Case law update
IPA Insolvency Practitioner newsletter, February 2022
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An insolvency case law update prepared by Neil Stewart, Associate Director at Manolete Partners PLC.
Bucknall & Roach v Wilson  EWHC 2149 (Ch)
In May 2020, eyebrows were raised across the profession regarding the decision at first instance in the case of Bucknall & Roach v Wilson. The decision on appeal, on 30 July 2021, was no more palatable to many IPs.
Why was the first judgment surprising?
The trial judge, ICC Judge Jones, found that the trustees had established all the elements of a preference claim. Ms Wilson’s defence, in which she had tried to rebut the statutory presumption of the bankrupt having been influenced by a desire to prefer, had failed. Furthermore, the judge made no criticism of the trustees in bankruptcy in bringing the preference claim against the respondent, Ms Gina Wilson. They had, after all, simply done their job and treated Ms Wilson perfectly fairly.
The judge nevertheless decided to make no order for relief, on the basis that restoration would be unfair and unjust.
In a bitter dispute, Mark Fowlds, the bankrupt’s son, successfully sued his father, Peter Fowlds, as a result of which the bankrupt became indebted to him in a sum exceeding £700,000. Mark Fowlds ended up being the only significant creditor in Peter Fowlds’ subsequent bankruptcy.
Within the two years immediately preceding the commencement of the bankruptcy, the bankrupt paid a sum of £47,675.51 to his stepdaughter, Ms Wilson, in partial satisfaction of her invoices to him for accountancy services that she had provided during the litigation. The bankrupt did not pay a penny to his son, but he paid all his other creditors in full.
Decision at first instance
The main justification for making no order for relief was that Ms Wilson had, in good faith, changed her position. She no longer had the money because she had used it to repay a debt to her father who had fallen on hard times and needed it to pay for his wife’s cancer treatment.
Ms Wilson had also paid some credit card bills but the precise details, including the split between the payment to her father and the payment of credit card bills, were never established.
If Ms Wilson now had to repay the money, she would have to sell her modest house and move to a less desirable area.
None of this had been set out in pre-action correspondence, nor in Ms Wilson’s witness statement (this was an Insolvency Act application without formal pleadings), nor was “change of position” expressly referred to at trial.
The alleged facts came to light only as a result of the judge’s own questioning of Ms Wilson. Furthermore, her story was unsupported by evidence and the judge chose not to follow the applicants’ counsel’s recommendation that the trustees be given an opportunity to investigate the previously undisclosed alleged facts.
Not surprisingly, the trustees appealed. The appeal judge, The Honourable Mr Justice Trower, disagreed with the trial judge on change of position, both in the approach he took to that issue and in the conclusion he reached. It may feature as a consideration but it is not the strong factor which the trial judge considered it to be.
The appeal judge nevertheless upheld the decision to grant no relief. The four reasons he gave for doing so are moderately complex but can be summarised as follows:
- The preference was not given to Ms Wilson because she was an associate; it was given to her simply because she was not Mark Fowlds. Imputing a motive to the bankrupt of wanting to prefer Mr Wilson because of his familial relationship with her is inconsistent with the fact that he paid her less than half the amount he owed, whereas he paid other creditors in full. Restoring the payment would therefore not be for the benefit of creditors as a whole.
- Ms Wilson’s claim for payment was akin to one made by an ordinary commercial creditor acting in good faith.
- Ms Wilson no longer had the payment. The impact on her of having to restore the payment would be wholly disproportionate to the benefit to the estate.
- There was really only one creditor in the bankruptcy so the balancing exercise of comparing the impact on the preferee with that on the sole creditor is possible, whereas it is neither practical nor desirable to do so in a genuine class action.
So, sorry Mr Fowlds junior, you are owed over £700,000 but the bankruptcy estate gets nothing and therefore your chances of receiving anything are nil.
There are many features of this case that call for comment. Here is a sample:
- Even with apparently strong claims where no defence with any realistic prospect of success has been put forward, it is still wise to step back and look at the overall picture. It might be worth asking “Will a judge feel comfortable making the order I am seeking, in these circumstances?”
- Both the trial judge and the appeal judge in this case are highly respected and experienced lawyers. But judges are human and often see cases very differently from each other. When reading a lengthy, carefully reasoned judgment on appeal, it is easy to think that the ultimate outcome was inevitable. That is rarely the case.
- Strange as it may seem, you cannot always rely entirely on the wording of statute. Section 340 of the Insolvency Act 1986 (the ‘Act’) says that, where a preference is established, “The court shall [not ‘may’ or ‘shall if it feels like it’] make such order as it thinks fit for restoring the position to what it would have been”. However, following Re Paramount Airways Limited  Ch 223, the phrase “such order as it thinks fit” is wide enough to enable the court to make no order at all against the preferee and that is what the judge decided to do.
You can push an analogy too far, but isn’t that like stepping into a cab and saying to the driver “I don’t care how you get there, but I need to get to Waterloo station” and the taxi driver saying “Well, in that case I won’t go anywhere”?
- “Change of position” is not a defence to a preference claim under section 340 of the Act, but you cannot ignore it because it is nevertheless a legitimate consideration for the court in deciding how to exercise its discretion.
In short, litigation is a risky business. Properly resourced litigation funding and acquisition companies such as Manolete are in that business and can remove the risk for office-holders entirely.
Content courtesy of IPA corporate partner Manolete Partners PLC.