In Re Fowlds  EWHC 2149 (Ch) the High Court confirmed that the decision of the Insolvency & Companies Court (Bucknall & Another v Wilson (Re Fowlds)  EWHC 1200 (Ch)) not to grant relief in respect of a preference claim against the associate of a bankrupt was correct, based on the facts of the case.
Both the Insolvency & Companies Court and the High Court felt that the facts of the case took it out of the norm. Peter Fowlds (F) was made bankrupt by his son in a dispute regarding the management of various properties. The son obtained a judgment in July 2014 of approximately £700,000 including interest and costs.
Shortly after the judgment, in August and September 2014, F sold various properties. He used the proceeds to pay his legal fees in relation to the litigation with his son. He also paid £47,700 to his step daughter (W). W had assisted F during the litigation by providing accountancy services. She had invoiced £99,000 for the accountancy work. F appealed the judgment but the appeal was dismissed six months later. In October 2014 the son obtained a freezing order. However, although the properties had been sold, F did not co-operate and in August 2015 a warrant of commital was issued. The son presented a bankruptcy petition in January 2016 and a bankruptcy order was made in March 2017. The joint trustees sought repayment of the sums paid to W. F did not co-operate with the joint trustees during the administration of the bankruptcy and his discharge was suspended.
Insolvency & Companies Court decision
At first instance, the High Court (ICCJ Jones) held that whilst all the statutory grounds of a preference had been established, the circumstances of the case were so far from the norm as to justify no order for repayment of the preference. The court held that W had been paid on a commercial arm's length basis for her work, had acted in good faith and had changed her position so that it would be inequitable to require restitution. The court considered W's financial and personal circumstances meant that the rule in Ex Parte James applied to prevent the relief sought by the joint trustees. The court felt that the trustees should not have issued the application. The court emphasised that its decision was fact sensitive and rare and that no other remedy had been proposed. The court noted that trustees in bankruptcy should be wary of simply relying on the statutory presumption of desire to prefer if seeking to recover a preference from an associate of the bankrupt without first investigating the matter. It also noted that when trustees in bankruptcy consider to what extent information should be sought from the recipient of the preference in order to establish the strength of the claim, they also need to take account of the principle of Ex Parte James and the view of the right thinking person in terms of the fairness of the claim.
The joint trustees appealed as they were concerned at the judge's findings in relation to change of position and the rule in Ex Parte James, and that the judgment could potentially alter the recovery of preference claims in the future. They submitted that the judge had been wrong to conclude that a change of position was a relevant consideration when deciding what relief was to be granted in a preference claim, that the overall conclusions of the judge had not justified refusal of relief and that the judge had been wrong to find that the rule in Ex Parte James prevented the relief sought by the joint trustees.
Appeal to High Court
The High Court (Trowers J) noted that the background facts were tragic and most unfortunate and concerned a bitter family dispute. It noted that W was a qualified management accountant and had been retained by F to provide accounting services. The judge had found that the agreement for W to be paid £40/hour when F could afford to pay was agreed on a commercial, arm's length basis. F had sold a number of properties and paid off solicitors and counsel who had been involved in the litigation with his son, and certain other debts including fees to agents and to the conveyancing solicitors. W had been paid from the sale proceeds of two properties. The effect of the payments was that all F's creditors had been paid in full apart from W who received 47% of her debt and F's son who received no payment. The High Court noted that the judge had found that F had chosen to pay W what he could, having first paid his other creditors in full. He was satisfied that F had paid W as a commercial creditor and not because she was his step daughter. The judge found that the fact that W was F's step daughter was the reason why F had decided not to pay her in full, in contrast with the other creditors.
The judge had held that:
- W was an associate of F.
- W was a creditor of F.
- F was insolvent at the time of the payment.
- The payment put W in a better position than she would otherwise have been in if the payment had not been made.
- It was presumed that F desired to prefer W, and W failed to rebut this presumption.
The High Court noted that the judge had refused to grant relief for four reasons:
- The debt arose out of a commercial relationship and W was paid less than the other commercial creditors. The two year time limit for associates was not justified.
- W played no part in the giving of the preference other than its receipt. She had no reason to question the payment. This justified a finding that she acted in good faith throughout.
- The payment was no longer available to W, nor did she have available assets purchased from the funds she received. W had changed her position on the basis of receipt of the payment in good faith.
- W's existing financial position and her inability to provide restitution without the sale of her family home. The judge had found that this was a "significant and wholly disproportionate effect upon [W] compared with the receipt into the bankruptcy estate of a sum of less than £50,000".
The High Court held that a change of position was not available as a defence under section 340 or 342 Insolvency Act 1986. However, where the court has found that there were exceptional circumstances that would establish a change of position, this would weigh in the balance when the court was determining how to exercise its discretion as to what order to make and whether to restore the position to what it would have been if the preference had not been given. However, the High Court felt that the change of position was not as strong a factor as the judge had considered it to be. The High Court felt that to have characterised it that way was to give insufficient weight to the underlying policy considerations and the difficulty of balancing the interests of the creditors against the interests of the innocent recipient of the preference.
The High Court noted that the personal needs of the recipient of the preference can be taken into account where the circumstances are sufficiently exceptional for the needs to be taken into account and a balancing exercise carried out.
The High Court concluded that there were a number of facts which taken together meant that the refusal of relief was the right order to make in the case. The factors included:
- That W was only vulnerable to the preference claim because she was an associate of F. The preference was not given to W because she was an associate. F had paid a number of other creditors in full before he made the payment to W.
- W claimed to be in the same position as an ordinary commercial creditor acting in good faith without knowledge that the payment was a preference.
- W no longer had the money she had received.
- The bankruptcy was effectively a single creditor bankruptcy. A preference claim is a class remedy in where the recipient receives payment in preference to all the bankrupt's creditors. In wholly exceptional circumstances where there is only one member of the class, there is less reason to favour the class over the recipient, particularly where the other factors are present.
The High Court noted the judge's reasoning that where the circumstances are sufficiently exceptional, justice may require no order to be made. It also noted that the judge had taken account of the proposed dividend to creditors of 6p in the £, which was quite modest and that the judge had found that this did not justify W losing her home to increase slightly the payment to the son. The High Court held that overall the judge had been entitled to reach the conclusion he had reached and to find that, in the circumstances of the case, there was no other appropriate remedy to refusing relief. It also noted that the judge himself had made it clear in his judgment that there was no danger of the decision opening the floodgates, and had highlighted that the decision was fact sensitive and was made in the context of a most unusual set of circumstances and facts, which made restoration of the preference unfair and unjust.
Finally, the High Court held that the rule in Ex Parte James was not engaged in the issue of the joint trustees issuing the preference application.
The judgments of both the Insolvency & Companies Court and the High Court highlighted the fact specific nature of the case. The son was to all intents and purposes the sole bankruptcy creditor. The court accepted that W was a commercial creditor who had provided accountancy services to F on a commercial basis. The court found that W had not been involved in the preference and had been paid less than other commercial creditors. F's failure to co-operate meant that the joint trustees were not able to interview him about the agreement with W, the preference payment and the payments made to other creditors.
However, the courts' rationale that the bankruptcy estate should not make any recovery based on the fact that W had spent the funds and so would have to sell her house is not based on factors outside of the norm. Indeed, this is the scenario often encountered by office holders in many cases concerning antecedent transactions. It is surprising that the court did not consider a charge over W's property which would have allowed her children to remain at the property until they had finished their education. It is difficult to not view the decision as overly harsh and to fail to appreciate that F had done all he could to frustrate the judgment obtained by his son whilst the son had taken appropriate steps to enforce the judgment debt and had used the bankruptcy process as a last resort.
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