Rescission of bankruptcy orders justified

LAW REPORT v 13 December 1995

Fitch v Official Receiver; Court of Appeal (Lord Justice Neill, Lord Justice Millett, Sir Iain Glidewell); 15 November 1995

A change of attitude of the petitioning creditor to the making of a bankruptcy order, supported by a substantial body of other creditors, justified the rescission of a bankruptcy order.

The Court of Appeal allowed appeals by the applicants, Anthony Edward Fitch and Janet Margaret Fitch, from Mr Justice Chadwick's refusal to rescind bankruptcy orders against them.

Bankruptcy orders were made against Mr Fitch, a chartered accountant, and his wife. Mr Fitch's statement of affairs showed a deficiency of some pounds 200,000 against secured liabilities and unsecured liabilites of pounds 60,000. Mr and Mrs Fitch applied for the orders to be rescinded under section 375(1) of the Insolvency Act 1986. The petitioning creditor and many other creditors supported the application, believing that there was a serious risk that the existence of a bankruptcy order against Mr Fitch would prejudice the recovery of a substantial asset for the estate.

Mr Fitch in partnership with Mrs Fitch was involved in the setting up of a business venture from which they would be entitled to introductory commission of pounds 112,500, pounds 150,000 consultancy fees over a two-year period and success fees of pounds 811,000 of which pounds 248,890 was already due. Nothing would be paid if the negotiations to set up the venture failed. The creditors were persuaded that the successful completion of the venture depended on Mr and Mrs Fitch not being known to be bankrupt.

Mr Justice Chadwick refused the application on the grounds that the petitioning creditor's change of attitude did not derive from new matters which were not available at the previous hearing and that the application involved the court in approving the deception that Mr Fitch was not a bankrupt.

Anthony Mann QC (Meade-King, Bristol) for Mr and Mrs Fitch; Stephen Moverley (Treasury Solicitor) for the Official Receiver.

Lord Justice Millett said that section 375 allowed the court to review and rescind or vary a order made by a court of co-ordinate jurisdiction. It applied to any order made in the exercise of the bankruptcy jurisdiction. An application under section 375 must be based on a change in circumstances since the order was made or, more rarely, on the discovery of further evidence.

Mr and Mrs Fitch accepted that the bankrupcty orders were rightly made. They based their application on the fact that circumstances had changed. They did not rely on the mere fact that the petitioning creditor had changed its mind, but on the fact that a large body of creditors, including the petitioning creditor, supported the rescission of the bankruptcy orders and that none of the known creditors opposed it.

If that had been the position when the bankruptcy orders were made, the petition would have been dismissed. The fact that the underlying circumstances which led the creditors to support the rescission of the bankruptcy orders had been known at that time did not prevent their change of attitude from being both new and relevant. Section 375(1) provided the only means of giving effect to the creditors' wishes that the bankruptcies should be discontinued.

There was no evidence from which the judge could properly conclude that Mr and Mrs Fitch intended to embark on a course of deception if the bankruptcy orders were rescinded. Mr Fitch was acting as an intermediary. His own creditworthiness was not directly relevant.

The judge exercised his discretion on an erroneous basis and the court must exercise it itself. The statutory discretion was unlimited. The inquiry on which the court embarked was whether the circumstances justified the rescission of the bankruptcy order, not whether they were sufficiently close to an informal scheme of arrangement. Re Izod [1898] 1 QB 24, as distinguished in Re a debtor (no 12 of 1970) [1971] 1 WLR 1212 did not lay down a rule of law fettering the discretion.

The discretion must be exercised with caution and only in exceptional circumstances. The circumstances in the present case were exceptional and justified the rescission of the orders.

Ying Hui Tan, Barrister