Income Payments Orders are Provable in a Second Bankruptcy

The statutory lacuna over the effects of a second bankruptcy order on an existing Income Payments Order (“IPO”) has been filled by the Court of Appeal in Azuonye v Kent [2019] EWCA CIV 1289. The end result, that the IPO payments become debts provable in the second bankruptcy, seems to follow logic but it is of interest how the Court of Appeal worjked through to that conclusion.

Section 335 of the Insolvency Act 1986 is clear that if a second bankruptcy order is made before the debtor is discharged from the first bankruptcy then the IPO becomes an asset of the second bankruptcy and the second trustee can collect the payments for his estate. However, there is no provision for what is to happen to an IPO if the second bankruptcy order is made after the debtor receives their discharge from the first bankruptcy order.

It fell to the Court of Appeal and David Richards LJ (with whom Floyd and Simon LJJ agreed) to decide what happens in those circumstances. As set out at paragraph [2], the debtor appellant had been made bankrupt in April 2015 and the respondent as his trustee obtained an IPO in April 2016 for £1,000 per month. Due to a failure to disclose information as required the trustee obtained an order increasing the monthly payments to £2,500 per month in June 2017. In December 2017 the debtor petitioned for his own bankruptcy and the second order was subsequently made [3]. The judgment is silent, but it one assumes that the respondent trustee is not the trustee in the second bankruptcy.

In the lower courts DJ Coonan and Falk J found that the IPO remained fully enforceable against the debtor by the trustee, notwithstanding his second bankruptcy and it was increased again to £3,000 per month in March 2018[4].

Possibly because he was dealing with something with no obvious statutory guidance, David Richards LJ commenced by going back to first principles as to the purpose of bankruptcy and its effects on debts owed by the debtor, noting the Supreme Court’s ruling in Re Nortelon the broad reach of the definition of provable debts [7-15].

Turning to the issue at hand, it was noted that the trustee agreed that any arrears under the IPO were provable in the later bankruptcy and cannot be recovered by other means, agreeing with the decision of HH Judge Hodge QC in Booth v Mond. The trustee also agreed that in light of Re Nortel payments falling due after the commencement of the second bankruptcy (future IPO payments) would also be a provable debt in the second bankruptcy. Therefore, it would appear that the IPO payments, like other debts, would cease to be enforceable against the debtor and become provable debts in the second bankruptcy.

The trustee argued that the wording of section 335(2) suggested that but for the specific wording then future IPO payments would continue to be payable to, and enforceable by, the earlier trustee [23]. Section 335(2) keeps the IPO alive and enforceable, but merely moves who can enforce the IPO from the earlier to the later trustee, so the trustee argues that without section 335(2) applying to an IPO where the second bankruptcy order is made after the debtor receives their discharge from the first bankruptcy, then the IPO remains alive and is enforceable by the first trustee. David Richards LJ did not agree with this and found at [29] that the extrapolation from section 335(2) could not displace the general rule as regards provable debts.

The second argument of the trustee was that an IPO is an exception covered by rule 14.2(5) of the Insolvency (England and Wales) Rules 2016 and relying on the cases of Cartwright v CartwrightRe Bradley-Hole and obiter comments from Booth v Mond [30-39]. Here David Richards LJ found that rather than support the trustee’s second argument, they supported the opposite view [40].

As such, the Court of Appeal found that amounts owed under an IPO form a provable debt in the later bankruptcy. Addressing a comment from Falk J in the High Court that if the IPO payments were a provable debt it would be “a strange result” because a debtor could declare themselves bankrupt to avoid the provisions, David Richards LJ stated at [42]:

I earlier said that this does not mean that the bankrupt could simply avoid an IPO by becoming bankrupt again. First, if the bankrupt was not in fact insolvent and the evidence of insolvency on which the later bankruptcy order was made is false, whether deliberately or otherwise, the court may annul the bankruptcy order under section 282(1)(a). Applications for annulment in these circumstances are not rare, particularly in the context of family proceedings: see Paulin v Paulin [2009] EWCA Civ 221, [2010] 1 WLR 1057 and the authorities there cited. Second, money and other assets derived from income earned after the commencement of the earlier bankruptcy and held at the commencement of the later bankruptcy will be assets forming part of the estate in the later bankruptcy. Third, both arrears and future payments under the IPO will be provable debts in the later bankruptcy. Fourth, the trustee in the later bankruptcy will be entitled to apply for a new IPO against the bankrupt. Other remedies may be available depending on the circumstances.

As published on 24 July 2019 on LinkedIn by Andrew Goodson, Insolvency Practitioner at Griffins  https://www.linkedin.com/pulse/income-payments-orders-provable-second-bankruptcy-andrew-goodson/