Stacks Living Limited & Ors v The Official Receiver & Anor

ICC JUDGE BURTON:

1. This is the hearing of applications in two connected cases pursuant to section 346(6) of the Insolvency Act 1986 (the “Act”). The Applicants seek an order to make final an interim charging order, notwithstanding that the judgment debtor, the First Respondent applied for, and obtained, a bankruptcy order between the making of the interim charging order and the hearing originally listed for 19 May 2025, to make it final.

2. The Applicants obtained a judgment against the First Respondent in two cases which were heard concurrently. ICC Judge Greenwood found that the First Respondent, had engaged in fraudulent trading and in one of the cases, that his long-term partner, the Second Respondent Ms Smith, had engaged in wrongful trading and breach of directors’ duties and in one of the cases, his long-term partner, the Second Respondent Ms Smith, had engaged in fraudulent trading . He, and latterly Ms Smith, used a series of company vehicles to trade from business premises, on each occasion seemingly paying all creditors other than the relevant local authority to which were due substantial non-domestic rates. The companies were then dissolved, leaving the rates unpaid.

3. The First and Second Applicant companies were wound up on petitions presented by a local authority. The Third Applicant is the liquidator of those two companies. He commenced proceedings in his own and the companies’ names against the Respondents in which on 21 January 2025 he obtained an order against the First Respondent for a judgment debt of approximately £567,000, including interest and costs. Interest continues to accrue at the rate of £124.45 per day.

4. On 12 February 2025, Deputy ICC Judge Lambert made an interim charging order over the First Respondent's interest in premises at Cornwall Drive, Stafford. He is the joint proprietor of the property with Ms Smith, whose interest was charged by way of a final charging order on 16 May 2025.

5. However, before the interim charging order was made final in respect of the First Respondent's interest in the property, he applied for his own bankruptcy. An adjudicator made a bankruptcy order against him on 1 May 2025.

6. The Applicants contend that the First Respondent applied for his own bankruptcy in order to frustrate their application for a final charging order and generally to impede the enforcement of the judgment debt against the property. They submit that this ill-motivated desire on the part of the First Respondent justifies the court exercising its extraordinary jurisdiction under section 346(6) of the Act , notwithstanding the intervening bankruptcy order, to make the interim charging order final,.

7. At an earlier hearing, I directed that the Official Receiver should be joined as a party to the application and given an opportunity to make submissions. The Official Receiver has been served with the application and has provided a report explaining that he takes a neutral stance, but drawing various matters to the court's attention, which I shall address in due course. Relevant statutory provisions

8. Section 285 of the Act provides that when proceedings on a bankruptcy application are ongoing, proceedings on a bankruptcy petition are pending or an individual has been made bankrupt, the court may stay any action, execution or other legal process against the property or person of the debtor, or, as the case may be, of the bankrupt.

9. Subsection 3 provides: "(3) After the making of a bankruptcy order no person who is a creditor of the bankrupt in respect of the debt provable in the bankruptcy shall – (a) have any remedy against the property or person of the bankrupt in respect of that debt, or (b) before the discharge of the bankrupt, commence any action or other legal proceedings against the bankrupt except with the leave of the court and on such terms that the court may impose. This is subject to section 346 (enforcement procedures) and 347 (limited right to distress)."

10. Section 346 provides, so far as relevant: "(1) Subject to section 285 in Chapter II (restriction on proceedings and remedies) and to the following provisions of this section, where the creditor of any person who is [adjudged] bankrupt has, before the commencement of the bankruptcy (a) issued execution against the goods or land of that person, or (b) attached a debt due to that person from another person, that creditor is not entitled, as against the Official Receiver or trustee of the bankrupt's estate, to retain the benefit of the execution or attachment, or any sums paid to avoid it, unless the execution or attachment was completed, or the sums were paid, before the commencement of the bankruptcy."

11. Subsection 5 provides: "(5) For the purposes of this section – … b) an execution against land is completed by seizure, by the appointment of a receiver or by the making of a charging order under that section."

12. Subsection 6 provides: "(6) The rights conferred by subsections (1) to (3) on the Official Receiver or the trustee may, to such extent and on such terms as it thinks fit, be set aside by a court in favour of the creditor who has issued the execution or attached the debt."

13. Each of subparagraphs 1 to 4 of section 346 is therefore directed at preventing a judgment creditor, following the making of a bankruptcy order, from upsetting the pari passu principle by enforcing its judgment potentially to the detriment of other creditors. They are therefore entirely consistent with section 285 and largely serve to reinforce its terms.

14. Subparagraph 5 explains what steps comprise the completion of various modes of enforcement.

15. Subparagraph 6 stands alone in providing discretion to the court to make an order, seemingly in contradiction of the general order of things according to section 285 .

16. As noted by Vaisey J in Re Grosvenor Metal Co Ltd [1950] Ch 63 , which involved the precursor to section 183 (which itself is the company liquidation equivalent of section 346 ) the Court's discretion to permit a judgment creditor to maintain the benefit of a charging order notwithstanding the intervening commencement of formal insolvency proceedings is wide. The court may make such order as it thinks appropriate including an order granting total or partial relief in favour of a judgment creditor. In that case, the judgment creditor was permitted to benefit from 50 per cent of what it would otherwise have received on enforcement.

17. The leading decision in relation to section 346(6) is a decision of Mann J in Tagore Investments SA v Official Receiver [2008] EWHC 3495 (Ch) . In that case, a judgment creditor obtained a final charging order in circumstances where it did not become aware that the debtor had been made bankrupt until after it had done so.

18. In this skeleton argument, Mr Fagan helpfully distilled the principles which Mann J considered in that case to be relevant, highlighting however, that the Judge clearly stated at the end of his judgment that the case before him was unusual and that the judgment should not be considered to establish any general principles about the relative weight of creditors' interest, or any general principle that charges can be set aside if brought about by the bankrupt just before a charging order is made absolute. Mann J described the case before him as one: "Which turns on its own particular and rather extraordinary facts, and which generates its own case of fairness."

19. As I shall soon explain, however, the facts of the case before me bear several striking similarities to those before Mann J, and in my judgment, the principles he extracted from earlier case law are, on this occasion, of considerable relevance to this case.

20. They are: "(1) That pursuant to section 346(6) , the court has a discretion and can and should do what is fair by reference to appropriate criteria. (2) In judging fairness, the: 'Prime circumstances … are those going to the enforcement of the judgment and the extent to which and the reasons for which the enforcement of the judgment has been frustrated.' (3) The emphasis should be on post-judgment events. (4) Pre-judgment events are relevant only insofar as they reflect on the quality of post-judgment events to enable: 'The court to draw an inference as to the motivation behind post-judgment events that might otherwise not be a proper inference to draw.' (5) The jurisdiction should only be exercised in an exceptional case. (6) There is a heavy burden on the Applicant to: 'Establish that the events which have happened have generated a sufficient unfairness if the execution is not allowed to stand, so as to generate an exception in his favour.'"

21. During the course of his judgment, Mann J also highlighted the importance of the Applicant not delaying its application to enforce the judgment.

22. Starting with this latter point, I am satisfied that in this case, the Applicants applied expeditiously for interim charging orders.

23. Turning to the second principle referred to in Tagore : in judging fairness, the court may take into account the extent to which and reasons for which the enforcement of the judgment has been frustrated. The emphasis should be on post-judgment events, although, as I have noted, pre-judgment events may be considered to be relevant where they enable the court to draw inferences regarding the motivation behind the post-judgment events.

24. The Applicants submit that the First Respondent's decision to apply for his own bankruptcy was cynical and likely motivated by a desire to make life as difficult as possible for the Applicants. They referred the court to correspondence passing between their solicitors and those acting for the First Respondent, initially reminding the First Respondent's solicitors of the deadline for payment of the judgment debt. 21 days later they served their application for a charging order. Included in the evidence is the Applicants’ solicitor’s attendance note of a telephone conversation the following day with the First Respondent's solicitor. She described the First Respondent's solicitor as: "Irate that the liquidators had 'sneakily applied for the charging orders' when he had contacted the Applicants’ solicitors to indicate that his clients would be putting forward proposals for payment."

25. I understand the reference to his clients to mean both the First Respondent and Ms Smith. A week later, the First Respondent’s solicitors wrote to the Applicants’ solicitors advancing an open offer from Ms Smith to pay £70,000 in respect of her 70 per cent share in the equity of the property, and for the First Respondent to: "Pay his 30 per cent net share of the available equity in full and final settlement."

26. The letter continued: "If this is not acceptable to your client, then we anticipate that he will declare himself bankrupt."

27. Their letter enclosed details of the debt due to the Respondents’ mortgagee and copy valuation information. The valuation information suggests that Ms Smith's 70 per cent interest in the property is worth significantly less than the £70,000 being offered. The offer consequently appeared to be to settle both Respondents’ liabilities to the Applicants.

28. As part of this application, the Official Receiver has provided details of the First Respondent's other creditors. After the Applicants, the First Respondent’s second largest creditor is already secured against the property. The only other significant unsecured creditors are HMRC for unpaid PAYE and the First Respondent’s solicitors. There is no evidence of HMRC exerting any immediate pressure to pay, other than presumably the usual imposition of penalties and interest where payments are late. As the First Respondent's solicitors appear to continue to act for him, they too do not appear to be pressing for payment.

29. The statement of affairs prepared by the Official Receiver using information provided by the First Respondent, states that his bankruptcy was precipitated by action on the part of the Applicants in respect of the judgment debt obtained against him. No mention is made of any other creditors pressing for payment.

30. Taking into account the following factors, in my judgment, it is more likely than not that the First Respondent applied for his own bankruptcy at that particular moment, not with a view to protect the interests of his creditors as a whole, but in order to frustrate the Applicants’ ongoing efforts to obtain a final charging order against his property and in order to put further obstacles in their way until they were eventually entitled to receive some form of distribution from his bankrupt estate.

31. Those factors are: (1) no other creditors appear to have been pressing for payment at the time the First Respondent applied for his own bankruptcy; (2) when he made that application, he was well aware that the Applicants had already obtained an interim charging order against his property and were seeking to make it final; (3) the First Respondent's solicitors presented an open settlement offer stating, notably after the Applicants’ solicitors’ reference to them being “irate”, that in the event that the offer were not accepted, the First Respondent would apply for his own bankruptcy, almost, perhaps, as a threat; (4) the haste with which the First Respondent suddenly took steps to apply online for the bankruptcy adjudication; and (5) this last point being the least influential factor, as it concerns pre-judgment conduct. However in the circumstances of this case, in seeking to ascertain the First Respondent’s motivation when applying for his own bankruptcy, I take into account the First Respondent’s pre-judgment conduct, that his modus operandi, leading to the fraudulent trading findings against him, involved running up debt and then at the last minute taking steps to defeat the interests of legitimate local authority creditors.

32. How, then, should these factors be weighed in the balancing exercise against the interests of the First Respondent’s other creditors? Would it be unfair on them to permit the Applicants to complete enforcement of their judgment against what appears to be the First Respondent's only asset?

33. As matters currently stand, the Applicants represent 96 per cent by value of the First Respondent's unsecured creditors. If the First Respondent had not behaved in the manner which I infer, on the balance of probabilities, was cynically motivated, the other creditors would have been presented with a property encumbered by not only the mortgagee's charge, but also by a final charging order in favour of the Applicants. As was the case before Mann J in Tagore , the likelihood of the First Respondent’s other creditors receiving much, if anything by way of distribution following the administration of the First Respondent’s bankrupt estate, is slim. The sums due to them will be dwarfed by the debt due to the Applicants and there will, of course, first need to be deducted the costs and expenses of administering the estate..

34. Counsel carefully took me through each of the points raised in the Official Receiver's report. Whilst I am grateful for the assistance provided by the Official Receiver, addressing each in turn, in my judgment, none of their points are sufficiently relevant or persuasive to deter me from making an order in the Applicant's favour.

35. First, the Official Receiver has referred to the moratorium that arises under section 285 of the Act . However, as I have already noted, that is expressly subject to any order which the court may make under section 346 .

36. The Official Receiver refers to Nationwide Building Society v Wright [2009] EWCA Civ 811 ; [2009] BPIR 1047. That case concerns the power of the court under section 3(5) of the Charging Orders Act 1979 to discharge a charging order made final before the making of a bankruptcy order. It contains a useful discussion of the policy underpinning section 346 of the Act and the intention of the legislature to preserve the rights obtained by those with the benefit of a final charge. However, the judgment does not add or detract from the analysis of the right of the holder of an interim charging order to seek relief under section 346(6) following the making of a bankruptcy order, in the manner set out by Mann J in Tagore .

37. The second case referred to by the Official Receiver is Industrial Diseases Compensation Ltd v Marrons [2001] BPIR 600. In my judgment this case can be distinguished on the basis that there, the creditor applied for garnishee orders nisi in the knowledge of three pending petitions filed by the Inland Revenue. There was no consideration of special or extraordinary circumstances. In contrast, in this case, the bankruptcy has arisen as a consequence of the debtor's own actions. He applied for the bankruptcy order after, and with knowledge that the Applicants had already obtained an interim charging order.

38. The third case is C & W Berry Ltd v Armstrong-Moakes [2007] EWHC 2101 (QB) ; [2007] BPIR 1199. I consider it also to be of limited relevance as it concerns the exercise of the court's discretion, again under section 3(6) of the Charging Orders Act 1979 , to discharge a final charging order and was focused on the conduct of the judgment creditor in the debtor’s bankruptcy. That conduct was considered to be sufficiently relevant to justify discharging the security that the judgment creditor had obtained. In the case before me, I have seen no conduct on the part of the Applicants to justify imposing such a sanction.

39. Finally, the Official Receiver refers to Practice Direction 73 where, at paragraph 1.2(5), a judgment creditor is required to give information regarding the existence of other creditors of the debtor. That information has been supplied to the court by virtue of the report prepared by the Official Receiver, to which my attention was drawn by the Applicants’ counsel, and it has, as noted, already been taken into account in reaching my decision. Conclusion .

40. Section 346(6) expressly provides the court with unfettered discretion to make orders, in appropriate circumstances, the effect of which might upset the strict distribution of a debtor's assets among his creditors on a pari passu basis. It will only be in exceptional circumstances that such an order could fairly or properly be made. For each of the reasons I have given, I am satisfied that this is one such extraordinary case.

41. By making an order, the court will be protecting the interests of the Applicants in the manner contemplated by the creation of the interim charging order which would have been made final were it not for the First Respondent’s decision to apply for his own bankruptcy. The Applicants incurred significant costs in exposing the First Respondent's fraudulent business practices and in obtaining a financial judgment against him. The liquidators represent the interests of the creditors of the First and Second Applicant companies who suffered as a result of the First Respondent’s fraudulent trading. In my judgment, taking into account what I infer, on the balance of probabilities, to have been the apparent motivation behind the First Respondent hurriedly obtaining his own bankruptcy order, the Applicants should be entitled to the fruits of that litigation.

42. I shall make an order in the terms sought. Epiq Europe Ltd hereby certify that the above is an accurate and complete record of the proceedings or part thereof. Lower Ground, 46 Chancery Lane, London WC2A 1JE Email: [email protected] This transcript has been approved by the Judge