Home > Re Budniok: the first foray into a brave new world

Re Budniok: the first foray into a brave new world

5th September 2017

This article was first published in Insolvency Intelligence 2017 30(6) and is now available on Westlaw.

From 6 April 2016, amendments made to the Insolvency Act 1986 (“the Act”) by the Enterprise and Regulatory Reform Act 2013 (“ERRA”) have meant that debtors wishing to have themselves declared bankrupt must make an application to the Adjudicator (appointed for this purpose under the new s. 398A of the Act), rather than petitioning the court, as previously.  The idea was to remove the process of debtors’ own bankruptcies from the courts and have them dealt with instead by a purely administrative process.  The new provisions do, however, allow the debtor whose application has been refused by the Adjudicator, to apply to the court to have that refusal overturned: s. 263N(5) of the Act.  The decision of the Chief Bankruptcy Registrar in Re Budniok: Budniok v The Adjudicator, Insolvency Service [2017] EWHC 368 (Ch) is the first case to tackle the procedural issues raised by this new process.

The facts

The Debtor, Thomas Budniok (“B”), was a German national who relocated to England in June 2014.  He ran into financial difficulties and became unable to pay his debts as they fell due.  On 16 June 2016 he made an application for a bankruptcy order under the Act, as amended, online to the Adjudicator.  As she was entitled to do, the Adjudicator requested further information from B, including documents relating to his current residence, proof of payment of rent, bank statements, utility bills, medical registration documents, documents in relation to his current employment and an explanation of why he had chosen to move to England.

B supplied these, as far as he was able.  His motivation for moving to England was, he explained, that in late 2013 he had met a woman from London and in the following summer he decided to move to London to be with her, adding that they were now planning to get engaged.

It appeared from the application and further evidence that B had originally moved to England to take up a position as a director of a company, but that he had resigned this position in December 2014 and instead taken up employment with a company called Blackpearl Business Partners Limited (“Blackpearl”).  Blackpearl operated a German website aimed at providing information to German nationals regarding the differences between the bankruptcy regimes in the two countries and how to improve their chances of becoming subject to the regime in England and Wales.

The Adjudicator refused B’s application on the basis that she was not satisfied that B’s centre of main interests (“COMI”) was in England and Wales.  B applied for the Adjudicator to review her decision, which she did on 2 August 2016, but came to the same conclusion.  B then applied to the court to appeal that decision (pursuant to s. 263N(5) of the Act).  In her written reasons for rejecting the application, sent to the court on 5 September 2016, the Adjudicator placed a good deal of emphasis on the nature of Blackpearl’s business and the fact that it had a German website: she clearly believed Blackpearl was assisting German nationals in the nefarious art of forum shopping and regarded B as being just such an individual.

The decision

On the appeal, Chief Registrar Baister had to grapple with the nature of this brand new appeal process itself before turning to consider the merits of this particular application.  After doing so at some length he set out in considerable detail the law in relation to determining COMI.  In particular he did so by reference to the summary of the relevant factors that the court (and now, of course, also the Adjudicator) must take into account when determining COMI that he himself had given in the earlier decision of Doyle v Quinn [2015] BPIR 226 (in particular at paragraphs [36]-[43] of that judgment), supplemented by some further observations (see paragraphs [81]-[82] of the present judgment).  Among the factors mentioned, the most salient are:

  • that a person can only have one COMI;
  • that it must be ascertainable by third parties – in particular creditors – and that this is essentially an objective question;
  • that it must have an element of permanence; and
  • that although a person is free to change his COMI, even on the eve of insolvency, any such change must be one of substance and not the mere illusion of change.

Applying this analysis rigorously to the facts of the present case, the Chief Registrar held that the Adjudicator had been wrong in her conclusions on COMI: in view of B’s unchallenged evidence it was clear that the court should be satisfied that he had genuinely moved his COMI to England.  On that basis, he allowed the appeal and granted the bankruptcy order.

The importance of the decision: the new jurisdiction

While the decision in this case helpfully collates the legal principles in relation to establishing COMI, it is not in this sense ground-breaking as it says nothing that is not to be found elsewhere.  The real importance of this decision lies in the analysis it offers of and the guidance it provides to the procedural law in relation to the new jurisdiction under s. 263N(5) of the Act.

The first and most important issue that the judgment addresses is the very nature of the appeal under s. 263N(5) and whether or not it constitutes a true appeal within the sense of CPR 52.21 (formerly 52.11) – that is, one limited to a review of the decision below.  The Registrar observed that, although the subsection uses the term “appeal”, nothing is said about the nature of the appeal and the relevant Rule (Insolvency Rules 1986 (“IR86”), r. 6.47, which is now, with minor alterations, r. 10.44 of the Insolvency (England and Wales) Rules 2016 (“IR16”)) refers to both “appeal” and “application” interchangeably.  In this context, the Registrar noted that the word “appeal” has various meanings within the insolvency legislation, some of which are analogous to an appeal under CPR 52 and some of which clearly are not.  Examples of the latter that the Registrar gives include appeals against decisions of office-holders in relation to meetings (e.g. IR86 r. 5.23(7) and r. 6.94(2), now both equivalent to IR16 r. 15.35(1)) or in relation to proofs (IR86 r. 6.105, now equivalent to IR16 r 14.8) or appeals against the decision of the Secretary of State or the Official Receiver (IR86 r. 7.50, now IR16 r. 12.62).  Having considered the Explanatory Notes to ERRA, the Impact Assessment prepared by the Insolvency Service in relation to those reforms and relevant passages from Hansard, and having noted that an appeal under s. 263N(5) is begun by application notice (what was then Form 7.1A and is now an application brought in compliance with IR16 r. 1.35) rather than by appellant’s notice, as would be the case under s. 375(2) of the Act, the Registrar came firmly to the view that the procedure was not an appeal in the strict sense described by CPR 52.21 but was rather one more akin to an appeal against the decision of an office-holder.  On this basis it may take the form of a “rehearing” (though, as he pointed out, there had never in fact been a hearing in the first place).

Allied to that first question, and to a great extent subsumed within it, was the question of whether the appeal should be heard on the basis of evidence that was before the Adjudicator or whether fresh evidence could be adduced.  Not surprisingly, given his answer to the first issue, the Registrar held that fresh evidence could be adduced. 

The next question was how such further evidence should be adduced and how it should be treated on the appeal. The Registrar was, understandably, reluctant to lay down any hard and fast rules in this regard, but he offered some useful guidance.  While in some cases it might suffice to have before the court only the evidence and material that had been before the Adjudicator, in other cases further evidence might be required.  In this case, B had made a witness statement in support of his application under s. 263N(5) of the Act and this was held to be appropriate.  There would be cases where it might be appropriate for there to be an order for cross-examination (as with any insolvency application).  What was necessary in every case was for the court to have regard to the need for a fair hearing (Art. 6 of the European Convention on Human Rights) and to the overriding objective (CPR 1.1).

The next issue was to decide what role the Adjudicator should play on the appeal.  The Registrar held that she should have the right to appear and/or make submissions but should not generally be obliged to do so and in the event that further evidence is allowed, the Adjudicator should be allowed, but not compelled, to file written evidence in answer.

The Registrar then went on to consider a number of other procedural issues.  Whilst he accepted that in many cases it would not be necessary or desirable to provide for notice to be given to creditors or for them to take any part in the appeal, he nevertheless held that the court did have power to make orders to this effect and indeed in the present case he had given a direction that the known creditors be notified.  The appropriate court to which the application should be made is governed by what is now IR16 r. 10.48, together with Schedule 6 to IR16, which in most cases will be the County Court hearing centre nearest to where the debtor resides.  It is, in the normal case, for the applicant debtor to prepare and file the appropriate bundle and to serve this on the Adjudicator, where she intends to appear.  As to the costs of the appeal, the Adjudicator is not personally liable for her own costs (see now IR16 r. 10(46(6)); as to any other question on costs, including whether the debtor should be responsible for paying the Adjudicator’s costs, the court had a very wide discretion.

It is likely that this helpful judgment will lay down the broad principles for this jurisdiction for some time to come.

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Sally Wollaston
Sally Wollaston
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