The end for the Mawer v Bland order?

This article was first published in Insolvency Intelligence 2017, 30(5), 85-87.

In an earlier edition of this publication I identified what appeared to be a growing trend for the making of a draconian form of order suspending the discharge of bankruptcies. This form of order is typically associated with the case of Mawer v Bland where Mrs Justice Rose upheld on appeal the following order made by Chief Registrar Baister:

1. "The period for the discharge of the Respondent from bankruptcy shall continue to be suspended and shall not run again until the Applicants [that is the trustees] have or either of them has confirmed to the Court in writing that the Respondent has properly and fully co-operated with the Applicants in all respects required of him.

2. The trustees are to file and serve a report confirming such co-operation within 14 days of being satisfied thereof, and shall specify therein the date from which the discharge period has again run and the consequential date of the Respondent’s discharge."

It would be quite wrong to suggest that Mawer in any sense created this form of order or, for that matter, the notion that the discharge of a bankruptcy could be suspended. In its modern form, the statutory bases both for the automatic discharge of a bankruptcy and for the making of an order suspending that discharge are found in s.279 of the Insolvency Act 1986 (IA 1986).

Under s.279, the default position is for discharge after one year. The remainder of the section is triggered in the event of an application by the bankrupt’s trustee and, where such an application is made, the Court must determine whether the bankrupt either has failed or is continuing to fail to comply with an obligation under Pt IX of the Act. The majority of the relevant such obligations are found in s.333 of the Act.

The structure, therefore, of s.279 is that a bankrupt is entitled as a default position to be discharged after one year. Where the trustee feels that the bankrupt has been non-compliant, they may apply for an order suspending the discharge from bankruptcy and, if the Court agrees, it may make an order within the scope of s.279(3). That subsection provides that the suspension shall run until either "the end of a specified period" or "the fulfilment of a specified condition".

The meaning of the second limb of subs.(3) is clarified by subs.(5):

"In subsection (3)(b) ‘condition’ includes a condition requiring that the court be satisfied of something."

It falls beyond the scope of this article to chart exactly when and how this occurred, however, it is apparent that, at some point in time, a shift occurred in the policy of trustees towards orders suspending discharge.

In my previous article on this subject, I observed that guidance given by the Insolvency Service in 2004 and 2008, along with a decision of Sir Andrew Morritt in Shierson v Rastogi had all suggested that the fixed-term suspension was the appropriate remedy for the most recalcitrant bankrupts. More minor breaches of the obligations of a bankrupt would, at that time, typically have been punished by an order suspending the bankrupt’s discharge until a condition had been fulfilled, usually the satisfactory answering of a list of pertinent questions.

Trustees, perhaps understandably, felt that this approach was somewhat ineffective as regards the most difficult or non-compliant bankrupts. In some bankruptcies, trustees would likely have been faced with the impending discharge of the bankruptcy, knowing that the bankrupt has failed to co-operate and having little idea of the extent of the matters the bankrupt was concealing. In that situation, an additional fixed-term suspension would be scant consolation to the trustee, who could reasonably anticipate the non-compliance to continue throughout the suspension period.

The solution developed by the trustees was to seek to suspend the discharge from bankruptcy until a specified condition was fulfilled. That condition was expressed to be the confirmation by the trustee that the bankrupt had complied with his obligations under Pt IX of the Act. Put simply, once the bankrupt was found to be in breach of his obligations, he should remain bankrupt until he had complied in full.

There is very little available evidence about when this practice started. It appears that the first occasion on which the High Court was called upon to consider whether an order in such terms fell within the scope of s.279 was in Mawer. Mrs Justice Rose in that case and HHJ Behrens in the later case of Wilson v Williams concluded that such an order was permissible, however, both had clear reservations about the effect of such an order.

Two observations ought properly to be made about these cases at the outset. The first is that it seems likely that nobody involved with either of them quite appreciated the significance of the decisions that were made. It is striking that, despite judgment being given in Mawer on 12 June 2013, the first formal reporting of the case was in the first volume of the 2015 edition of the Bankruptcy and Personal Insolvency Reports, released only a short time before the hearing in Wilson.

The second, related, observation is that, and no criticism is here made of the fact, the judges in those cases appear to have received fairly limited submissions on the jurisdictional basis for the order that was made.

It is apparent, however, that those cases, identified as they were by the leading practitioner texts, influenced both trustees and the lower courts who heard applications of this sort. An illustrative example of how an application for indefinite suspension proceeded in the wake of Mawer and Wilson can be seen from the decision of District Judge Shorthose in Bramston v Harris.

Future applications under s.279 for indefinite suspensions must, however, take note of the considered reasoning of Mr Justice Nugee in the recent decision in Hilsdon v Weir. This was an appeal against an order made by District Judge Payne at Kingston County Court. The order made was:

"The relevant period for the purposes of s279 Insolvency Act 1986 and Schedule 19 to the Enterprise Act 2002 shall cease to run until such time as the Trustee in Bankruptcy confirms to the court by filing a report that the bankrupt has complied with his duties and obligations or until the court orders otherwise."

In short, an order suspending discharge indefinitely on terms similar to that at issue in Mawer.

The bankrupt, Ms Hilsdon, appealed this order, arguing, inter alia, that this form of order was outside the scope of s.279 of the Act. It is apparent from His Lordship’s judgment that he had the benefit of extensive and detailed submissions from both counsel about the proper interpretation of s.279.

After hearing those submissions, His Lordship concluded that:

"I therefore do not accept the submission that the form of order made by DJ Payne was wrong in principle and contrary to s. 279(3). Such an order in my judgment is both something that the Court has power to make under s. 279(3) and something that can be an appropriate and indeed necessary response to a bankrupt’s failure to co-operate with a trustee in suitable cases."

His Lordship followed up, however, with a note of caution:

"It does not however follow that it is an appropriate form of order to make in all cases."

In the paragraphs which followed, Nugee J set out useful guidance on the circumstances in which such an order ought properly be made. He began by noting that:

"I in fact have no material to assess whether, as counsel told Rose J, it is a form commonly used in bankruptcy proceedings, or whether, as Ms Johnson suggested to me, this is incorrect. Nor do I have any material on which to assess how obstructive the typical bankrupt who comes before the Court on a s. 279(3) application is. There is obviously a spectrum between bankrupts who are being as difficult as possible and doing everything to frustrate the trustee’s inquiries, and those who are in the main cooperative and seeking to provide information to the trustee but have nevertheless failed to comply properly with their obligations."

His Lordship identified three significant adverse effects of making an order suspending discharge in the Mawer form.

First, it deprives a bankrupt of certainty as regards the time at which his bankruptcy, with its attendant restrictions, would be discharged. This plainly impacts upon his ability to organise his economic affairs and to rebuild his professional and commercial life.

Secondly, such an order runs contrary to the policy objectives encapsulated in the reforms to the personal insolvency regime brought about by the Enterprise Act 2002. His Lordship cited the following comment by the Insolvency Service in 2007 about the function of those reforms:

"… to provide a modern bankruptcy regime that encourages business start-ups and allows those who have failed honestly to achieve financial rehabilitation whilst repaying the most they can reasonably afford to their creditors and to have a second chance to make an economic contribution to society."

An order in the Mawer form plainly does not have a sense of financial rehabilitation as its foremost motive.

Thirdly, His Lordship saw merit in observations made in my previous article on this topic about the disincentives which the Mawer v Bland orders create for the trustees to promptly and to efficiently progress their investigations into the activities of the bankrupt. In the ordinary course, the impending date of automatic discharge or the date upon which the fixed term suspension is due to expire imposes a sense of urgency on the trustee to resolve whatever unanswered questions may remain following his investigations. The ability of a trustee to secure an open-ended suspension until full compliance is achieved undermines or even eliminates that incentive. This puts the bankrupt’s life on hold and encourages inefficiency in the system.

On the other side of the debate, Nugee J noted that:

"There may well be circumstances in which policy considerations strongly point to such an order being required. It is well-known that bankrupt individuals often take significant steps to obstruct and mislead trustees. It may well be that, even after one year, the trustee is not only unable to state that full compliance has occurred, but also unable to know how much more there is to discover."

Drawing the various threads of the debate together, His Lordship offered the following guidance, which ought to assist District Judges and Registrars faced with applications of this sort going forwards:

"As so often in discretionary matters, the task of the Court is to strike a balance between these competing considerations. Where the balance is to be struck in any particular case must depend on the facts of the case, and I am reluctant to lay down any general principles, not least because cases vary infinitely in their facts. But it does seem to me that the Court should be hesitant about reaching for the Mawer v Bland type of order as a routine or standard form."

He continued:

"In my judgment therefore the Court should always consider whether an order in Mawer v Bland form is really justified on the facts of the case, rather than treating it as the default option on an application under s. 279(3)."

Interestingly, Nugee J considered that the bankrupt Mr Bland was deserving of such an order but Ms Hilsdon was not. It is very possible also that the decision in Bramston would have been unaffected by the decision in Hilsdon.

This is, however, a significant decision and one which is likely to influence the decisions trustees make both during the investigative process and when making applications to suspend the discharge from bankruptcies. Trustees seeking Mawer orders must be confident that the court will make significant adverse findings of fact against the bankrupt in respect of his conduct during the relevant period.

One aspect which seems to have become overlooked in this debate is the role played by Bankruptcy Restrictions Orders (BROs). Failing to co-operate with the official receiver or a trustee is a ground for the making of a BRO. When the Enterprise Act 2002 brought forward the point of automatic discharge from three years to one year, BROs were introduced as a quid pro quo, recognising the fact that some bankrupts might be undeserving of a swift, unrestricted return to full economic freedoms.

In light of Parliament’s conscious and considered statutory balancing exercise in the Enterprise Act 2002, it is surprising to note that BROs were not mentioned at any stage in Nugee J’s judgment. The balancing exercise which His Lordship undertook presupposed that suspending the discharge of a bankruptcy was the only effective tool at the Court’s disposal when faced with a non-compliant bankrupt. It is not. It is not unreasonable to expect BROs to have some role to play in tackling the scourge of non-compliant and down-right dishonest bankrupts and evidence suggests that BROs are used in the industry.

Following Hilsdon, it may be that s.279 orders play a much more limited role in combatting non-compliant bankrupts and BROs step into the space left behind. This would minimise the negative effects associated with the making of a Mawer type order and would perhaps offer a closer adherence to the intention of the Parliament which enacted the Enterprise Act 2002.