By Dave
15/03/2012

Proportionality and bankruptcy: On fish and terrapins

One question (of the many) arising from the watershed that is represented in English and Welsh law by Pinnock is just how far it extends.  We hope to have a Court of Appeal decision on private landlords and the application of proportionality soonish.  But there is also a question on the relationship between this new jurisdiction and that of bankruptcy sale proceedings.  Prior to Pinnock, there was a discussion in some of the cases about the overlap between section 335A, Insolvency Act 1986, and Article 8 (the starting point for this discussion is Barca v Mears [2004] EWHC 2170 (Ch), but that case is rather hopeless; more recent discussion has occurred in Foyle v Turner [2007] BPIR 43 and Turner v Avis [2008] BPIR 1143).

Section 335A(3) provides that, where the trustee makes an application for an order for sale in respect of property held by the bankrupt under a trust of land, and does so after the first year of the bankruptcy, “… the court shall assume, unless the circumstances of the case are exceptional, that the interests of the bankrupt’s creditors outweigh all other considerations”.  It is designed to retain the kind of fervour for bankrutpcy trustees which was exemplified by the extremely unfortunate judgment of Nourse LJ in Re Citro [1991] Ch 142 (homelessness, moving, changing schools are not exception but “the melancholy consequences of debt and improvidence with which every civilised society has been familiar”).

The question comes down to whether the exceptional circumstances test works with the proportionality test.  There was full argument on this issue in Ford v Alexander [2012] EWHC 266 (Ch), which includes discussion of the horizontal application of Article 8 to such cases.  Although Peter Smith J refused permission to appeal, which means it’s non-binding, there are some interesting observations.  The Fords bankruptcy involved debts of around £262,500.  Their main asset was a studio flat worth around £40-55k.  The Fords resisted the trustee’s inevitable application for an order for sale with evidence of moderate depression as a result of their position, their non-priority need status for homelessness, and “They would also have difficult finding private rental accommodation due to their need to house their fish and terrapins …”  I have to say that this was hardly the most compelling evidence, but their counsel argued that section 335A needed to be read in concert with Article 8, post-Pinnock.  The district judge who heard the case disagreed that Article 8 required her to operate a different exercise from the wording of s 335A but also, as an alternative, held that it would not be disproportionate to order a sale on the facts.  And there was another problem: the Fords were seeking to resist the order not just for a limited period but indefinitely (or, as SJM and I now know, “permanently”).  Both the District Judge and Peter Smith J found it inconceivable on the facts before them to find that it was proportionate permanently to deprive the crerditors of any prospect of ever having any realisation out of the bankruptcy.  That was on the facts of this case and Peter Smith J concludes his analysis with the observation that “There may be a circumstances where it is proportionate permanently to deprive a Trustee but that is not the position in the present case” (at [39]).

He then discussed whether Article 8 had any relevant at all.  He recited paras [4] and [50] from Pinnock and there is a lengthy citation from Zehentner v Austria (noting that it was referred to in Pinnock “not on the point under consideration”), and taking the view that the circumstances of that case “were extremely unusual”.  Further, s 335A(2) and (d) “… provide a necessary balance as between the rights of creditors and the respect for privacy and the home of the debtor.  That balance serves the legitimate aim of protecting the rights and freedoms of others.  I am therefore of the opinion that the requirements of section 335 A satisfy the test of being necessary in a democratic society and are thus proportionate …  This was the conclusion in the pre Pinnock bankruptcy cases and I see no basis for coming to a different conclusion”.  I have to say that I am in almost entire disagreement with that comment.

What was not discussed was the role of “exceptionality” in Pinnock and its crossover with “exceptional circumstances”.  One might be able to have quite an interesting play there.

2 Comments

  1. SimonH

    I think that Peter Smith J got this one spot on, except in one respect: I find it very hard to see that there would ever be circumstances in which it would be proportionate to permanently/indefinitely deprive the trustee (for which read: “the bankrupt’s creditors”) of the order for possession.

    Bankruptcy is a social remedy which provides benefits to the debtor as well as to his (or her) creditors. It gives him a chance to escape his debts and make a clean break. The quid pro quo for this is that he has to give up his assets in order that his trustee can realise them and pay such dividend as he is able to the creditors. In the vast majority of bankruptcies the largest asset is the family home. I fail to see that it can ever be proportionate to give the bankrupt release from his debts without giving up his major asset.

    It is perhaps unfortunate that the Learned Judge didn’t consider the relevance of s.283A further in this regard. This ‘use-it-or-lose-it’ provision means that the trustee’s right to seek possession and sale of a family home is one which is limited in time. The trustee has three years to seek the order (only 2 with the presumption that the interests of the creditors outweigh all others). Once that time is up, there is no way of getting an order. It is entirely right that the sword of Damocles should not be left to hang over the head of the debtor indefinitely. However, it cannot be right that the debtor and the courts can put the trustee in a position where he is unable to use the sword at all.

    As an aside, it seems to me that Nourse LJ’s comment on the meaning of exceptionality in Re Citro is entirely correct. In order to give effect to the word ‘exceptional’, it is necessary to look at the usual case and see whether the case before the court has features markedly different from that norm. In order to make out a plea of exceptional circumstances, one must therefore show something beyond the usual consequences of debt and improvidence. The turn of phrase is a little rhetorical, I grant, but in effect is simply applies the usual rules of statutory interpretation in giving effect to all the words used by the legislature.

    Reply
    • dave

      Simon, I fear that we will have to agree to disagree on Nourse LJ’s comments and, in particular, whether they can live with the proportionality jurisdiction. I accept, of course, that proportionality is a balancing act, and the creditors’ interests do, and should, weigh heavily. However, I also think that there may be cases under this provision which do raise, in quite stark form, the proportionality of exceptional circumstances (if I can put it like that). It makes no sense to close off that jurisdiction entirely. But, on the facts of this case, I’m not sure I would have liked to have been in David Watkinson’s shoes, arguing that the fish and terrapins went to proportionality. Finally, in defence of the judge, he did cite section 283A fully in the judgment; I did not refer to it above because it was not subsequently considered by him and the application was made within the three year period.

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