Re Citro

B e f o r e :

THE HONOURABLE MR JUSTICE PETER SMITH ____________________

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David Watkinson (instructed by Moss Beachley Mullem & Coleman) for the Appellants William Willson (instructed by McEwen Parkinson) for the Respondent Hearing dates: 15th November 2011 ____________________

HTML VERSION OF JUDGMENT ____________________

Crown Copyright ©

Peter Smith J:

INTRODUCTION

On 15 th November 2011 I heard a number of applications. The primary application was a review of a decision I made on 5 th July 2011 when I granted the Appellants Mr and Mrs Ford ("the Appellants") permission to appeal the decision of District Judge Lambert dated 19 th May 2011 sitting in the Central London County Court in Bankruptcy. By that decision the learned District Judge granted the Respondent ("the Trustee") the right to possession and sale of the Coach House, 2A Turrett Grove, Old Clapham Town, SW4 0EU ("the Property"). She provided for the order to be suspended until 1 st July 2011 and made other ancillary orders in respect of the proceeds of sale.

When I granted permission to appeal on 5 th July 2011 I was not aware of the fact that a Civil Proceedings Order had been made against the Appellants by the Court of Appeal. Equally I was unaware that the day before the Appellants had made an application for a stay before Mann J which he had refused.

When those matters were drawn to my attention I decided it was appropriate to review my decision of 5 th July 2011 and I directed the parties to apply to listings to fix a date with an estimate of half a day with a consensually agreed stay of execution remaining in force until the review was determined.

That was the hearing that was before me which has led to this judgment. It also meant that effectively the review of the decision, the application for permission to appeal if granted and appeal would all be heard at the same time.

At the conclusion of the hearing I indicated that I would refuse the Appellants permission to appeal upon review of my decision on the grounds that their appeal had no prospect of success. I indicated that I would give reasons thereafter. This judgment sets out the reasons.

Subsequent to the hearing Mrs Ford wrote to me on 5 th December 2011 raising matters which were not canvassed in the hearing. I have taken those into account. The Trustee did not wish to make any observations. I do not believe that anything in that correspondence assists the Appellants in their appeal.

BACKGROUND

The background to this case is substantially set out in the judgment of the learned District Judge below and I need to advert to it only briefly.

On 12 th October 2007 Bankruptcy Orders were made against the Appellants. The petitions related to a unpaid costs order made by Ouseley J on 24 th September 2004 in proceedings between the London Borough of Lambeth and Mr and Mrs Ford. The Official Receiver became Trustee of Mr Ford's estate on 20 th November 2007 and the Trustee of Mrs Ford's estate on 26 th November 2007.

The Trustee was appointed Trustee of the estates of Mr and Mrs Ford on 26 th April 2010. He notified them on 12 th May 2010 of his intention to seek an order of possession of the property pursuant to rule 6.237 of the Insolvency Rules 1986 as amended by section 283 A of the Insolvency Act 1986 ("IA 1986"). He invited them to make an offer to him within 14 days for his interest in the property. No offer was received and they have confirmed that they are not in a position to make any offer. The present proceedings were commenced on 16 th July 2010 and heard by the District Judge on 15 th April 2011. Her judgment as I have said was delivered on 19 th May 2011.

The issue relates to the Property and whether or not the Respondent as Trustee ought to have possession in order to sell it to provide a return to the Creditors in the estate of the two bankrupts.

THE PROPERTY

The Property is somewhat unusual. It comprises a garage/outbuilding that was converted without planning permission into a studio flat. The Appellants occupy this building as their only home. It has been in Mr Ford's ownership since 1981although he was not in continuous occupation until 2003 when the Appellants started to live in the Property together. There are no charges on the Property and the Appellants are the only people in occupation.

On 26 th January 2011 the Planning Inspector made a decision allowing an appeal by the Appellants against the refusal to grant planning permission and granted retrospective planning permission for the use of the existing building as a dwelling at the Property subject to conditions. The relevant condition is that the dwelling should be occupied only by the Appellants and when the building ceases to be occupied by at least one of those as their main residence the use as a dwelling shall cease.

IMPACT OF BANKRUPTCY

All property owned beneficially by a bankrupt vests in the Official Receiver and then in any subsequent Trustee when appointed. The duty of the person so appointed is so far as possible to realise the assets for the benefit of the creditors and for paying the costs of the bankruptcy and the Official Receiver. There have been a number of specific provisions addressing the principal dwelling of a bankrupt. The latest is section 283A IA 1986 which was inserted by the Enterprise Act 2002 (section 261 (1)). The relevant section provides as follows:-

The essence of this statutory provision was to give a Trustee 3 years to realise the property in question. If he has not attempted to realise at the end of that period the property revests in the bankrupt without any conveyance, assignment or transfer.

In this case the notification was given on 12 th May 2010 which is within the 3 year period.

The Appellants are registered as joint proprietors of the Property with title absolute under title number TGL203329. As they held the Property upon trust for themselves the legal title would not vest in their trustees and they would remain trustees to give effect to the beneficial interest which would have vested in the Trustee. That means that the Trustee would have to make an application (which is in effect what he has done) to realise the beneficial interest under the trusts of the Property. Provision is made for such application to be made in the bankruptcy court (as it always was made) under section 335A IA 1986. That section provides as follows:-

The hearing before me centred almost exclusively on the impact of that section on the Trustee's application. As the section shows in effect the bankrupts are permitted if no action is taken by the Trustee to remain in possession of the Property for one year. Thereafter under sub section (3) it is provided that after that year the court shall unless the circumstances of the case are exceptional assume that the interest of the bankrupts' creditors outweighs all other consideration.

There was an issue as to the value of the property especially in the light of the limited planning permission. On 11 th January 2011 Deputy Registrar Jones gave all parties permission to file expert evidence as to the value of the Property both with and without planning permission. The Appellants never filed any expert evidence as to the value. The Trustee had a letter from Hamptons recommending an asking price of £40,000 for this property and a second valuation from a local agent Duck & Hedges for the same amount. He had also received a written offer to purchase the property at that price from Gregory Besterman of Nightingale Square Properties, a neighbouring land owner. It appears that the acquisition of the property might be beneficial to the development of the adjoining property. Finally, shortly before the hearing before the District Judge the Trustee provided a short valuation from Messrs Currell dated 13 th April 2010 estimating the value of the property at £40,000. The Appellants challenged that valuation and said that it was an undervalue. They produced no evidence however beyond a letter dated 11 th April 2011 from Messrs Foxtons recommending an asking price of £55,000. The Trustee confirmed he would seek to sell the property for that price although he would have to be realistic and accept the best price available.

There was some dispute about the creditors with the total figure according to the Trustee being some £262,171.08. There was an issue about whether or not there were any other assets, in particular a sum of £6,550 which was supposedly paid into Wandsworth County Court but the Trustee investigated with the court and was unable to find any evidence showing such a payment in.

The creditors' sums are therefore significant and the sale of the Property represents the only likely method of the creditors having some return. The Trustee's costs were approximately £15,000. If the Property achieved a sale price of £55,000 there will be a net figure of £40,000 for the creditors. If they were in at about £262,000 that would produce a dividend in very approximate terms of 20 pence in the pound.

The counter argument for the Appellants is that the property should never be sold. They should remain there indefinitely and the creditors receive nothing.

OPPOSITION TO SALE

The Appellants relied on matters set out in their witness statements in support of their claim that it would be disproportionate to order a sale of their home in comparison to the benefit of the sale to the creditors. There was reference to the medical conditions that they suffered and the fact that they would lose their only home. It was said to be doubtful that they would be accepted as homeless and would not meet the definition of priority as they are childless and clearly not vulnerable. They would also have difficulty finding private rental accommodation due to their need to house their fish and terrapins, particularly a property in the area in which they currently live. Although the Trustee did not challenge any of this evidence, in my view it was seriously undermined by the fact that the Appellants had made no attempts to find any alternative property to see whether their fears were justified.

DISTRICT JUDGE'S DECISION

First she reviewed the law in this area comprehensively. When it came to applying section 335 IA 1986 she had mind to the impact of section 3 Human Rights Act 1998 ("HRA") and Article 8 of the Convention for Protection of Human Rights and Fundamental Freedoms 1950 ("Convention"). The former provides that in so far as it is possible to do so primary legislation must be read and given effect in a way which is compatible with the Appellants' convention rights i.e. the operation in this case of section 335 A. The latter affirms that everyone has a right to respect for his private and family life his home and his correspondence (Article 8 (1)). However there is a limit as sub paragraph (2) which specifies:-

The Deputy Judge rightly expressed the view (paragraph 16) that there has to be a balancing exercise between the individual's rights where, there is some interference with that right and where the rights and freedoms of others might be affected.

She then reviewed a series of cases involving applications for sale of a bankrupt's home where Article 8 was considered and it was found in all those cases that the legislation in section 335 A IA 1986 was not incompatible with Article 8 (see for example Foyle v Turner [2007] BPIR 43 and Turner v Avis [2008] BPIR 1143 ).

In Foyle His Honour Judge Norris QC (as he then was) considered the impact of Article 8 and applying Kay v London Borough of Lambeth [2006] UKHL 10 ; [2006] 2 AC 465 concluded that, where a statutory regime confers on the court jurisdiction to make an order for possession, if the court thinks it is reasonable then the exercise of that jurisdiction will require the court to undertake the very assessment which Article 8 requires to be undertaken. The learned Judge then (paragraph 17) expressed the view that the same principles apply to section 335 A IA 1986 and that provided the provisions of that section were faithfully followed and applied there was no need to enter into any separate consideration of Article 8 rights. The priority determined by Parliament as between creditors and bankrupts' family (after the initial period of 1 year) is that save in "exceptional circumstances" the interests of the creditors are to prevail.

In Turner His Honour Judge Pelling QC applied Foyle and also went on to consider "exceptional circumstances" . I will return to that further in this judgment.

EXCEPTIONAL CIRCUMSTANCES

The District Judge then reviewed what were exceptional circumstances and applied Harrington v Bennett [2000] BPIR 630 at 663 and expanded in Dean v Stout [2005] BPIR 113 (paragraph 19). She determined that:-

She then followed the observations of Paul Morgan QC (as he then was) in Hosking v Michaelidis [2006] BPIR 1192 and Judge Pelling in Turner above. She also observed that in an application like the present for an order for sale the court is considering the rights of the parties under trusts of land and that the bankruptcy state (by that she meant the beneficial interests) is vested in the Trustee in bankruptcy. The purpose of the sale by the Trustee is in order to realise the beneficial interest vested in the Trustee and he expressed the view that was a legitimate aim which answers a pressing social need as in most cases this would be justified on the basis it is necessary to protect the rights of others, namely creditors.

She rejected the submission that the exercise of the rights under section 335 A was disproportionate and cases cited to her namely Zehentner v Austria [2009] and Manchester City Council v Pinnock [2010] UKSC 45 did not require her to operate a different exercise from the wording of the section. She also concluded that those decisions did not require her to adopt a different approach from that taken by the courts in Re Citro and Harrington v Bennett and Dean v Stout referred to above.

She therefore concluded that she approached the matter in accordance with the section as set out in the previous authorities summarised in this judgment above.

THE EVIDENCE

Having directed herself to the correct application of the law she then reviewed the evidence of value and other assets. She considered the matters put forward by the Appellants as to disproportionality and the difficulties they would have in finding alternative accommodation and considered those in her judgment (paragraph 55 et seq). She balanced the position of the creditors and their desire to obtain something out of the bankruptcy, which they would not unless the Property was sold, against the medical evidence showing that the Appellants were suffering from moderate depression and moderate to severe depression being brought about by the worry associated with the consequences of losing their home. It was submitted on behalf of the Trustee that these were not exceptional circumstances but merely "melancholy consequences of debt and improvidence". She also observed that whilst there might be difficulties about alternative accommodation there were other possibilities which had not been fully investigated by the Appellants. That remained the position before me and she observed (paragraph 60) that they did not seek a suspension of the order for possession but an indefinite suspension.

She rejected that the evidence of the Appellants showed any exceptional circumstances justifying a rejection of the Trustee's claim (paragraph 78). She set her reasons out in full in paragraph 79. She rejected the medical condition and the ages of the Appellants as being exceptional circumstances (paragraph 81) and she determined that the interest for the creditors required a sale (paragraph 83). This led her to an overall conclusion that there were no exceptional circumstances and that even if all the circumstances put forward by the Appellants were considered collectively she did not consider they were exceptional and were nothing more than the sad consequences of debt and improvidence. There is no challenge to these findings. Nor could there be in my view.

Finally she dealt with the position if she was wrong on the alternative argument put forward by the Appellants in that section 335 A needs to be modified to apply a proportionality test for the order for sale. If that were the correct test then she concluded that it would not be disproportionate to order a sale on the facts of the case.

She therefore granted the application but suspended its operation for 6 weeks.

GROUNDS OF APPEAL

Ground 1 is that the District Judge failed to read and apply section 335 A in compliance with section 3 and 6 of HRA 1998. Ground 2 is that she failed to find that "unless the circumstances of the case were exceptional" should be read as if for "exceptional" was inserted " such that it would be disproportionate to do so " or otherwise " exceptional " should be read and applied subject to the proportionality principle. Third it is complained that she failed to find their circumstances exceptional in that sense in the Appellants' case so that the Trustee's application should be dismissed. Finally it is complained that in so far as she did purport to apply the proportionality principle she failed to do. It is suggested she wrongly took the view that applying that principle would mean the Trustee would never be able to realise the interest in a bankrupt's home and she failed to balance the serious harm caused by making the order to the Appellants against a slight potential gain to the creditors.

The fundamental difficulty with the Appellants' case is that in my view the grounds of appeal are based on a misunderstanding of paragraph 90 of the District Judge's judgment. She plainly reconsidered all the facts of the case as if the law of proportionality as contended for by the Appellants was applicable to the case. Applying that test she came to the same conclusion.

There is no challenge in reality to the factual findings of the District Judge. If the law is as established by the line of authorities that I have referred to above she considered all the facts and applied that law and came to a conclusion that the Trustee on behalf of the creditors ought to prevail. I can see no grounds as the Appellate Court in interfering with that conclusion. None is given. Nor could there be because the District Judge's review is comprehensive and total in my view.

That then leads to the possibility that she has mis-applied the law by rejecting the primary argument of the Appellants that the proportionality test required by Article 8 should be read in to section 335 A. It is correct as I have said that she has rejected that submission. Nevertheless paragraph 90 of her judgment makes it quite clear that she comes to apply that test on a reconsideration of facts and comes to the same conclusion. I do not accept the criticism of her observation that in a case of this kind if an order for sale cannot be made on the ground of proportionality a Trustee would never be able to realise his interest in the bankrupt's home for the benefit of the creditors to meet their debts. She seems to be saying in my view nothing more than the logical conclusion of the Appellants' submissions. She cannot conceive of any circumstances on the facts before her where it would be proportionate in effect to look at the creditors' prospects (which she did), look at the circumstances of the Appellants (and in particular the unexceptional nature of their circumstances), look at what the Appellants were seeking (namely a permanent suspension) and thus conclude that it was proportionate permanently to deprive the creditors of any prospect of ever having any realisation out of the bankruptcy. Instead the conclusion that the Appellants contend for would be that they should be allowed to stay in the Property that no longer belongs to them forever. I agree with her analysis but it must be appreciated that that analysis and the conclusion is in the context of the facts of the case. There may be a circumstance where it is proportionate permanently to deprive a Trustee but that is not the position in the present case.

I can see no basis for criticising this part of her judgment. That means that even if the law as contended for by the Appellants the District Judge has come to the conclusion which in my view is impeccable and has no basis for challenge whatsoever.

PROPORTIONALITY

Although it is strictly unnecessary for me to do so by reason of my analysis of the judgment below I think it is appropriate to express a view on the submissions made by the Appellants based on the Pinnock case.

All of the bankruptcy cases which considered Article 8 pre date the Pinnock decision. Nor were the Trustee in bankruptcy cases considered in Pinnock.

The case involved public sector lettings and the landlord seeking possession was a local authority. There was therefore clearly a public authority which was purportedly interfering with the tenants' Article 8 rights. The question is the extent to which Article 8 applies (if at all) where the person seeking possession is not a public authority.

The Appellants' arguments start unpromisingly in my view when one looks at Lord Neuburger's judgment in Pinnock . In paragraph 4 he said:-

Paragraph 50 stated as follows:-

Given that it seems to me that the Pinnock case provides no assistance to the Appellants.

Faced with that Mr Watkinson, who appears for the Appellants referred me to the Austrian case of Zehentner v Austria (app no 20082/02 16 July 2009) where the ECHR first section considered the effects of Article 8 in the context of an order evicting the Applicant from her home following a judicial sale after the making of the Austrian equivalent of a charging order. The decision was referred to in Pinnock not on the point under consideration, namely whether the enforcement procedures by courts is sufficient to attract Article 8 and there was no analysis of that decision in this context.

The Zehentner decision said this on the question of Article 8 applying to the proceedings:-

It is clear that the circumstances of the case were extremely unusual. However in the context of section 335 A in my view the requirements in sub section (2) and the change of emphasis in sub paragraph (3) do not infringe Article 8 (2). They provide a necessary balance as between the rights of creditors and the respect for privacy and the home of the debtor. That balance serves the legitimate aim of protecting the rights and freedoms of others. I am therefore of the opinion that the requirements of section 335 A satisfy the test of being necessary in a democratic society and are thus proportionate (see McCann v United Kingdom (App no 19009/04) and Connors v United Kingdom (App no 66746/01) ). This was the conclusion in the pre Pinnock bankruptcy cases and I see no basis for coming to a different conclusion.

For the same reasons I do not see that the decision of the Supreme Court in Mayor and Burgess of London Borough of Hounslow v Powell & Ors [2011] UKSC 8 offers any assistance. The checks and balances set out in section 335 A in my view suggest a procedure that is proportionate and Article 8 adds nothing.

In my view therefore given the requirements that are set out in section 335 A the court procedure does not infringe Article 8.

I stress however that that is not necessary for the purpose of this appeal because the District Judge in paragraph 90 of her judgment considered and applied that test in the alternative.

SUBSEQUENT CORRESPONDENCE

I referred earlier in my judgment to correspondence received from Mrs Ford after the hearing. I do not consider any of the matters raised by that correspondence has any relevance to the case before me. The issues were fully argued both orally and in writing.

I will therefore conclude that on a further reconsideration in the hearing the Appellants' appeal has no prospect of success. Accordingly I revoke my decision to grant the Appellants permission to appeal on 5 th July 2011. In effect the hearing before me is an oral hearing in any event on the application for permission to appeal. I therefore determine any appeal has no prospect of success.

POSSESSION

At the end of the hearing I adverted to section 89 of Housing Act 1980 which restricts in most possession proceedings the ability of the court to suspend an order for possession. It limits it to 14 days or 6 weeks in the case of exceptional hardship. The debate between counsel and myself was to the effect that that provision applied (to the present possession proceedings). It was accepted further that as the Appellants had had more than 6 weeks without actually establishing exceptional hardship there can be no prospect of invoking that provision. I raised with the Appellants whether or not they would be willing to give undertakings to the Trustee to vacate the property when he had a buyer (a common practice in bankruptcy cases) and other undertakings of a similar nature but they refused to give any such undertakings.

I have now considered the Pinnock case and the Powell case. The section was raised in both of them ( Pinnock paragraph 63 and Powell paragraphs 67 et seq). However in both cases the question of whether or not Article 8 could be relied upon to extend the 6 week period was not argued. I am conscious that that matter has not been argued before me and I invite the parties to provide submissions for my consideration when I hand down this judgment as to the applicability of Article 8 to the provision.