a garage proprietor to retain acar repaired by him until its owner pays the repair bill. Such a common law liengives the holder no right (in the absence of a contractual or statutory provision) tosell the property retained or to deal with it in any other way. In this respect, as weshall see, there is a marked difference between a common law lien and a mortgage.Furthermore, if the holder of the lien parts with possession of the property to thedebtor or his agent, or to anyone other than his own agent, it is lost. In short, the‘security’ for the debt is dependant entirely upon the creditor’s possession of theproperty and this too is a point of difference from a modern mortgage”.25. It is noteworthy that, under the terms of the proposed arrangement, Carley & Connellanare not treated in any way differently to the other unsecured creditors. There is nothingPage 9 ⇓in the proposed arrangement which refers to or addresses any lien which they may beentitled to invoke against Mr. Flynn. Nor is there any evidence before the court whichsuggests that Carley & Connellan have ever sought to invoke such a lien. Likewise, thereis no sufficient evidence as to the nature of the documents held by Carley & Connellan oras to whether any of them are important or whether any of them have a particular value.In this context, it is important to bear in mind that the onus lies on the practitioner todemonstrate to the court that all of the requirements of s.115A have been satisfiedincluding the requirements of s. 115A (9) (g). In my view, the evidence falls far short ofestablishing that any claimed lien would put Carley & Connellan in a different class to theunsecured creditors identified in para. 3 above.26. Moreover, even if one were to overlook the paucity of evidence in respect of the lien, it isnotable that it is nowhere suggested that, as a consequence of any lien, Carley &Connellan are entitled to demand more by way of repayment from Mr. Flynn than any ofhis other unsecured creditors or to be treated, in any meaningful way, differently to theunsecured creditors. In terms of the dividend to be paid to them under the proposedarrangement, they will be paid at precisely the same rate of return as any of the otherunsecured creditors. They get no additional benefit under the arrangement as aconsequence of their right to exercise a lien. Accordingly, it is the right to be repaidwhich seems to me to be the relevant right for present purposes.27. For the reasons outlined above, it is clear that each of the unsecured creditors (includingCarley & Connellan) have similar rights – namely the right to be repaid the debt owed tothem. In each case, the manner in which that right is to be released or varied under theterms of proposed arrangement is precisely the same. In each case, the unsecuredcreditors will each receive a dividend calculated in the same way. Thus, under the termsof the scheme, in lieu of their pre-existing right to pursue Mr. Flynn for the whole of therelevant debt due to each of them, they will (in the event that the scheme comes intoeffect) have the right to payment of a dividend calculated at the same rate in each case.Thus, applying the approach suggested by Chadwick L.J. (quoted in para. 23 above) therights which are to be released or varied under the arrangement (i.e. the right to berepaid their debts) are all precisely the same. Similarly, the new rights given to themunder the proposed arrangement (namely the right to payment of a dividend distributedon a pari passu basis) are also precisely the same. No distinction whatever is madebetween Carley & Connellan and the remaining unsecured creditors. Subject to aconsideration of the remaining issues raised by counsel for the practitioner, it thereforeseems to me to follow that, to paraphrase Laffoy J. in Millstream Recycling, the rights ofeach of the unsecured creditors are sufficiently similar to the rights of the others that notonly can they properly consult together but they should be required to do so. Applyingthe test laid down in the Sovereign Life Assurance case, all of the unsecured creditorsshould therefore be treated as a single class.The security held by Everyday28. As noted in para. 6 above, it was further submitted that there was a distinction to bemade between Carley & Connellan, on the one hand, and Everyday on the other, inPage 10 ⇓circumstances where Everyday hold security over property of Fortberry. In my view, thisis an entirely academic point. Even if Everyday were to be treated as falling into adifferent class, it is clear that a significant majority in value of the remaining unsecuredcreditors voted against the proposed arrangement. The relevant debts due to each of theunsecured creditors are listed in para. 3 above. It is quite clear that, together, the debtsowed by Mr. Flynn to Promontoria Aran Ltd and Havbell DAC far exceed the debt owed toCarley & Connellan.29. For completeness, I should make clear that, even if the considerations identified in para.28 above did not exist in this case, I cannot see a proper basis to treat Everyday as beingin a different class merely because it holds security over property of Fortberry. While, ofcourse, Everyday would be entitled to exercise rights over the property secured in itsfavour by Fortberry, Everyday retains the right to pursue Mr. Flynn in respect of hispersonal liability on foot of the guarantee given by him in respect of the debts ofFortberry. In fact, the only right which Everyday has against Mr. Flynn is a purelypersonal right to pursue him on foot of the judgment for payment of a debt. Incircumstances where none of the debts is disputed, this is precisely the same right as anyof the other unsecured creditors have. The fact that Everyday holds security over theproperty of Fortberry does not affect this conclusion. Crucially, Everyday holds no securityover the property of Mr Flynn. As an unsecured creditor of Mr Flynn, Everyday retains theright to seek repayment from him notwithstanding its concurrent right to rely on itssecurity against Fortberry. The relevant principle was identified in the following terms inthe opinion of the Privy Council in China & South Sea Bank v. Tan [1990] 1 AC 536 at p.545 where Lord Templeman explained the position as follows:-“In the present case the security was neither surrendered nor lost nor imperfect noraltered in condition by reason of what was done by the creditor. The creditor hadthree sources of repayment. The creditor could sue the debtor, sell the mortgagesecurities or sue the surety. All these remedies could be exercised at any time ortimes simultaneously or contemporaneously or successively or not at all. If thecreditor chose to sue the surety and not pursue any other remedy, the creditor onbeing paid in full was bound to assign the mortgaged securities to the surety. If thecreditor chose to exercise his power of sale over the mortgaged security, he mustsell for the current market value but the creditor must decide in his own interest ifand when he should sell. The creditor does not become a trustee of the mortgagedsecurities and the power of sale for the surety unless and until the creditor is paidin full and the surety, having paid the whole of the debt is entitled to a transfer ofthe mortgaged securities to procure recovery of the whole or part of the sum hehas paid to the creditor.”30. In my view, it is clear from this passage that a creditor who holds security from aprincipal debtor is not prevented from exercising his or her rights to pursue and seekpayment from a guarantor in respect of the debt guaranteed. The creditor has a choiceas to how to proceed. In this case, the right which Everyday has against Mr. Flynn isprecisely the same right as that available to all of the other unsecured creditors of Mr.Page 11 ⇓Flynn – namely the right to pursue Mr. Flynn in respect of his debt. As the China & SouthSea Bank case shows, the fact that Everyday also has a right to pursue Fortberry and toexercise security rights over the property of Fortberry does not affect this conclusion.Carley & Connellan as a provider of services31. As noted in para. 6 above, one of the arguments made by counsel for the practitioner inthis case is that Carley & Connellan should be differentiated from the other unsecuredcreditors on the basis that, alone of those creditors, Carley & Connellan provided servicesto Mr. Flynn. All of the claims of the other unsecured creditors arise from a debtor-creditor relationship following the advancement of monies to Mr. Flynn or to a companycontrolled by Mr. Flynn. In my view, the origin of the indebtedness of Mr. Flynn to Carley& Connellan is irrelevant in this context. The case law shows very clearly that what thecourt must consider is the nature of the rights which the creditors have against the debtorand the extent to which those rights are varied or affected by the proposed arrangement.As already discussed above, the rights which Carley & Connellan have against Mr. Flynnare precisely the same as the rights which any of the other unsecured creditors have. Itis true that Carley & Connellan may have the entitlement to exercise a lien over certainpapers of Mr. Flynn. However, for all of the reasons discussed in paras. 24 to 27 above, Iam of the view that the existence of this lien is not relevant. The relevant right of Carley& Connellan is the right to be paid. It is the same right as that held by all of the otherunsecured creditors. Moreover, as discussed above, it is affected in precisely the sameway as the claims of all of the other unsecured creditors. Each of them suffers the sameproportionate reduction in the debt under the terms of the proposed arrangement as all ofthe other unsecured creditors. None of them is dealt with any differently under the termsof the arrangement than the other. In all of these circumstances, I can see no basis toform the view that merely because Carley & Connellan provided services to Mr. Flynn,they should be treated as falling into a separate class.The allegation of animus32. In the course of the hearing, my attention was drawn by counsel for the practitioner tocertain correspondence that took place between AIB (the predecessor in title to Everyday)and the solicitors then acting for it. The correspondence in question predated theformulation of the proposals for the arrangement in this case. The correspondenceincluded an email from AIB’s solicitor to AIB itself in which reference was made to MrFlynn’s “past behaviour” and expressed the opinion that AIB should “refuse the PIA”. Itwas submitted by counsel for the practitioner that the correspondence demonstrated that,at that stage, AIB and its solicitors had already firmly made up their mind to oppose anyproposals that might be put forward by the practitioner for an arrangement under the2012-2015 Acts. It was suggested that this showed a definite animus on the part of AIBagainst Mr. Flynn and that, for that reason, Carley & Connellan (who hold no suchanimus) should be treated as falling into a separate class. In this context, it appears tobe suggested that, in some way, all of the other unsecured creditors share this allegedanimus against Mr. Flynn. It was also submitted that, given this alleged animus, thoseunsecured creditors and Carley & Connellan could not consult together with a view totheir common interest.Page 12 ⇓33. In my view, this submission on the part of the practitioner is mistaken. I fail to see howthe motivation of a particular creditor is relevant to the question as to how classes ofcreditors are be constituted. In any arrangement, it would be unsurprising that one ormore creditors might have some level of hostility to a debtor in relation to a long unpaiddebt. More importantly, as the case law shows, the question as to how creditors are to beclassified depends on the rights held by them and the way in which those rights arevaried or released under the terms of a proposed arrangement. Whether a creditor is welldisposed or ill disposed towards the debtor is not relevant to those issues.34. If anything, the email from AIB’s solicitor evidences a predetermination to vote againstthe arrangement. In principle, I can see no distinction between cases where a creditor,even in advance of receipt of proposals for an arrangement, has determined to opposeany arrangement which is put forward and cases where, for example, creditors agree inadvance to support a particular arrangement. In the latter case, it is well established thata creditor who agrees in advance to support a particular arrangement is not to be treatedas falling into a separate class from other creditors holding the same rights. This is clearfrom the decision of David Richards J. in Re. Telewest Communications Plc (No. 1)[2005] 1 BCLC 752 at p. 759. That principle was expressly followed by Kelly J. (as he then was)in Ireland in Re. Depfa Bank Plc [2007] IEHC 463. I can therefore see no distinction inprinciple between the position of a creditor who undertakes to vote in favour of aparticular arrangement and the position of a creditor who determines, in advance of thecirculation of proposals for an arrangement, to oppose any such arrangement. I have,accordingly, come to the conclusion that the existence of any alleged animus on the partof AIB, as predecessor in title to Everyday, would not require that AIB or Everyday beplaced into a different class. Even if it were placed into a different class, that would notmake any difference to the result. As previously noted, the vote of Carley & Connellanwas outweighed by the value of the votes of Promentoria Aran Ltd and Havbell DAC whoboth voted against the arrangements. There is no evidence before the court to establishthat there was any animus against Mr. Flynn held by either of those creditors.Other matters35. There is one further matter which I should address. While I do not believe that it isrelevant to the issue which requires to be decided in this case, a submission was made bycounsel for the practitioner here that gives me some cause for concern. In the course ofsubmissions, counsel for the practitioner sought to suggest that there was a tensionbetween one element of the decision of Baker J. in Sabrina Douglas and one element ofmy own decision in Noel Tinkler [2018] IEHC 682. In particular, it was suggested that theview expressed by me in para. 32 of my judgment in Tinkler is inconsistent with the viewexpressed by Baker J. in para. 45 of her judgment in Sabrina Douglas where she held thata creditor holding security over a principal private residence is capable of beingconsidered as a separate class of secured creditor for the purposes of s. 115A. In myview, there is no inconsistency between the views expressed by Baker J., on the onehand, and by me, on the other. The point made by me in para. 32 of my judgment inTinkler is not concerned with the issue addressed by Baker J. in para. 45 of her judgmentin Sabrina Douglas. The latter is concerned with whether or not the holder of securityPage 13 ⇓over a principal private residence should be considered to constitute a separate class ofsecured creditor. In contrast, para. 32 of my judgment in Tinkler is concerned withwhether or not the holder of such security is entitled to preferential treatment (ascompared to secured creditors holding security over other property of a debtor). I wish tomake it very clear that I entirely agree with the view expressed by Baker J. in para. 45 ofher judgment. In my view, a creditor holding security over a principal private residence iscapable of constituting a separate class of secured creditor for the purposes of s. 115A (9)(g) of the 2012 Act. In light of the provisions of s. 99 (2) (h) and s. 104 (1) of the 2012Act (both of which make clear that, save in quite exceptional circumstances, a personalinsolvency arrangement should seek to preserve the ability of a debtor to remain in his orher principal private residence) the rights of the holder of security over such a propertyare capable of being affected in a uniquely different way to the holders of security ofother property of a debtor. In such circumstances, having regard to the well-establishedtests which are applied in the context of the constitution of classes of creditor (as outlinedabove) it is almost always the case that such a creditor will be in a different class ofsecured creditor to any other secured creditors of a debtor in any particular case. Thereis nothing in my judgment in Noel Tinkler which affects or undercuts that fundamentalproposition.Conclusion36. In light of the views expressed by me above, I have come to the conclusion that, in thiscase, Carley & Connellan, solicitors, cannot be considered to be in a separate class to theother unsecured creditors of Mr. Flynn. In those circumstances, the condition set out in s.115A (9) (g) of the 2012 Act cannot be satisfied in this case. As a consequence, theapplication made by the practitioner under s. 115A (9) must fail. In these circumstances,I proposed to make an order dismissing the present application on that basis. It istherefore unnecessary to consider the remaining issues that would ordinarily require to beaddressed on an application under s. 115A.
Result: The condition set out in s115A (9)(g) of the Personal Insolvency Act 2012 has not been satisfied, with the consequence that the application to approve a personal insolvency arrangement must be dismissed.
In re Maloney.
[1926] IR 205
Johnston J.
This is an application on behalf of the Land Commission for an order that a debt of £26 due by the bankrupt be declared a preferential debt, and that it should be paid out of the moneys realised in the bankruptcy next after the payment of debts due by the bankrupt included in sect. 4, sub-sect. 1, of the Preferential Payments in Bankruptcy (Ireland) Act, 1889.
The bankrupt, who is an auctioneer, had been employed by the Land Commission in 1922 to act in the sale of a certain holding, in respect of which the Land Commission had made an advance under the Land Purchase Acts. The land purchase annuity was in arrear, and the Land Commission sold the holding under their statutory powers. It appears that the holding was sold for a sum of £52 and auctioneer’s fees, and that a sum of £26 had been paid by the purchaser to the bankrupt on behalf of the Land Commission. It is suggested by Mr. Blood, on behalf of the assignees, that the bankrupt may have been a stakeholder as between the purchaser and the Land Commission, and ought therefore to be regarded as holding the money in that capacity pending the completion of the sale. The purchaser, however, has made no claim in the bankruptcy; there is no evidence before me that the sale was not completed; and, in my opinion, there is sufficient evidence in the affidavit of Mr. H. M. P. Hare, filed on behalf of the Land Commission, that the bankrupt does owe the Land Commission this sum of £26. In the absence of any evidence to the contrary, I must hold that the debt has been established.
That the claim of the Land Commission is a preferential one cannot be gainsaid; and, indeed, that principle is not contested by Mr. Blood. Mr. Lynch, on behalf of the Land Commission, has cited numerous cases on this point, including In re Galvin, a Bankrupt (1); In re Niblock (2); Attorney-General v.Howley (3); and Greene v. Irish Land Commission (4), in which cases debts owing respectively to the Inland Revenue, the Postmaster-General, the Board of Works, and the Irish Land Commission were given preferential treatmentthe first two by the Bankruptcy Court and the second two by the Chancery Division.
In Irish Land Commission v. O’Neill (5), Madden J. enunciated the legal relationship of the Land Commission and the Treasury as regards land purchase finance in these words:”There are cases in which a corporation entrusted with the administration of money for public purposes has power to make advances by way of loan in a manner which would not create a debt to the Crown. But the cardinal distinction between such a case and the present is that here the Land Commission is merely a conduit-pipe for the purpose of conveying advances from the fund created by the statute for the purposes of land purchase. The advance is made by the State, not by the Land Commission.”I may add that the purchase annuities payable by purchasing tenants are paid to the State, and not to the Land Commission.
This debt arose in 1922; but, in my opinion, it is an “asset”that has been transferred by the legislation culminating in Article 80 of the Irish Free State Constitution from the former Government of the United Kingdom of Great Britain and Ireland to the Government of the Irish Free State. I reviewed that legislation very fully in the case of In re Reade, a Bankrupt (6),and it is unnecessary to restate it. Mr. Lynch has referred me to the decision of the House of Lords in Attorney-General v.Great Southern and Western Railway Co. of Ireland (7), where the process of the transfer of the burden of liabilities and the benefit of assets from the old Departments to the new is very fully described.
I am quite satisfied also that that branch of the prerogative on which the present claim is basednamely, that the Crown, as representing the Government and people of the country, is not bound by a statute unless it is expressly or by necessary implication referred to thereincan be resorted to in the present case by the Land Commission acting in this matter for and on behalf of the Minister for Finance. On that point Mr. Blood is forced to admit, in view of the preamble and of Articles 12 and 51 of the Constitution, that this principle of constitutional law is of full force and effect in the Irish Free State. It was held by the Judicial Committee of the Privy Council in the case of Commissioners of Taxation for the State of New South Wales v.Palmer (1) that in the administration of a bankrupt’s estate under the New South Wales Bankruptcy Act, 1898, the Crown was entitled to preferential payment over all other creditors; and I may say, incidentally, that the judgment of Palles L.C.B. in In re Galvin (2) was referred to in terms of high approval by Lord Macnaghten. The same principle was established in the case of Attorney-General for New South Wales v. Curator of Intestates’ Estates (3). I have been referred by Mr. Blood to Cameron on the Canadian Constitution, p. 124, as to the practice in this matter in Canada.
There is one other matter to which I must refer. Mr. Blood suggests that there may be new bankruptcy legislation in the Free State in the near future, and he says that it might be well for the authorities to take note of the fact that the branch of the prerogative with which this case is concerned has been voluntarily surrendered by the Crown in England so far as bankruptcy administration is concerned; and that it no longer applies in the winding up of companies. This consideration involves questions as to governmental policy with which I, as a Judge, have no concern. It is sufficient for me to interpret and administer the law as I find it.
I must make an order in favour of the Land Commission in the terms of the notice of motion.
In re Shepherd
Court of Bankruptcy
12 May 1876
[1876] 10 I.L.T.R 95
Harrison J.
Motion, on behalf of Miss Elizabeth Anne Moore, by way of appeal from a decision of the Chief Registrar, rejecting a proof of debt sought to be filed by the bankrupt as the sole surviving trustee and executor of the will of Robert Moore, of Armagh, deceased; or, in the alternative, that Miss Elizabeth Anne Moore, a legatee entitled under the said will, might be permitted to prove on the bankrupt’s estate for the sum of £540 16s. 9d., part of the assets of the said Robert Moore, which the bankrupt had applied in his business.
Under the will of Robert Moore, who died in April, 1867, three daughters, all of them under age, were residuary legatees, and entitled to a considerable sum of *95 money. The residue was to be applied by the trustees and executors “to provide for, educate, and clothe my three children, Elizabeth Anne, Catherine, and Laura,” until they respectively came of age, “and upon trust, on the arrival of each of my children of age, to pay and hand over to each child the one-third share of the amount which shall then be due such child, and upon trust, in the event of the death of any of my children before arriving at the age of twenty-one years, then, the share or shares of such child or children to form part of the share of the surviving child or children.” The bankrupt and William Boyd were named trustees and executors of the will, and took out probate and acted in the trusts of the will. Boyd died before the bankruptcy of Shepherd; and after his death Shepherd, from time to time, applied part of the trust moneys, to the amount of £540 16s. 9d., in aid of his business, without the consent of the cestui que trusts or any of them. One of the children—Catherine—died before attaining her full age. Laura was still under age.
The bankrupt made a proof of debt “in his character and capacity of sole surviving trustee and executor” for the sum of £540 16s. 9d., and produced an affidavit from Miss E. A. Moore, in which it was stated that the bankrupt had consented, on his proof being admitted, that the dividends should be received by her. The Chief Registrar rejected the proof, and this motion was then brought before the Court. The amount of the debt due to the trust estate was proved by the affidavit of the bankrupt’s book-keeper.
Kisbey, for Miss E. A. Moore.—Though, to some extent, the motion may be regarded as an appeal from the decision of the Chief Registrar, the alternative part of the motion is that which it is desired that the Court should grant. The Chief Registrar was unquestionably right in rejecting the bankrupt’s proof; for, though an executor who is a bankrupt may perhaps prove under his own bankruptcy in respect of a debt due from him to the testator’s estate, he cannot do so without an order of the Court: Ex parte Shaw, in re Howard and Gibbs, 1 G1. & J. 127. There no such order was obtained. In other reported cases executors have been refused liberty to prove: ex parte Shakeshaft, 3 B. C. C. 197, ex parte Fairchild, 2 G1. & J. 221; ex parte Vine, re Hoopes, 1 Dea. & Ch. 357. But the case of ex parte Moody, in re Warne, 2 Rose, 413, shows that where an executor or trustee has committed a devastavit, though he may be precluded from proving against his own estate,1 still liberty will be given to a legatee to prove on behalf of himself and others interested; and the dividends will be directed to be paid into the bank, in trust in the matter: Ex parte Norris, re Biddulph, L. R. 4 Ch. 280, is to the same effect. The order sought in the present case is that Miss Elizabeth Anne Moore may be permitted to prove on behalf of herself and her sister, who is a minor, for their moneys invested without their knowledge in the bankrupt’s business, and that the dividendsmay be retained in Court to be paid to the person entitled.
Perry, for the assignees.—The first part of the motion having been abandoned, it is submitted that the alternative part cannot be sustained. The proper course would have been not to come to the Court to ask permission to make a proof of debt, but to send the proof in the ordinary way to the official assignee, who, if necessary, might require it to be established before the Chief Registrar.
Kisbey, in reply.—If this were an ordinary proof of debt the objection would be a just one, but a special order is required here as to the application of the dividends. In ex parte Moody the same objection was made, but the Vice-Chancellor, and afterwards Lord Eldon on appeal, held that in such a case it was a proper course to go to the Court in the first instance.
Harrison, J.
The first part of the notice of motion was properly given up. The order will be that Miss E. A. Moore be at liberty to prove for the amount of the trust moneys invested by the bankrupt in his business, the dividend to be retained in Court for the persons entitled, and to be paid, not to the bankrupt, but to those persons on their own receipts.
In the Matter of Nelson Car Hire Limited
In the Matter of The Companies Act, 1963
The High Court
1 March 1971
[1969 No. 1903 P.]
[1973] 107 I.L.T.R 97
Kenny J.:
Nelson Car Hire Limited (“the Company”) was incorporated in the Republic of Ireland as a private company on the 17th April 1961. The subscribers to the memorandum of association, who were employees in a solicitor’s office, subsequently transferred their shares to two members of a firm of accountants. In 1965 four shares were allotted to Mr. John Bernard King of San Antonio, Dalkey Avenue, County Dublin, (“Mr. King”) who was described as a building contractor, and four to Mr. Charles Fay of 29, Fitzwilliam Square, Dublin, a solicitor. The company never traded in the hiring or buying of cars.
On the 14th December 1964 Mr. Garret Reilly agreed to sell to Mr. King 15 acres of land at Shanganagh, County Dublin for £11,264. 1. 3. On the 21st January 1965 Mr. King lodged an application for planning permission to develop these but seems to have found out that it was unlikely that this would be granted. On the 15th March 1965 the purchase of the lands at Shanganagh was completed by a conveyance of them to the company and on the 26th March Mr. King lodged another application for outline planning permission for development of the lands by building a supermarket and ninety houses. *99 On the 31st March 1965 Mr. King agreed to pay £50,000 to the company for a licence which gave him permission to enter on the lands and he contracted to make roads and footpaths and to build so that the development would be completed on the 1st September 1968. The company agreed to give leases to purchasers from Mr. King at rents of not less than £10 per year for each lease. Stamp duty of ten shillings was paid on the licence. An Order for the grant of outline planning permission for the building of a supermarket and ninety houses was made by the local authority on the 7th April 1965 and their decision was sent to Mr. King on the 13th July. The £50,000, the price of the licence, was paid to the company before August 1965.
On the 14th April 1965 Traditional Homes Limited (“Traditional”) was incorporated as a private company with a nominal capital of £10,000 which was fully subscribed. The directors and shareholders were Mr. King (who was a director and shareholder of the company, who had made the contract for the purchase of the lands at Shanganagh and to whom the licence had been granted), Mr. Hugh King and Mrs. Catherine King of San Antonio, Dalkey. One of the objects of Traditional was to purchase for investment or resale and to traffic in land and other property. On the 1st August 1965 the company conveyed the 15 acres at Shanganagh to Traditional for £6,000 and, in reply to an enquiry from the Revenue Commissioners in connection with the stamp duty payable on the deed, the solicitors acting for the vendors and purchasers stated that this sum represented the full market value of the property passing and that it had been paid in cash. There was no reference in the deed or in the form lodged to get the particulars delivered stamp on it to the licence of the 31st March 1965. Traditional, however, took the lands subject to it.
On the 20th August 1966 the company passed a resolution that it be wound up voluntarily and Mr. Joseph Charleton was appointed liquidator. The liquidation did not present any unusual problems and so Mr. Charleton was able to prepare an account of the winding up within a short time. Section 263 of the Companies Act 1963, so far as it is relevant, provides: “263 (1) … as soon as the affairs of the company are fully wound up, the liquidator shall make up an account of the winding up showing how the winding up has been conducted and the property of the company has been disposed of, and thereupon shall call a general meeting of the company for the purpose of laying before it the account and giving any explanation thereof. (3) Within one week after the meeting, the liquidator shall send to the registrar of companies a copy of the account, and shall make a return to him of the holding of the meeting and of its date, … (4) … the registrar on receiving the account and either of the returns hereinbefore mentioned shall forthwith register them, and on the expiration of three months from the registration of the return the company shall be deemed to be dissolved.”
The liquidator’s account, which is dated the 15th May 1967 shows loans and advances of £56,000 as the main asset of the company while the amount due to creditors was £11,819 so that there was an estimated surplus of £44,189. The return required by s. 263 of the holding of the meeting was made to the registrar of companies on the 19th June 1967 and the company was therefore dissolved on the 19th September of that year. In April 1966 five shares in the capital of the company had been allotted to Mr. Hugh King so that on dissolution there were fifteen issued shares on each of which £2,938. 17. 3. became payable.
The Revenue Commissioners became interested in the company and began to ask for information. On the 10th December 1965 Messrs. Bastow Charleton and Company had written to them confirming that from the date of its incorporation the company had not had any income, trading or otherwise, taxed or untaxed and that it had not paid any charges or other sums under deduction of tax. The Revenue became much more interested in 1968 when the company had been dissolved and from March 1968, they were pressing the accountants for information. Ultimately on the 23rd September the accountants wrote to the inspector that the company bought land at Shanganagh for £11,818. 15. 3. which it sold for £56,000 before liquidation, that the property had been bought by the company as an investment and that at the time of the purchase it was agricultural land without planning permission. The inspector was also informed that the company realised six months after it purchased the land that development on it was possible but that it was not bought as trading stock as there was no permission for development and no reason to suspect that this would be granted. The statement in this letter that the property was sold for £56,000 is, I think, an error because £50,000 was paid for the licence and £6,000 for the property subject to the licence. *100
Section 310 sub-section (1) of the Act of 1963 reads:
“310 (1) Where a company has been dissolved, the court may at any time within two years of the date of the dissolution, on an application being made for the purpose by the liquidator of the company or by any other person who appears to the court to be interested, make an order, upon such terms as the court thinks fit, declaring the dissolution to have been void and thereupon such proceedings may be taken as might have been taken if the company had not been dissolved.”
On the 14th July 1969 the Revenue Commissioners presented a petition to this Court for an order under s. 310 declaring the dissolution to have been void. They wish to assess the company for income tax and corporation profits tax on the profits made from the purchase and sale of the land which, they say, was an adventure in the nature of trade and also because they claim that stamp duty at the rate of 3% was payable on £56,000 and not on £6,000 only. As no assessment for tax was made on the company when it was on the register, the Revenue Commissioners are not creditors but in my view they are persons interested in having the dissolution declared void. The expression “any other person who appears to the court to be interested” has a wider meaning than member or creditor of the company. The words themselves have this effect but it is also shown by a comparison of s. 310 with s. 311 which deals with the power of the registrar to strike companies which are not carrying on business off the register. If the register does this, sub-s. 8 provides that if a company or any member or creditor thereof feels aggrieved by the company having been struck off, the court may restore the name of the company to the register. I think that the Revenue Commissioners are persons interested within s. 310 if they establish that they have a reasonable prospect of success in a claim for tax against the company if it is restored to the register and an assessment is made on it. The Court has a discretion in granting the application and the decisive matter must be whether the claim, which it is sought to make against the company, is one which might succeed. It is relevant that if the company is restored to the register and the claim fails, the company will not suffer any loss as the Revenue Commissioners will be liable for all the costs including the costs of this application.
I do not propose to express a final view on the question whether the company is liable for tax of any kind on the land transaction because this is a matter to be decided in other proceedings. Under the law in force when the property at Shanganagh was bought, income tax was payable on every trade carried on in the State and trade was defined by s. 237 of the Income Tax Act, 1918 as including “every trade, manufacture, adventure or concern in the nature of trade”. I think that there is much to be said for the view that the purchase of this land, the immediate application for planning permission, the grant of the licence to a building contractor who was a shareholder in the company and the subsequent sale to a development company was not an investment but an adventure in the nature of trade and a passage in the speech of Lord Radcliffe in Edwards v. Bairstow [1956] A.C. 14; 36 Tax Cases 207 supports this. In that case the taxpayers had bought spinning plant which they subsequently sold at a substantial profit. They had not had any transactions in machinery before and they had no intention of using it. They were assessed to income tax on the profit which they made on the transaction. The Commissioners decided that it was not an adventure in the nature of trade. The High Court and the Court of Appeal held that the question whether it was or not, was, in the hallowed judicial formula, “purely one of fact” but this determination was reversed in the House of Lords. The passage in Lord Radcliffe’s speech which I think is of assistance is: “If I apply what I regard as the accepted test to the facts found in the present case, I am bound to say, with all respect to the judgments under appeal, that I can see only one true and reasonable conclusion. The profit from the set of operations that comprised the purchase and sale of the spinning plant was the profit of an adventure in the nature of trade. What other word is apt to describe the operations? Here are two gentlemen who put their money, or the money of one of them, into buying a lot of machinery. They have no intention of using it as machinery, so they do not buy it to hold as an income-producing asset. They do not buy it to consume or for the pleasure of enjoyment. On the contrary, they have no intention of holding their purchase at all. They are planning to sell the machinery even before they have bought it. And in due course they do sell it, in five separate lots, as the events turn out. And, as they hoped and expected, they make a net profit on the deal, after charging all expenses such as repairs and replacements, commission, wages, travelling and entertainment and incidentals, which do in fact, represent the cost of organising the ven *101 ture and carrying it through. This seems to me to be, inescapably, a commercial deal in second-hand plant. What detail does it lack that prevents it from being an adventure in the nature of trade, or what elements is present in it that makes it capable of being aptly described as anything else?”
Mr. Baker says correctly that there is no liability for income tax or corporation profits tax until the assessment becomes final and that the Revenue are not, therefore, creditors and so cannot succeed on this application. This, however, is not a good answer to the contention that the Revenue Commissioners are persons interested and so entitled to the order sought. In my opinion the company should be restored to the register and there will be an order declaring that the dissolution of the company was void. The costs of this application will be reserved: if the claims for duty which the Revenue wish to make are unsuccessful, those who opposed the order will be awarded their costs of these proceedings on a solicitor and client basis.
In the Matter of Supatone (Eire) Ltd.
In the Matter of The Companies Act, 1963
The High Court
21 October 1971
[1969 No. 1904P]
[1973] 107 I.L.T.R 105
Supatone (Eire) Limited (“Supatone”) was incorporated on the 9th September 1960 with an authorised share capital of £20,000. Its first object was to carry on a number of businesses but it had power to purchase and acquire freehold and leasehold property and to sell and grant licences over any of its property and assets. Two shares only were issued and it did not trade until March 1965 when these two shares were transferred to persons associated with a firm of solicitors. *108 On the 24th September 1964 this firm (Messrs. James F. Fitzpatrick & Co.) had signed a contract in trust by which they agreed to purchase 46 acres of land at Butterfield, Rathfarnham, County Dublin, from members of the Hely Hutchinson and McEntaggart families for £95,000. On the 22nd February 1965 an application was made to the Dublin Corporation as the town planning authority for outline permission to develop these lands. On the 31st March 1965 Supatone made an agreement with a company which had not then been formed, Industrial and Commercial Property Development Company Limited (“the development company”) by which the development company agreed to pay £229,000 for a licence to enter on the lands at Butterfield. This was to be paid by instalments, £29,000 on the signing of the agreement and the balance when the development company entered on the lands. The development company were to build roads and houses in accordance with the plans which had been prepared and were to complete the work before the 1st September 1968 and Supatone agreed to grant leases of the plots on which the houses were built when they were completed at yearly rents. The development company was incorporated on the 15th April 1965 and then ratified the agreement of the 31st March.
Outline planning permission for the development was given by the Dublin Corporation on the 12th April 1965 but an appeal against this was lodged by some of the residents in the area and on the 8th November 1965 the Minister confirmed the planning permission. On the 31st March 1965 the two issued shares in Supatone were transferred to Mr. J. Duffy and Mr. Charles G. Fay, members of the firm of solicitors to which I have referred and on the 8th April 1965 the lands at Butterfield were conveyed to Supatone.
The share capital of the development company was £1,000 divided into 1,000 shares of £1 each and 495 of these were allotted to Mr. Austin Hastings, 495 to his wife Bridget Hastings and 10 to Mr. Vincent Collier. The directors of the development company were Mr. Austin F. Hastings, Mrs. Bridget Hastings and Mr. Collier.
On the 18th January 1967 298 shares in Supatone were allotted for cash, 99 to Mr. Austin F. Hastings, who was a shareholder in the development company, 99 to Mr. Pascal Vincent Doyle and 100 to Mr. Frank Fitzpatrick, a member of the firm of solicitors which I have already mentioned.
On the 28th February 1967 Supatone passed a resolution that it be wound up voluntarily and Mr. T. J. Thunder was appointed liquidator. When this resolution was passed the balance of the purchase money had not been paid because the development company had not entered on the lands but it was subsequently paid in April. On the 4th April 1967 Mr. Thunder as liquidator made an agreement with L.S.D. Limited (“the purchasers”) by which he agreed to sell the lands at Butterfield which had formerly been used by the Rathfarnham Golf Club for £62,500 subject to the agreement of the 31st March 1965. When this sale had been completed, the liquidation did not present any further problems and so an account of the winding-up was prepared for submission to a meeting.
Section 263 of the Companies Act, 1963, so far as it is relevant, provides: “263(1) … as soon as the affairs of the company are fully wound up, the liquidator shall make up an account of the winding-up showing how the winding-up has been conducted and the property of the company has been disposed of, and thereupon shall call a general meeting of the company for the purpose of laying before it the account and giving any explanation thereof. (3) Within one week after the meeting, the liquidator shall send to the registrar of companies a copy of the account and should make a return to him of the holding of the meeting and of its date … (4) … the registrar on receiving the account and either of the returns hereinbefore mentioned shall forthwith register them and on the expiration of three months from the registration of the return the company shall be deemed to be dissolved.”
The liquidator’s account, which was prepared in June 1967, shows that the amount of £200,180 due by debtors on the 22nd February 1967 had been paid and that the property of the company valued at £43,500 on that date had realised £62,500. When the bank overdraft and other creditors had been paid, there was a surplus of £168,292, and when the liquidator’s fee was provided for, the members received £611.8.8 for each £1 ordinary share which they held. The property of Supatone had been transferred to the purchasers by two deeds on the 2nd June and the liquidator’s account was submitted to a meeting of the members on the 12th July. This was then sent to the registrar of companies together with the return of the holding of the meeting and Supatone was therefore dissolved on the 14th October, 1967. On the 14th July, 1969, the Revenue Commissioners *109 presented a petition to this Court for an order under section 310 declaring the dissolution to have been void.
Between 1962 and 1967 the Inspector of Taxes had enquired as to whether the company was trading and had been informed that it had not. On the 18th April, 1967, after the liquidation had commenced, he wrote to Mr. Thunder that he understood that Supatone had purchased property for development in November, 1964, and that as liability to income tax and corporation profits tax might arise on the disposal of this, the distribution of the assets of the company should not be completed pending the ascertainment of the exact liability to tax. The inspector asked for a statement of the amount received on the sale of the property. On the 9th June, 1967, Mr. Thunder gave the information which had been asked for and also sent a draft of the liquidator’s account which he proposed to submit to the meeting to be held on the 12th July. On the 15th June the inspector wrote to the liquidator a letter which included these passages:—
“The question of liability of the company on property transactions including licences granted, is under enquiry here and a further communication will issue on this matter in due course.
“You should note, however, that assessment may be raised covering the profits of the company in respect of all property transactions from the date of purchase of the property on the 10th December, 1964. No distribution of the assets of the company should therefore be made which does not take into account liability to income tax and corporation profits tax which may arise on the profits of the company in connection with its transactions and property.”
The liquidator adhered to his view that no liability for tax arose in respect of the property transactions though the inspector repeated his view that it did in a letter of 4th July. On the 12th December, 1967, when the company was already dissolved, the inspector asked for further information and in May 1968 issued notices of assessment to tax on £29,000 for the year 1965/1966 and £167,500 for 1966/1967.
Section 310 of the Act of 1963 reads:
“Where a company has been dissolved, the Court may at any time within two years of the date of the dissolution, on an application being made for the purpose by the liquidator of the company or by any other person who appears to the Court to be interested, make an order, upon such terms as the Court thinks fit, declaring the dissolution to have been void and thereupon such proceedings may be taken as might have been taken if the company had not been dissolved.”
It seems to me that the Revenue Commissioners are persons interested if they establish that they have a reasonable prospect of success in a claim for tax against the company if it is restored to the register and an assessment is made on it. I do not wish to repeat what I said in the Nelson Car Hire Limited and the Companies Acts 107 I.L.T.R. in which judgment was given on the 1st March 1971. The expression “any other person who appears to the Court to be interested” is one of great amplitude (see Test Holdings (Clifton) Limited [1970] Ch. 285 and in re Wood and Martin (Bricklaying Contractors) Limited [1971] 1 All E.R. 732. Mr. Justice Megarry said that the interest required to enable a successful application to be made to have a company restored to the register has not to be one which is firmly established or highly likely to prevail but that one which is not merely shadowy is sufficient.
The main argument advanced against the restoration of Supatone to the register is that the money paid for the licence was not a taxable receipt and would not have to be included in its profits for tax purposes even if it should be held that it was trading in land. Insofar as liability for tax under Schedule A (now repealed) is concerned this is correct but the document is not a licence only: it is a licence and an agreement to grant leases. The Revenue Commissioners, however, do not rest their claim on Schedule A but on Schedule D and say that Supatone was trading in land and that the sum received for the licence is part of its assessable profits. The grant of the licence to the development company in 1965 and the passing of the resolution in 1967 to wind up Supatone show that the lands were not acquired as an investment. They were not purchased with the intention that Supatone should develop them (see the letter of 28th December 1967 from Messrs. Bastow, Charleton & Co.). They were bought by Messrs. Fitzpatrick in trust for a company in which their client would acquire all the issued shares. The two shares in Supatone were transferred on 31st March, 1965, and on the same day the agreement creating the licence which gave the development company *110 the right to call for leases to purchasers from them was made. These matters provide evidence on which a court would be justified in holding that the lands were acquired by those who subsequently bought the shares in Supatone with the design that a licence would be given to the development company at a price which would give a substantial profit to Supatone which would then be put into liquidation. The conclusion that there is evidence of trading in land is supported by Mr. Austin Hastings’ shareholding in Supatone and in the development company. I am therefore not prepared to hold that the money paid for the licence escapes tax. The Revenue Commissioners may succeed in their claim that the purchase of the land was an adventure in the nature of trade.
The next argument advanced by Mr. McKenna was that the order which the Revenue were seeking was not one to which they were entitled as of right but for which they had to invoke the discretion of the Court. He argued that the delay by the Revenue Commissioners in making their claim and their failure to issue assessments on the company before its property had been distributed in the liquidation should have the result that the order should be refused. On the 9th June, 1967, the liquidator had disclosed all the relevant matters in connection with the purchase and the licence when he wrote to the Chief Inspector of Taxes. On the 15th June, Mr. Thunder had been told that he should not distribute the assets of the company without making provision for liability to income tax and corporation profits tax on the profits in connection with the dealings in these lands and the inspector had repeated his warning on the 4th July. No assessments however issued in connection with the matter until May, 1968. True, the inspector had sought additional information in December, 1967, but since the 9th June he had had all the information on which he could decide whether he would treat the profits made on this transaction as being assessable to tax. I do not think, however, that this delay in issuing assessments is a valid ground for refusing to restore the company to the register. It might be a reason for refusing to do so if the first attempt to collect tax had been made after the assets had been distributed but the warning on the 15th June, 1967, that a claim for tax might be made should have indicated to the liquidator that he should retain an amount sufficient to meet any liability for tax which might arise.
In my opinion, Supatone should be restored to the register and there will be an order declaring that its dissolution was void. The costs of this application will be reserved: if the Revenue fail in the claims for duty which they are now making, those who opposed the order to restore the company will be awarded their costs of these proceedings on a solicitor and client basis.
In The Matter of Van Hool McArdle Ltd (In Liquidation)
High Court
21 May 1981
[1982] I.L.R.M. 340
(Carroll J)
CARROLL J
delivered her judgment on 21 May 1981 saying: The liquidator has sold certain properties which were subject to incumbrances and has incurred a liability for corporation tax on chargeable gains accrued on that sale under the Capital Gains Tax Act, 1976. The questions which the liquidator has asked the Court to answer are as follows:
1. Whether or not the capital gains tax payable in relation to the sale is an expense incurred in the realisation of an asset within the meaning of rule 129 of the winding-up rules order 74;
2. If it is, can it be deducted from the proceeds of sale payable to the mortgagee(s) and;
3. Is the tax merely a necessary disbursement of the liquidator under the third heading listed in order 74 rule 129.
A similar question to question 1 was asked in In Re Mesco Properties Ltd [1979] 1 WLR 558 and on appeal [1980] 1 WLR 96. I accept the reasoning of Brightman J, in answering no to that question. I adopt his argument which is set out in [1979] 1 WLR at 563:
Nor do I think that corporation tax on a capital gain made by the liquidator when he sells an asset is an expense incurred in realising that asset. It is not like the fees *341 payable to a solicitor or to an estate agent in connection with a sale, or the advertising costs of a sale which are clearly part of the expenses of the sale. The tax does not assist the liquidator to sell. Nor is it a necessary result of the sale. It is merely a possible consequence of a sale at a profit. Even when a sale has been made at a profit the liquidator may not know whether any tax will ultimately be payable. This will depend on what, if any, profits, including both income and chargeable gains or losses, arise in that financial year and whether any losses can be carried forward from a previous year. The tax is merely a possible consequence of the realisation of an asset at a profit; it is not an expense which the liquidator incurs for the purposes of, or as a direct result of realising that asset, and therefore it is not, in my view, an expense incurred in realising it.
Therefore the answer to question 1 is No.
Accordingly question 2 does not arise.
Question 3 is similar to question B also asked in Mesco Properties Ltd to which Brightman J, answered Yes. I do not agree that this should be the answer to question 3 asked here.
Under clause 15 of schedule 4 to the Capital Gains Tax Act, 1975 capital gains tax qualfies for preferential payment under s. 285 of the Companies Act, 1963 to the extent that it is assessed on the company up to 5 April before the liquidation and is claimable under sub-s. 2(a)(ii). No other priority is given by the Capital Gains Tax Act, 1975 to capital gains in a winding up. The chargeable gain in this case has accrued after the date of liquidation so the statutory priority given by s. 285(2) of the Companies Act, 1963 does not apply.
S. 285(2) commences, In a winding up there shall be paid in priority to all other debts there then follows details of the preferential debts.
The company is chargeable to corporation tax on profits arising on chargeable gains in a winding-up (see s. 6(2) and s. 13(5) of the Corporation Tax Act, 1976). After assessment, the tax is a debt of the company. If the capital gains tax incurred in this case were interpreted as a necessary disbursement of the liquidator within the meaning of the third heading listed in rule 129 order XXII it would give a priority not conferred by Statute.
I do not accept that the capital gains tax is a necessary disbursement within the meaning of the third heading. The liquidator is bound to discharge the tax but only to the extent that assets are available and in the order of priority laid down by Statute. In my opinion the rules cannot disturb a priority which is given by Statute. If the legislature have failed to give any priority in respect of capital gains tax assessed after the commencement of winding-up, such priority cannot be given by the rules.
Accordingly I answer question 3 No.
The Revenue Commissioners v John Donnelly
1981 No. 164
Supreme Court
24 February 1983
[1983] I.L.R.M. 329
O’HIGGINS CJ
(Henchy and Hedermann JJ concurring) delivered his judgment on 24 February 1983 saying: The respondent in this appeal is the official liquidator of Van Hool McArdle Ltd. In the course of the liquidation he sold certain properties which were subject to incumbrances. A liability was thereby *330 incurred for corporation tax on chargeable gains accrued on that sale under the Capital Gains Tax Act, 1975. The respondent thereupon brought a Motion in the High Court before Carroll J seeking certain directions which included the following.
(1) Whether or not capital gains tax payable in relation to the sale is an ‘expense’ incurred in the realisation of an asset within the meaning r. 129 of O. 77 of the Rules of the Superior Courts which relate to winding-up.
(2) If it is, can it be deducted from the proceeds of sale payable to the mortgagees?
(3) Is the tax ‘a necessary disbursement’ of the liquidator under the third heading listed in r. 129?
O. 77 r. 129 appears under the heading:
XXII Costs and expenses payable out of the assets of the Company
The rule is in the following terms:
129.
(1) The assets of a company in a winding-up by the court remaining after payment of the fees and expenses properly incurred in preserving, realising or getting in the assets, including where the company has previously commenced to be wound up voluntarily, such remuneration, costs and expenses as the court may allow to a liquidator appointed in such voluntary winding up, shall, subject to any order of the court, be liable to the following payments which shall be made in the following order of priority, namely:
First, the costs of the petition, including the costs of any person appearing on the petition whose costs are allowed by the court.
Next, the costs and expenses of any person who makes or concurs in making the company’s statement of affairs.
Next, the necessary disbursements of the official liquidator, other than expenses properly incurred in preserving, realising, or getting in the assets hereinbefore provided for.
Next, the costs payable to the solicitor for the official liquidator.
Next, the remuneration of the official liquidator.
Next, the out-of-pocket expenses necessarily incurred by the committee of inspection, if any.
(2) No payments in respect of bills of costs, charges or expenses of solicitors, accountants, auctoineers, brokers or other persons, other than payments for costs, charges or expenses fixed or allowed by the court, shall be allowed out of the assets of the company, unless they have been duly fixed and allowed by the Examiner or the Taxing Master, as the case may be.
The first question asked whether the tax could be regarded as covered by ‘expenses properly incurred in preserving, realising or getting in the assets’, which are contained in the opening paragraph of the rule. Carroll J answered this question in the negative. No appeal has been taken against this decision nor do I think that any such appeal could succeed. By reason of this answer the second question did not arise.
The third question asked whether the tax was a necessary disbursement of the official liquidator within the meaning of the third paragraph. Carroll J answered this question in the negative. She did so because she was of the opinion that corporation tax was entitled to priority payment only in accordance with *331 its given priority as an ‘assessed tax’ under s. 285 sub-s. 2 (ii) of the Companies Act, 1963 (being a priority it was given under the Capital Gains Tax Act). This priority is given, however, only in relation to assessed taxes which are ‘assessed on the company up to the 5th April next before’ the winding-up.
As this tax was not so assessed but arose after the winding-up, it did not qualify for priority payment under s. 285 sub-s. 2(ii). Accordingly, in Carroll J’s view, to give it priority under r. 129 would be to make the rule dominate the section. Carroll J may well be correct in this view, but I do not think it necessary to base my judgment on this reasoning.
In my view, r. 129, as its heading indicates, is intended to deal with costs and expenses, and not with the liabilities of the company. Each of the paragraphs deals with either costs or expenses incurred by persons involved in the liquidation. The third paragraph must have the same meaning since the ‘necessary disbursements’ there referred to are expressed to be ‘other than expenses properly incurred in preserving, realising or getting in the assets herein before provided for’. Such must, therefore, be expenses of some other kind. I would imagine that what was intended were expenses such as necessary maintenance of buildings or wages for caretaking or for other purposes. In my view, such could not include a liability of the company for corporation tax. I agree, therefore, that the third question should be answered in the negative as it was so answered by Carroll J, but for the reasons I have indicated, I would dismiss this appeal.
In re Michael Clenaghan, a Bankrupt
High Court
3 February 1961
[1961] 95 I.L.T.R. 89
Budd J.
Budd, J.;
His Lordship having stated the facts said that the Bank wished to take advantage of the increase in the value of their security. If they were allowed to do so the practical result would be that there would be less for distribution amongst the general body of creditors as the appreciation in value of the stock would, if the stock were sold, come to be distributed amongst all the creditors; whereas if the bank were to be allowed to revise their valuation the difference would go to them.
In a case such as the present the Bank had three courses open to them. They could either sell the security and prove for the deficiency or value the security and prove for the balance or they could rely on their security and stay out of the bankruptcy altogether. If a secured creditor chose to come into the bankruptcy he must either value or sell before he proves and in this case the bank had valued and proved.
The court was charged with the duty of seeing that the general estate (that is that part of it other than that constituting the security) was divided equally amongst the general body of creditors. There was, to some extent a clash of interest between the secured creditor and the rest of the body of creditors. The secured creditor could not expect to have it both ways; if he were permitted to prove for the full amount of his debt, and, at the same time, to pay himself portion of his debt out of the secured property he would, to some extent, be getting paid twice in that he would be receiving a dividend on that portion of his debt which would be met out of the security. In other words he would be getting a dividend on a portion of the debt which would be paid off and non-existent when the security was realised. This would manifestly be an injustice to the general body of creditors. The Court by its rules and practice sought to strike a just balance between the secured creditor and the general body of creditors by insisting that, before he proved, the secured creditor must value his security and prove only for the balance.
His Lordship said the Counsel for the bank had stated that the basis for the application was that it was very difficult to value securities and that the Court had a wide jurisdiction to allow amendment. Order LXXXVIII, rule 100 had been referred to. The bank was a secured creditor and entitled to have the full advantage of its security. Continuing, his Lordship stated that the rules he was concerned with in the Motion were rules 86 and 87 of Order LXXXVIII, which were as follows: *89
86. A secured creditor whether in bankruptcy or arrangement unless he shall have realized his security shall previously to being allowed to prove or vote state in his proof the particulars of his security and the value at which he assesses the same, and he shall be deemed to be a creditor only in respect of the balance due to him after deducting such assessed value of the security.
87. The proof of any such creditor shall not be increased in the event of the security realizing a less sum than the value at which he has so assessed the same.
His Lordship then continued by saying that it could be remarked in passing that if a creditor were not to be allowed to increase his proof in the event of the security realising less than the sum at which he had assessed it, then it would at least seem illogical to allow the creditor to get a great deal more into his hands by increasing at a later stage the valuation which he had placed upon his security. Rule 100 is as follows:—
100. In any proceedings the Court may allow any amendments which in the judgment of the Court ought to be allowed on such terms as may be ordered.
The bank had relied on two cases; In re Greacen 31 I.L.T.R. 56 and In re Johnston [1929] N.I. 103. In Greacen’s Case a secured creditor, who had, by mistake, proved for the whole of his debt and failed to value his security, was allowed to withdraw his proof and value his security. Boyd J., had stated that he was entitled to do so as no one would be affected adversely by his doing so since he could have valued his security in the first instance. The report did not, however, suggest that a secured creditor having once valued his security could increase that valuation afterwards. In re Johnston was a very unusual type of case. Johnston had been adjudicated a bankrupt and was at that time indebted to the Ulster Bank. Prior to his adjudication the bank registered judgment mortgages against two farms belonging to the bankrupt. The bank valued the security and proved as unsecured creditors for the balance of their debt. Subsequently as a result of certain criminal acts on the part of the bankrupt, the value of the farms was so depreciated that they failed to realise the amount at which they had been valued by the bank. The official assignee had recovered sufficient assets to pay all the unsecured creditors twenty shillings in the pound, Brown J., had allowed the bank to increase their Proof of Debt remarking that he could find no precedent for the application. His Lordship stated that it had been the Proof that the bank had been allowed to increase in Johnston’s Case and not the valuation of their security. Further, the other creditors had received twenty shillings in the pound. Had the Order not been made the bankrupt would have been the gainer by his own criminality. In re Johnston had been heard in February of 1929 and later in the year the Bankruptcy Amendment Act (Northern Ireland), 1929, was passed. Under the provisions of rule 5 in the Schedule thereto a creditor could amend his proof and valuation on showing that the security had diminished or increased in value since its previous valuation. At the time of the passing of the Act the bankruptcy laws in Northern Ireland were in most respects similar to the Statutes operating here. It accordingly appeared that the Northern Legislature thought it necessary that express power should be given to a secured creditor to enable him to re-value his security after he had already valued it. That seemed to imply that the power to re-value did not previously exist.
His Lordship further stated that Counsel for the Bank had referred to In the Matter of an Arranging Debtor 45 I.L.T.R. 20. This again was a case of allowing a creditor to withdraw a Proof and value his security. There had not been a revaluation of a security.
It has been argued on behalf of the Official Assignee that the bank was bound by its 1956 valuation. If the bank were allowed amend its valuation there was no reason why an application should not be allowed each time there was a change in the value of stocks and shares. The Official Assignee had relied particularly on the wording of rule 86. The rule, it was submitted, had been designed to achieve finality: he had further relied on Ex parte King 20 L.R. Eq. 273.
His Lordship having dealt with the facts in King’s Case, continued, “The rule which Bacon C. J., had to consider is substantially the same in its terms as our rule 86 and the decision turned to a considerable extent upon the construction of that rule”. Bacon C. J., having cited the rule had said that it meant “he never can increase the amount of his Proof”. The learned Chief Justice had pointed out that if a creditor chose to retain the security at the value he annexed to it and he afterwards received more for it, that surplus would belong to the bankrupt’s estate and should be administered as part of it. He had said “But the creditor in this case comes within the very words of the Act and the Rules; he has said, let me prove and take my chance of getting the £1,200 if there is *90 a dividend of twenty shillings in the pound, subject only to the deduction of £200 at which I value my security. He has acquired that right. His Proof has been admitted on these terms. The Act and the Rules in my opinion apply in all their provisions, although it is by a mere accident that the value of the security has been shown by realization to be a great deal more than was contemplated by anyone at the time when the proof was admitted. I think that since the creditor has asserted and acquired the right to share in the bankrupt’s estate in respect of a debt of £1,200, reduced only by the £200, he cannot now say, I am entitled to retain that which I said was worth £200, but which has now turned out to be worth £1,200, while I rank as a creditor for the amount for which I have proved.”
Although the actual decisions themselves did not assist a great deal there were some observations in the cases of Couldery v. Bartrum 19 Ch.D. 394 and Deering v. Bank of Ireland 12 App.Cas. 20 which appeared to his Lordship to be of assistance. Jessel M.R., at page 401 of the former case dealt generally with the question of secured creditors in bankruptcy and in the course of his observations had stated: “Then there came cases in which it was not convenient to realise the security. It might be a doubtful security or the creditor preferred to keep it. How was the security to be dealt with then? This contrivance was adopted; instead of directing the security to be valued, as it would be abroad, by an official of the Court, the law allowed the creditor to value it himself, but said ‘Now mind, you shall never get any more out of it than the value you have put upon it’. That was the check which the law placed upon wrong valuations. The object was to get a creditor to value his security at as high a figure as possible, so that he might prove for as little as possible; and, therefore, when he was told ‘whatever you value it at you shall never get any more than that value for it’ of course he would not undervalue his security, because, if he did, he would lose the benefit of it beyond that valuation. That was the theory of the Bankruptcy Law, and that is kept up at the present day.” In the latter case Lord Watson, at page 27, had also dealt with the position of creditors who had valued their security and had said “So far as concerns the proceedings in Bankruptcy, the security is dealt with as having been realised and paid to the creditor, and his debt to the extent of its valuation or actual proceeds is extinguished, the balance unpaid being then treated as unsecured, and therefore admitted to proof”. His Lordship continued by saying that the Master of the Rolls and Lord Watson had both spoken as if the valuation made by the secured creditor was final and not subject to alteration and their views were entitled to great respect.
In the present case the bank had proved for £4,451 0s. 7d. and had acquired the right to do that on the terms that the security was valued at the sum of £163 2s. 6d. in just the same way as King had done. His Lordship said that there seemed very little difference between what was suggested by the applicant and the case of a secured creditor finding out on a sale that he had made an undervaluation and then coming in and asking the Court to be allowed to change his valuation then. The bank sought to have their security sold, they could sell it tomorrow, but could it be said that they could then come in and ask to have the valuation changed after the sale ? His Lordship thought not. There was not much difference between that course and coming on the present application, possibly the day before the sale, and asking to have what amounted to the same thing done.
His Lordship continuing said that the decisions cited by the applicant were not really in point and that the application stood without precedent. It might be a good thing to alter the law as had been done in Northern Ireland. He would express no view on that as it was his function to administer the law as he found it. While Ex parte King (supra) was not binding on him it was a decision of a Court exercising a very similar jurisdiction and he saw no valid reason for saying it was wrongly decided. It was quite against the applicant’s contention. Furthermore, the views of Jessel M. R., and Lord Watson, although obiter, supported the view that a valuation once having been made cannot be altered. The terms of rule 86 also seemed to support this view.
His Lordship further said that it was true that rule 100 allowed a very wide power of amendment and he was not prepared to say that an amendment of a valuation could never be allowed. Having regard, however, to the lack of precedent, in favour of doing so and the trend of the decisions referred to, it did seem a power that should only be resorted to in a matter of valuation, in some very extreme instance. His view was that a change in the value of a security did not ordinarily come within that category. If the present application were allowed there seemed no good reason why secured creditors should not be allowed amend their valuations with every rise and fall in the market. The better course was to follow what appeared to have been the practice heretofore. The applicant would not be allowed to amend his valuation *91 but an Order declaring the security well charged and an Order for sale would be made.
Green & Sons, Limited v Gogarty
High Court (Bankruptcy).
5 May 1926
[1926] 60 I.L.T.R 149
Johnston J.
Johnston, J.
The defendant is sued as one of the makers of two promissory notes on which he was surety for a debtor in an arrangement matter in bankruptcy, and his defence is that he was released from the debt by the conduct of the plaintiffs in accepting a dividend in a second arrangement matter instituted by the petition of the same debtor. The following are the admitted facts. The principal debtor took the protection of the Bankruptcy Court on March 10, 1924, and offered to pay twenty shillings in the £1 in six instalments payable after three, six, nine, twelve, fifteen and eighteen months. The first four instalments were secured by the debtor’s own notes and the last two by the notes of the debtor and John J. Gogarty, the defendant. This offer was confirmed on June 20, 1924, the plaintiff’s debt being £161 16s. 2d. The notes were duly lodged, and the debtor paid the first two of them and then made default.
On May 26, 1925, he presented a second petition for arrangement, offering two shillings and sixpence in the £ in cash. The plaintiffs did not appear at all at the first private sitting in this matter. They did appear by their solicitors at the second private sitting, when the offer was confirmed, but there is no record that they voted or otherwise took part in that proceeding. They proved for a debt of £108 10s. 8d. “for promissory notes not met,” and in the schedule to the affidavit of proof the four promissory notes made by the debtor and (as regards the last two notes) the defendant in the first arrangement and payable on March 20, June 20, September 20, and December 20, 1925, are properly set out. The proof did not expressly reserve any rights against the defendant as surety on the last two notes. The plaintiffs received a sum of £13 11s. 4d. by way of dividend in the second arrangement, and they have sued the defendant for £47 9s. 8d., being the amount owing on the last two of the promissory notes, less one half of the dividend paid in the second arrangement.
There is no doubt that, generally speaking, when a creditor binds himself to accept a composition on his debt from the principal debtor, the surety is released unless the creditor expressly reserves his rights against him. This rule is based not so much on any reason of consideration for the surety as on the supposed interests of the principal debtor. Patteson, J., in North v. Wakefield, 13 Q. B. 536, sets out very clearly the reason for this rule of law. He says:—“The reason why a release to one debtor releases all jointly liable *150 is because unless it was held to do so, the co-debtor after paying the debt might sue him who was released for contribution, and so in effect he would not be released; but that reason does not apply where the debtor released agrees to such a qualification of the release as will leave him liable to any rights of the co-debtor. Neither does such a clause qualifying the release operate as a fraud on other creditors, for as it appears on the face of the deed, all who execute that deed are aware of it and agree to it.” It has always been held, however, that that rule of law does not apply in the case of composition proceedings carried through in a court of law, the reason being, firstly, the publicity which such a proceeding entails and, secondly, the fact that the carrying of the composition ultimately is effected “by operation of law consequent upon pending statutory liquidation” (per Vaughan-Williams, J., in In re London Chartered Bank of Australia, [1893] 3 Ch. 540), and not by the voluntary act of the parties. (That principle is statutorily recognised in ss. 59 and 64 of the Bankruptcy (Ireland) Act, 1872).
When an arrangement matter breaks down through the failure of the debtor to pay one of the instalments, the creditors are remitted to all their original rights, and they may sue the debtor for the whole of the debt, giving credit, of course, for any sums they may have received in the arrangement matter: In re Campion, [1899] 2 Ir. R. 112. But the creditors may also rely upon the rights that they acquired in the arrangement, and they may sue the debtor for the amount due upon each of the instalment notes as they fall due: In re Butler, 1 L. R. Ir. 225. A third state of facts may arise. If after the arrangement has broken down, the debtor presents a second petition for an arrangement, the creditor may prove in the arrangement for the original debt; but if he does so, he must give up all rights and securities that he acquired in the first arrangement: In re R., 23 L. R. Ir. 19. In that case creditors in a second arrangement matter sought to prove their original debt and at the same time retain the benefit of a security that they had acquired in the first arrangement. It was held by the Court of Appeal that the creditors “must make up their minds whether they decide to stand by the old composition or to abandon it in toto, except as regards the moneys they have actually received on foot of it.” FitzGibbon, L.J., said:—“The creditors must either give up all the first notes still unpaid, in which case we shall allow them to prove for [the full original debt]; or if they retain any of the notes, they must keep them all and can only prove for the amount of them.” It seems to me that this decision, coupled with the decision of the Court in Provincial Bank v. Cussen, 18 L. R. Ir. 382, is absolutely conclusive in the plaintiff’s favour. In the latter case it was held that though a surety is discharged when the creditor gives time to the principal debtor, the same result does not happen if the indulgence is the judicial act of a bankruptcy court, even though it is done with the consent of the creditor.
The same principle was applied by the Court of Appeal in England in 1875 in In re Jacobs, L. R. 10 Ch. App. 211. In that case Sir William James, L.J., reading the judgment of Mellish, L.J., said:—“There can be no doubt that if the holder of a bill, by becoming party to a deed or agreement, independently of any Bankruptcy Act, agrees to accept a composition from the acceptor, he thereby discharges the drawer; but on the other hand, it is equally clear that if the acceptor is discharged from his liability by operation of law by becoming a bankrupt, the liability of the drawer to the holder is not thereby affected.” I think that the same reasoning applies in the case of two persons jointly liable on a note as principal and surety. Sir William James continues (p. 214):—“We think that a discharge of a debtor under a composition or liquidation is really a discharge in bankruptcy by operation of law,” for the reason that under the Bankruptcy Act, 1869, “the proper majority of the creditors have power to assent to the terms by which the debtor is to be discharged whether the creditor who is the holder of the bill chooses to attend or not or chooses to vote or not.”
It necessarily follows that if the creditors’ rights against a surety are preserved as a matter of law, no express reservation of his rights by the creditor is required, and as a matter of fact that matter was also decided in In re Jacobs and in In re London Chartered Bank of Australia, L. R. 10 Ch. App. 211, [1893] 3 Ch. 540.
The only matter that might obscure (to use Mr. Henry’s phrase) the application of the principle on which I base my decision is the fact that the dividend which was carried in the first arrangement was one of twenty shillings in the £; but it seems to me that the rule of law cannot be held to be dependent on the amount of the dividend—it must be the same whether the dividend is twenty or only five shillings in the £. It is clear that the creditors “stood by the old composition” (to use Lord Ashbourne’s phrase in In re R., 23 L. R. Ir. 19), and they are therefore entitled to all the benefits of the composition. *151
There must therefore be judgment for £47 9s. 8d.
In the Irish Aero Club;
Gillic v. Minister for Industry and Commerce and Minister for Defence
[1939] IR 207
Gavan Duffy J. 207
This case has raised some interesting and difficult questions at law, but I shall confine myself to deciding those matters which, in my view of the position, are material to my judgment.
The Irish Aero Club, Limited, is in voluntary liquidation;its assets are not likely to realise much over £300, while the Liquidator has received claims exceeding £900 and has the costs of liquidation to meet. He accordingly asks the Court to decide: 1, whether a claim by the Minister for Defence for some £260 is a valid claim, 2, whether, if valid, it is payable in priority to the claims of the general creditors, and 3, whether a claim by the Minister for Industry and Commerce for £35, aerodrome licence fees, is payable in priority to the claims of the general creditors.
The bulk of the claim of the Minister for Defence which the Liquidator attacks as a commercial transaction, is for repairs done to the Club’s aircraft, together with a small claim for their daily inspection; the rest of the claim is nearly all for services rendered in connection with the King’s Cup Air Race, 1937, and is of a type which may have been contemplated by the relevant Appropriation Acts. All the claims arise from informal, but definite, arrangements between the Club and the Department of Defence; it is admitted that the several services were satisfactorily rendered and there is no suggestion of any overcharge.
The Liquidator seeks to repudiate these claims on the ground that the Minister had by law no authority to render the services, in other words, that he exceeded his powers under the Defence Forces Acts and the Ministers and Secretaries Act, 1924 (No. 16 of 1924). It is not suggested that the Minister did anything prohibited by law of course, he could not recover on an agreement that the law forbids. Nor can the Minister’s charges be attacked as disguised taxation, and therefore illegal; they are not taxation at all, because they are simply claims for services voluntarily rendered or for facilities voluntarily provided, and not demands made by virtue of the sovereign power of the State: cp. Packet Co. v. Keokuk (1).
Now, there are several ways in which, and many occasions on which, ultra vires action may successfully be challenged, but, valuable as the doctrine of ultra vires has proved to be as an instrument of defence in the hands of a body that has exceeded its power, it is generally out of place as a weapon of offence against such a body in the hands of a person seeking to impeach a transaction, fully completed, especially when he has enjoyed all the benefit, without giving the payment which he promised in return. For this purpose the Liquidator is in the position of the Club and cannot resist a claim which the Club wouldhave had to honour. In my view it was not open to the Club, and is not open to the Liquidator, in the absence of illegality, at once to approbate and reprobate; I do not think that the persons to whom the Minister has given full value at their request can now turn round and question his power to render the services, of which they have reaped the full benefit, after he has performed his whole bargain. Consequently, the Minister is entitled to recover his claim: Hull Flax Co. v. Wellesley (1); Bournemouth Commissioners v. Watts (2); In re Irish Provident Assurance Co. (3); R. v. Taylor (4).
But a radically different issue is raised, when the two Ministers claim, not payment merely, but preferential payment in full before the general creditors get anything. This claim was put upon two distinct grounds: 1, because the money is “due or payable to or for the benefit of the Central Fund” and accordingly has the special priority conferred upon certain assets of the Central Fund by s. 38, sub-s. 2, of the Finance Act, 1924 (No. 27 of 1924), and 2, because the State is entitled to enjoy the prerogative which accorded to the British Crown a right to payment in full in priority to its subjects; but, in the course of the hearing, Mr. Dixon, on behalf of the two Ministers, has expressly abandoned this second claim, very properly, if I may say so, for such a claim would be hard to reconcile with the Constitution.
The Central Fund is the national fund to which (apart from certain exceptions) all the revenues of the State, from whatever source arising, belonged under the late Constitution and belong under the Constitution of Éireann: see Constitution of Saorstát Éireann , Art. 61; Adaptation of Enactments Act, 1922 (No. 2 of 1922), s. 1; Constitution of Éireann , Art. 11; Constitution (Consequential Provisions) Act, 1937 (No. 40 of 1937), ss. 6, 7. The Liquidator, in my opinion, has a right, on behalf of the general creditors, to challenge the Ministers’ claim to priority. But the Act of 1924 speaks both of moneys”due” and of moneys “payable” to or for the benefit of the Central Fund. If the moneys now in question are payable for the benefit of the Central Fund, it matters not whether they are due legally or not. Now, I have held that the Liquidator must pay the Minister without questioning the lawfulness of the claim, in the circumstances of this case; in his turn the Minister, once he has got the money for the State, must pay it to or for the benefit ofthe Central Fund; I think it follows that this money, whether due or not legally, is “payable for the benefit of the Central Fund.”
The question is whether the money, being so payable, has the priority claimed for it. Mr. MacBride for the Liquidator says “No,” on the ground that s. 38, sub-s. 2, of the Act of 1924 confers special priority only on taxes and duties, whereas the licence fees claimed by the Minister for Industry and Commerce are no more taxes or duties than the miscellaneous revenue claimed by the Minister for Defence. This question is of practical importance in a country where the State retains to-day in all or most cases of insolvency a priority which it has given up in the country from which we take most of the working principles of our law. The question was expressly left open by the Supreme Court in McIntosh v. Thompson & Co. (1), and it is in the public interest that it should now be decided.
I have sufficiently described the claim of the Minister for Defence. The claim of the Minister for Industry and Commerce appears to be for fees payable on a licence authorising the use of an aerodrome as a regular place of departure and landing for aircraft carrying passengers or goods for reward: see the Air Navigation (General) Regulations, 1930 (Stat. R. & O., 1930, No. 26), Arts. 64 (1) and 87, and Sched. II c, and the Air Navigation and Transport Act, 1936 (No. 40 of 1936), s. 15. These fees are fixed by the Regulations themselves, which were made by the Governor-General on the advice of the Executive Council; they are not imposed by the Minister for Finance, nor with his official concurrence; they are described as”fees,” not as taxes or duties, and I am not at liberty to place them in the category of taxes and duties from the mere fact that they are payments imposed by authority, when the expert departmental draftsman has classified them as fees. The distinction is real and led to the passing of the Public Offices Fees Act, 1879, which does not apply to Customs duties (see s. 7) and under which the Air Navigation (Collection of Fees) Order and Regulations (Stat. R. & Or., 1934, Nos. 360 and 361) were made as to the method of payment, though these fees are, of course, payable for the benefit of the Central Fund: Act of 1879, s. 6; Regulations of 1934, Art. 4.
The Finance Act, 1924 (No. 27 of 1924), is divided into five Parts:I”Income Tax”; II”Customs andExcise”; III”Death Duties”; IV”Corporation Profits Tax”; and V”Miscellaneous and General”; there are four schedules. The titles of the first four Parts speak for themselves; Part V, if I omit s. 38, sub-s. 2, which is in dispute, deals only with various taxes and duties and matters incidental thereto; the same obervation applies to the schedules. Sect. 38 has two sub-sections; the first deals with taxes and duties under the care of the Revenue Commissioners and fines incurred in connection therewith which shall be deemed to be debts due to the Minister for Finance for the benefit of the Central Fund and shall be payable to the Revenue Commissionersnote the words”due” and “payable”and recoverable at the suit of the Attorney-General; then comes sub-s. 2:”Moneys due or payable to or for the benefit of the Central Fund shall have and be deemed always to have had attached to them all such rights, privileges, and priorities as have heretofore attached to debts due to the Crown”; the intended priority is clear, even if the assumed continuance of the royal prerogative under the then existing Constitution be open to question. The only doubt is as to the scope of the sub-section.
The wording, taken by itself, is wide enough to include the moneys now claimed by both Ministers. But, if the Oireachtas really intended to make so sweeping a declaration of priority for revenue of every description, one would have expected that so far-reaching a claim for the State would have had a section to itself; at least one would not have expected to find it rolled up with an introductory sub-section concerning the position and enforcement of taxes and duties under the care of the Revenue Commissioners. And one would certainly not, without the plainest wording to show that the Act was now launching out into a far wider topic, have looked for this declaration concerning all revenue of every kind in a sub-section of an Act dealing from the beginning to the end (including the schedules) with taxes and duties or matters incidental to taxes and duties.
I do not believe that the Legislature intended in s. 38, sub-s. 2, to deal with anything but taxes and duties under the care of the Revenue Commissioners, and this conclusion is fortified by s. 44, sub-s. 3, as to the dates at which different provisions come into force, a sub-section which, whatever other criticism may be made of it, carries the plain implication that the scope of the Act comprises income tax (including super tax) and other taxes and duties. I construe the Act on the long established principle that “the construction of a statute is best made ex visceribus actus” (Co. Lit. 381 a) and, so construing it, I hold that it was not intended to give priority either to the licence fees claimed by the Minister for Industry and Commerce or to the miscellaneous revenue claimed by the Minister for Defence. Cp. Ingram v. Drinkwater (1). The result is that the State in respect of these claims will get its dividendspro rata with the general creditors.
Olpherts, Deceased
Olpherts v Coryton
Supreme Court of Judicature.
Court of Appeal.
24 February 1913
[1913] 47 I.L.T.R 102
Barry L.C.1Holmes, Cherry L.JJ.
Barton, J.—This is a motion on behalf of two of the defendants, Lionel Charles Frith Wynne and the Reverend Henry Haworth Coryton, executors of the will of the late Francis Montgomery Olpherts, for an order declaring them entitled to be paid four sums of £1,000, £1,550, £1,820 1s. 11d., and £3,000, being claims 2, 15, 19, 26 in the Fourth Schedule of the Chief Clerk’s Certificate in priority to all other claims. The suit is for the administration of the estate of Richard Olpherts, deceased. Francis M. Olpherts was one of his executors, and this claim is founded upon the right of retainer as executor. I shall, for shortness, refer to him, where it may be convenient to do so, as “the executor” The claim is, of course, made only against the personal estate of the deceased. There is about £6,750 representing pure personal estate. As regards three of these claims, there is now very little dispute, a question about interest having been withdrawn from discussion. The controversy arises as to the claim No. 15 for £1,550, arrears of an annuity of £100, which the executor or his representatives have since the death of the testator paid to Mrs. Louisa Olpherts who was widow of Colonel Henry Olpherts, a brother of Richard Olpherts, and of the executor. This annuity of £100 was payable to Mrs. Louisa Olpherts under the will of her husband, of which the testator, Richard Olpherts, and Francis M. Olpherts were trustees. The suit is an old one, in which the Vice-Chancellor made his primary decree on Feb. 14, 1894. The executor, Francis M. Olpherts, filed his affidavit of claim on Sept. 24, 1894. That claim comprised a number of payments for interest upon mortgages and promissory notes, in which Francis M. Olpherts had joined as surety with his brother. The claimant, in his affidavit, made his claim in a form which is usual in the case of a surety. He alleged that *103 in all these transactions he had joined solely as surety, and had received no payment or satisfaction or security in consideration of so doing. The executor then proceeded to make his claim with reference to this annuity in the same shape and form as if this was some similar mortgage or obligation in which he had joined as surety, in the same way as he had in the mortgages and promissory notes already referred to That was, in my opinion, a mistake. It was an intelligible mistake, having regard to all the other transactions in which he had been surety, and also having regard to the fact that in one aspect of this claim he had a right of indemnity against the testator. The Court can, however, give effect to the claims without strict reference to the form of the claimant’s affidavit. His claim was set forth in paragraphs 9 and 10 of the affidavit of claim. He represented that by deed of Feb. 21, 1871, he and testator had covenanted to pay to Mrs. Louisa Olpherts an annuity of £100 bequeathed to her by the will of her husband, Henry Olpherts, the payment of which the testator took upon himself having acted in the trusts of the will and on account of portion of the assets having come to his hands. He then says that he (Francis M. Olpherts) had received no payment, satisfaction or security in consideration of executing the deed, and that he executed it solely as surety. He further says that he had taken credit in his executor’s account of personal estate, for £146 0s. 10d. paid by him in pursuance of the said covenant, and that he claims to be paid out of the estate of Richard Olpherts all further sums as he shall from time to time be obliged to pay as such surety. In fact he treats it just like the numerous mortgages in which he had joined as surety, as regards none of which is any question raised. The Chief Clerk’s Certificate was not made up until seven years afterwards, Jan. 18, 1901. The executor’s claim does not figure in it, bcause the executor had taken credit for his payments in the executor’s account, and had declared his intention of claiming any payments of the annuity made or to be made after the testator’s death. The claim of Mrs. Louisa Olpherts against the testator for arrears of her annuity appears No. 15 in the list of creditors (Schedule four to Certificate): Arrears of annuity to April 30, 1894, £1,085; value of annuity on April 30, 1894, £969 4s. 11d.: interest thereon at 4 per cent. from April 30, 1894, £260 10s. 10d.; cost of claim, £2; total, £2,316 5s 9d. The present application treats Francis M. Olpherts as surety. He, or his estate, has paid the annuity since testator’s death, for 15½ years = £1,550. It is claimed now that the value of the annuity fixed by the Chief Clerk in 1901 in favour of the annuitant be cancelled, and that the applicants be declared creditors for £1,550, and that the annuity be now revalued and be paid to them as a provision against the future gales of the annuity for which the testator’s assets were liable. It appears from the recitals in a deed of Feb. 26, 1871, that Colonel Henry Olpherts, by his will, bequeathed to his wife, Louisa Olpherts, this annuity of £100 a year, and appointed Richard Olpherts and Francis M. Olpherts to be trustees of the will, and appointed one Sankey executor, to whom alone probate was granted in India where Col. Olpherts died on Nov. 5, 1860, leaving Mrs. Louisa Olpherts, his widow, surviving. The deed then recites that Richard Olpherts, acting in execution of the trusts, by reason of assets which had come to his hands, took upon himself the payment of the annuity and paid it to Mrs. Louisa Olpherts up to May 5, 1864, and that by deed of Aug. 23, 1864, he had secured the further payment of the annuity by assignment to her of a mortgage of £3,000 (referred to as the Verschoyle charge), which he now wished to pay off, and for that purpose to have it released from the payment of the annuity and to make substituted provisions for the payment of annuity. The deed then proceeded to give the annuitant a first security, and Richard Olpherts and Francis M. Olpherts joined in covenanting for themselves, their executors, administrators and assigns, to pay the annuity to Mrs. Louisa Olpherts. There is nothing on the face of the deed to show that Francis M. Olpherts was or was not a surety for his brother Richard. He was a necessary party to the deed in respect of a release which was given to him and Richard in respect of another matter by Mrs. Louisa Olpherts. It was recited that he was one of the trustees in the will of Col. Henry Olpherts. It is left perhaps ambiguous whether he had acted in the trusts, and whether he was joining in the deed as a trustee responsible to Mrs. Louisa Olpherts as such trustee, for the payment of the annuity, or whether he had never acted in the trusts and was only joining in the deed as surety for his brother. After Richard’s death, a deed was executed on May 1, 1895, to which Francis M. Olpherts, Mrs. Louisa Olpherts, and Edgar F. Jenkins (as trustee) were parties. This deed recites the will of Col. Henry Olpherts and that Richard and Francis M. Olpherts were appointed trustees of that will. It then recites that Francis Montgomery Olpherts received certain benefits under the will, to be paid on Mrs. Louisa Olpherts’ death, and that the trustees were to pay to Mrs. Louisa Olpherts an annuity of £100 for her sole use. The deed then recites the deed of Feb. 21, 1871, already referred to, by which Richard Olpherts and Francis M. Olpherts had covenanted to pay the annuity, and that there was £1,128 3s. 4d. due to be paid of the annuity. By the deed Mrs. Louisa Olpherts then proceeded to release Francis M. Olpherts from any liability for these arrears, and Francis M. Olpherts provided security for the future payment of the annuity. She also covenanted to take all sums received from the estate of Richard Olpherts, deceased, in excess of the £1,128 3s. 4d arrears, in part payment of the annuity, and she covenanted to prosecute her claim against Richard Olpherts’ estate, and for that purpose, if necessary, to put a value on the security given to her for the payment of the same by the deed of 1871. The deed contains a proviso that if Francis M. Olpherts should fail to pay the annual sum covenanted to be paid by the deed or any instalment thereof, Mrs. Louisa Olpherts shall be able to put in force not only the remedies afforded by these presents, but also take such action against the said Francis M. Olpherts, whether in regard to her rights under the deed of Feb. 21, 1871, or in regard to the administration or maladministration of the estate of the said Henry Olpherts, or to enforce her other rights in any manner however in all respects as if this indenture had not been entered into. I infer from these deeds that Francis M. Olpherts had been, from the first, responsible to Mrs. *104 Louisa Olpherts for the annuity as trustee under Col. Henry Olpherts’ will. Otherwise what is the meaning of the recitals in this deed that the trustees, including himself, were to pay the annuity, and of the provision that in the event of failure on his part to discharge his obligations under the deed Mrs. Louisa Olpherts would be at liberty to put in force against him her remedies for the administration or maladministration of the trusts of her husband’s will? How can I infer that he never acted in these trusts and was never responsible to her? I inter it was Richard who got the assets, and who was what I may call the guilty trustee in the matter. As between Francis and Richard, Richard, who alone derived a personal benefit from the trust, is liable, and is bound to indemnify his brother. (See Bahin v. Hughes, 31 C. D. 390.) But towards the cestui que trust Mrs. Louisa Olpherts, Francis M. Olpherts was just as liable for the annuity as Richard. I cannot therefore infer that it was as surety he entered into the deed of 1871. His position is that he was personally responsible to Mrs. Louisa Olpherts as one of her trustees, and that he had undertaken to pay the annuity under the deed of 1895. The result is that his obligation under the deed of 1871 towards her only arises and revives, if he fails to discharge his obligations under the deed of 1895. He was at the death of his brother entitled to claim the value of his right of indemnity. He did not do so, but gave notice of his claim. The estate has not been fully administered, and the residue is not distributed. He can come in now and claim for what he has paid, and the value of his right of indemnity. He is not too late. It is not a duplicated claim. He is not a surety, but a person who has a right of indemnity in respect of which he can claim with other creditors. Mrs. Louisa Olpherts has not been paid anything out of the estate, and not having been paid anything, she can amend her claim. The Court will see that while the estate discharges its obligations, it does not pay twice over. The annuitant has covenanted with Francis M. Olpherts to take all sums, which she may recover in excess of arrears, in part payment of her annuity. Therefore the amount which may now be fixed as the value of the annuity must be retained in Court. Francis M. Olpherts will be entitled to a stop order against it. If he pays her annuity until her death he will be entitled to be paid that sum. If he fails to pay the annuity the annuitant will be at liberty to apply with reference to it, because on failure to pay her annuity all her pre-existing rights revive as against Francis M. Olpherts. The claim is made in respect of claim 15 as the claim of a surety who has paid the principal debt. The true foundation of the claim is, in my opinion, the right of an innocent trustee to be indemnified by a guilty trustee. In my opinion the claim should be a separate claim of that kind. The claim would, if the trust had been originally under seal, be a specialty: Lockhart v. Reilly (1 De G. & J. 464, 479): Lewin on Trusts (8th ed.), 1117. Here the trustees joined in executing a deed, and so made it a specialty debt. Apart, however, from that view of the case, I am prepared to hold that the executor’s retainer takes priority of specialty creditors. The English Judges seem to consider themselves bound by practice and authority to hold the contrary against their better opinion,2 and I find that no such practice is known in my chambers for the past twenty years. That leaves me free to follow the opinion of the English Judges, with which I respectfully agree, rather than the decisions to which they reluctantly defer.
Appeal
Holmes, L.J., held that, on the facts disclosed by the deeds and affidavits, the most that Francis M. Olpherts was entitled to, as regards proof against the assets of Richard, was to stand in the place of the annuitant in respect of the annuity, which had been valued by her at £969 4s. 11d., and that his executors were not entitled to be indemnified by the estate of Richard in respect of the moneys paid by them on foot of the annuity. In a proper case there was jurisdiction to strike out a claim and substitute another claim therefor, but this was not a case in which that jurisdiction should be exercised. The valuation of the annuity at £969 4s. 11d. should be restored without prejudice to any application by the respondents to Mr. Justice Barton to ascertain whether and to what extent they were entitled to stand in the place of the annuitant.
Cherry, L.J.
In the view I take of the facts, it is unnecessary to decide any point of law. The annuity in question appears to have been charged by Col. Henry Olpherts on all his personal estate. It does not appear what that estate was. He appointed his two brothers, Richard and Francis, trustees of his will. He died in India, and beyond the recitals in the deeds there is no legal evidence of the contents of the will. The deed of 1871 recites that Richard, acting in the execution of the trusts of the will and by reason of the assets which had come to his hands, took upon himself the payment of the annuity. By that deed he gave his personal covenant to pay the annuity, and he secured the payment thereof by assigning a mortgage which was his own property and never formed part of the assets of Henry. Francis, up to that date, does not appear to have been treated as personally liable to pay the annuity. The deed of 1871 makes no mention of any personal liability on the part of Francis, and, in my opinion, it is clear that he joined in the deed, so far as the annuity is concerned, solely as surety and in no other capacity. The deed of 1895 is the most important. It recites the deed of 1871 and proceeds:—
“And whereas there is now due from the said Richard Olpherts (or he being dead from his estate) and from the said Francis M. Olpherts jointly and severally to the said Louisa Olpherts under the covenant by them contained in the said indenture of Feb. 21, 1871, the sum of £1,128 3s. 4d. in respect of the arrears of the annuity thereby covenanted to be paid by them.”
It then recites an agreement by Louisa to release Francis from all liability in respect of these arrears upon having the future payment of the said annuity of £100 and an additional sum of £62 12s., making together £162 12s., secured by him. It witnesses the release by Louisa of all claims against Francis in respect to the said sum of £1,128 3s. 4d. for arrears of said annuity under the said covenant conditional on punctual payment of the said annuity of £162 12s. Francis then gives security for the future payment of the annuity and gives his personal covenant to pay it:—
Provided always, and it is the true intent of these presents, that the said Louisa Olpherts shall not be entitled to claim against the said Francis M. Olpherts or his estate or effects more than the said annuity or sum of £162 12s. per annum during her life, notwithstanding the covenant on the behalf of the said Francis M. Olpherts contained in the said indenture of Feb. 21, 1871, and further, that all sums (if any) recovered in excess of the sum of £1,128 3s. 4d. upon a claim which she had lately lodged against the estate of the said Richard Olpherts in respect of the arrears of the future accruing gales of the said annuity of £100 secured by the said indenture of Feb. 21, 1871, shall be taken by her in part payment of the said annuity or sum of £162 12s. hereby covenanted to be paid: *106 … And the said Louisa Olpherts hereby covenants with the said Francis M. Olpherts that she, the said Louisa Olpherts, will forthwith take the necessary steps to make and substantiate as far as it is in her power so to do a claim against the estate of the said Richard Olpherts at present being administered in the Chancery Division of the High Court of Justice in Ireland for the accruing gales of the said annuity, and will for that purpose, if necessary. put a value on the security given to her for the payment of the same by the said indenture of Feb. 21, 1871.
The provisions of this deed were acted on by all parties. Mrs. Louisa Olpherts proceeded to prove her claim, and valued her annuity as of April 30, 1894, at £969 4s. 11d. Francis paid her the annuity as provided by the deed, and as long as he lived this was acted upon. Now, after his death, his executors seek to expunge this altogether and make a fresh claim. In the view I take of the arrangement between the parties by the deed of 1895, nothing can come to Francis out of the estate of Richard, in respect of the annuity, until Mrs. Louisa Olpherts, or her representative, is paid in cash the sum of £1,128 3s. 4d. If the present application were allowed it would mean a double claim against the estate. As regards the alleged breach of trust, I cannot see any evidence of it. No such claim was made by Francis during his life, and it cannot be allowed now, twenty years after his death. It is unnecessary to decide whether s. 256 of the Bankruptcy Act of 1857 has any application.