In our latest blog post, John Vickery analyses a recent decision showing that the Court retains a discretion whether to make an order under section 340 Insolvency Act 1986 against a creditor of a bankrupt, even when the Court is satisfied that the creditor has received a payment in preference to the bankrupt’s other creditors.
Preference Claims: The Court’s Discretion
The recent decision in Re Peter Herbert Fowlds (a bankrupt) Bucknall and another (as joint trustees in bankruptcy of Peter Herbert Fowlds) v Wilson  EWHC 1200 (Ch) is a reminder that the Court retains a discretion whether to make an order under section 340 Insolvency Act 1986 against a creditor of a bankrupt even when the Court is satisfied that the creditor has received a payment in preference to the bankrupt’s other creditors.
Mr Fowlds, the bankrupt, was made bankrupt on a petition presented by his son. The son had obtained judgment against the bankrupt in litigation relating to their business. The respondent, the recipient of the ‘preference’, was the bankrupt’s step-daughter. The bankrupt had engaged the respondent to provide him with forensic accountancy advice for the purpose of the litigation for which she had raised various invoices totalling £99,330.
Within two months of the judgment and with permission to appeal having been refused, the bankrupt realised his assets and paid the respondent 48% of the debt due to her and paid all his other creditors, other than his son, in full.
ICC Judge Jones held that all the elements required under section 340 to bring successful claim were present: a bankruptcy order had been made: the payment had been made to a creditor within the relevant time; the bankrupt had been insolvent at the relevant time; the payment had the effect of putting the respondent in a better position that she would have been if the payment had not been made; and the bankrupt was influenced by a desire to put the respondent in a better position.
The issue was whether the Court should, nevertheless, exercise its discretion in favour of the respondent and not make a restorative order. Previous authority has determined that such discretion, where all other elements of the statutory provision are satisfied, will only be exercised in exceptional, “out of the norm” circumstances. The burden was on the respondent to demonstrate the case was ‘out of the norm’.
The Court considered the following factors:
- 1. The debt arose out of a normal commercial relationship and the payment was not influenced by the respondent being an associate. The facts did not fall within the usual justification for the extended ‘relevant time’ for family and associates;
- 2. The respondent played no part in the making of the preference. She had no reason to question the payment and acted in good faith;
- 3. The payment was no longer available to her. ICC Judge Jones made the point that this was relevant in two ways: First it is a “prerequisite” for the exercise of the discretion in any respondent’s favour; and secondly, relying on earlier authority, it would not be appropriate to make an order against a recipient who has changed position on the basis of the receipt in good faith (i.e. without knowledge of the possibility of preference) in a way that would make it unfair to require repayment of the money. As to these, the Judge found that the payment had been used to repay the respondent’s father who in turn had used the money to pay his wife’s medical bills.
- 4. The effect on the respondent would be disproportionate to the benefit to the bankruptcy estate. The respondent had limited income and to satisfy a restorative order she would have to sell her house. The proceeds of sale available to her would be insufficient to purchase another house in the same area. That, in turn, would have had a detrimental effect on her business and on her children (14 and 16 years old) who would have had to move school. The Judge accepted that this factor alone is not exceptional in cases of this kind but it is one factor which goes to the issue of justice and fairness and is one to be considered with the other factors when deciding if the case is ‘out of the norm’.
The Judge held that factors 1 and 2 and the ‘prerequisite’ were important foundations for the respondent’s argument but that they would be insufficient without the addition of either the change of position or proportionality factor. The Judge held that either of factors 3 or 4 when added to factors 1, 2 and the ‘prerequisite’ were sufficient to take the case ‘out of the norm’. The Judge therefore exercised his discretion in favour of the respondent and made no order.
In reaching his conclusion, the Judge made the point that this case had an unusual set of circumstances and facts and that ‘out of the norm’ cases will be rare.
John Vickery is a member of the Business & Property Department at 18 St John Street Chambers. If you have any queries about this or any other related subject, please feel free to contact us on our usual contact details and we will be delighted to assist you.