Debt due as personal liability under Companies Act not provable in debtor's bankruptcy

In the matter of Matthew Kelly, a bankrupt.

In the matter of Matthew Kelly, a bankrupt.

And in the matter of an application by the Revenue Commissioners.

Bankruptcy - Application for extension of time for proof of a debt in the bankruptcy - Whether an inordinate and excusable delay in bringing the application - Whether monies payable by the bankrupt on foot of an order imposing personal liability for company debts provable as a debt of the applicant - Whether debts statute-barred - Companies Act 1963, section 297(1) - Bankruptcy Act 1988, section 136.

The High Court (before Miss Justice Laffoy); judgment delivered 20 December 1999.

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A debt which it was alleged formed the basis for an order, made prior to the adjudication as a bankrupt, for personal liability pursuant to section 297(1) of the Companies Act 1963 was not enforceable by the applicant, but formed part of the general assets in a winding-up, and was therefore not provable by the applicant as its debt. However, if it had been so provable, it would not be statute-barred, since the applicant was seeking to recover the debt in the bankruptcy rather than by other means.

Richard Law Nesbitt SC and Shane Murphy BL for the applicant; James Salafia SC and Feargal Altman BL for the bankrupt.

Miss Justice Laffoy said that this was an application seeking liberty to submit a proof of debt to the official assignee in the bankruptcy of the bankrupt, notwithstanding that the time limited by the official assignee for submission of proofs of debt to him had expired. The debt claimed was made up of: (a) a sum of £292,439,91 being the debt upon which the applicant's petition was founded; (b) a sum of £17,378.46 being the interest on that sum; (c) a sum of £19,850, being unpaid in come tax for the year 1980-81, together with interest thereon in the sum of £12,158.13; (d) a sum of £13,916.66, together with interest thereon in the sum of £18,302.60 for unpaid VAT; (e) a sum of £22,500, together with interest thereon in the sum of £38,687.50 for unpaid VAT; (f) a sum of £1,809,611.96 in respect of various taxes alleged to be due by the bankrupt in respect of Kelly's Carpetdrome Limited ("the company") (in liquidation).

The bankrupt was adjudicated a bankrupt on the petition of the applicant on 13 January 1984. On 8 March 1984, the bankrupt had sworn a statement of affairs and had disclosed two debts due by him to the applicant in respect of taxes, namely, the sum of £292,439.91 and the sum of £1,800,000. The applicant's petition had been grounded on the first of these sums and the bankrupt conceded that the sums referred to at (a) and (b) above, were deemed to be admitted.

The official assignee had fixed 31 July 1997 as the last day on which creditors' proofs of debt in the bankruptcy were to be received by him. By virtue of section 76 of the Bankruptcy Act 1988 and paragraph 3 of the First Schedule to that Act, a proof submitted thereafter should not be allowed except by order of the court.

The application was grounded on an affidavit sworn by Barry Galvin, the Bureau Legal Officer appointed to the Criminal Assets Bureau ("the CAB") pursuant to section 9 of the Criminal Assets Bureau Act 1996. The bankrupt submitted that the CAB had no legal standing to bring the application. However, Miss Justice Laffoy said that this argument was misconceived in that it did not take cognisance of the fact that the applicant was not the CAB but was the Revenue Commissioners. She was satisfied that there was statutory authority for the evidence to support the application being put before the court by Mr Galvin.

On the question of delay, the bankrupt had advanced two broad propositions. First, it was suggested that the court could get guidance as to the appropriate time-frame governing proof of debts from Rule 66 of the Rules of the Superior Courts (No. 3) 1989, which provides for a time limit of 14 days for appealing to the court to vary or reverse a decision of the official assignee allowing or disallowing a claim. Secondly, it was submitted that the court should apply equitable principles in relation to laches, acquiescence and estoppel in determining whether an extension of time should be granted.

Miss Justice Laffoy said that in relation to the sums referred to at (c) above, it was common case that those sums were included in a proof of debt dated 31 July 1997, which was submitted on behalf of the applicant to the official assignee, but which, due to an administrative error, was not received by him until the following day. Even though there had been considerable delay on the part of the applicant in bringing his application for an extension of time, the application should be granted in respect of those sums.

Miss Justice Laffoy said that the position in relation to the sums referred to at (d) and (e) above was different. The first intimation from the applicant that it intended to prove for those sums in the bankruptcy was when the notice of motion issued on 1 November 1999. There was evidence before the court that throughout 1998 and 1999 the bankrupt had been considering the means by which he could have himself discharged from the bankruptcy. He was in correspondence with both the insolvency division of the applicant and the solicitors for the official assignee. In particular, the insolvency division had furnished the bankrupt with particulars of the applicant's status as a creditor in April 1998, and had not claimed those sums as debts. Miss Justice Laffoy said that even in the context of 15 years having elapsed between the date of adjudication and the final date fixed for submission of proofs of debt, a delay of two and a quarter years in bringing an application for an extension of time was prima facie inordinate and inexcusable. The only excuse for failing to meet the final date was "administrative error" and no explanation of any kind had been advanced for the failure to bring this application for two and a quarter years. Miss Justice Laffoy said that it was not appropriate in the circumstances to extend the time in favour of the applicant.

The basis on which the applicant claimed to be entitled to prove for the sums referred to at (f) was that it was entitled to the said sums by virtue of an order of the High Court (Mr Justice Costello ) of 1 July 1983, in In re Kelly's Carpetdrome Limited. The order contained a declaration that the bankrupt and another person had knowingly been parties to the carrying on of the business of the company with intent to defraud creditors of the company and for other fraudulent purposes. The order made the bankrupt and the other person personally liable without any limitation of liability for all of the debts and liabilities of the company and it further decreed that the bankrupt and the other person were liable to pay to the applicant (who was the official liquidator of the company) the sum of £1,809,614.96.

Miss Justice Laffoy said that it was clear from the judgment of Mr Justice Costello that that sum represented the sum found by an appeal commissioner to be due by the company in respect of tax together with interest thereon. This sum had never been proved in the bankruptcy and it was suggested in the applicant's grounding affidavit that the probable reason for this was that until recently there had been a substantial deficit in the affairs of the bankrupt and the applicant probably believed that there was no useful purpose to be served in attempting to collect those sums. It was averred by Mr Galvin that it was only recently, through the work of the CAB, that the applicant had become aware that the bankrupt was in possession of very substantial after-acquired assets and this had been concealed by the bankrupt. These averments had not been controverted by the bankrupt.

The bankrupt submitted that the effect of the order of Mr Justice Costello was to create a debt in favour of the official liquidator of the company which inured for the benefit of the general body of the creditors of the company, not a debt in favour of the applicant. He also submitted that, as the order pre-dated the adjudication of the bankrupt and the limitation period was running at the date of adjudication, the entitlement to enforce the judgment was statute-barred.

In support of the first submission, the bankrupt relied on two English decisions on provisions of company legislation similar to section 297(1) of the Companies Act 1963. The first was In Re William C. Leitch Brothers Limited (No 2) [1933] 1 Ch 261 where Mr Justice Eve had held that the sum of £3,356, recovered by the liquidator from a director who had been found to have engaged in fraudulent trading, and who had been declared personally liable for the debts of the company to the extent of £6,000, formed part of the general assets in the winding-up. He held that the relevant section, which was similar to section 297 (1) in its original form, was directed solely to the particular offence of fraudulent trading. It imposed a liability, but did not purport to create any new rights for the creditors, and could not be regarded as involving any departure form the general scheme of all modes of winding up, i.e, a pari passu distribution of the assets.

The more recent case upon which the bankrupt relied was Re Cyona Distributors Limited [1966] 1 All ER 825. The question for determination there was whether a creditor of an insolvent company which was in liquidation, who had initiated proceedings under the section corresponding to section 297, could retain a payment of a sum of money received otherwise than from the liquidator, or could be compelled by the liquidator to account to him for it in order to produce a benefit for the general body of creditors. Mr Justice Plowman referred to Re Leitch (No 2) and approved of the reasoning of Mr Justice Eve. In the circumstances of the Cyona case, there was only a claim, rather than a court declaration of liability. Mr Justice Plowman held that such a claim was a chose in action. As such, it was no different from any other property of the company, which, by virtue of the provisions of the Companies Act, was required to be applied in satisfaction of its liabilities pari passu. The claim was, therefore, impressed with a trust for the creditors generally.

The applicant urged the court not to follow these decisions. Miss Justice Laffoy said that, while it was true that the order of Mr Justice Costello was distinguishable from the declaration being enforced in Re Leitch (No 2) in that Mr Justice Costello had made a specific finding of fact that the sum of £1,809,611.96 for which he declared the bankrupt was personally liable represented a debt due to the applicant by the company, nevertheless the principles applied by Mr Justice Eve were equally applicable to section 297. Moreover, the order made by Mr Justice Costello was wholly consistent with the approach adopted by Mr Justice Eve. The application before Mr Justice Costello was made by the official liquidator of the company. The declaration made was to the effect that the bankrupt was liable "for all the debts or other liabilities of the company" and that he was liable to pay to the official liquidator the sum in question.

The applicant had contended that it had a legal right to enforce the declaration, even though it might be that the sums thereby collected might be impressed with a trust in favour of the Official Liquidator. Miss Justice Laffoy said she did not agree. There was no basis on which the applicant had an entitlement to enforce any provisions of the order of Mr Justice Costello. Accordingly, the applicant had not established that the sums referred to at (f) above constituted debts provable by it in the bankruptcy and the application for extension of time in relation to those sums was refused. Furthermore, it was immaterial that the sum of £1,800,000 referred to in the statement of affairs might have been intended by the bankrupt to correspond to those sums. Miss Justice Laffoy also commented that she had given no weight to the recitals in the final order of the High Court (Mr Justice Murphy ) in the winding-up, which were to the effect that the applicant had not objected to the order being made.

For the sake of completeness, Miss Justice Laffoy dealt with the arguments of the bankrupt that the entitlement to enforce the order of Mr Justice Costello was statute-barred, which she ruled did not stand up. In fact, the principal authority relied on by the bankrupt, In Re Banzon, Bower v Chetwynd [1914] 2 Ch 68, established this. The case concerned the donee of a power of appointment in respect of a fund of £15,000. He was twice adjudicated as a bankrupt, once in 1890 and once in 1892. He died in 1911, having by his will duly exercised his power of appointment. The creditors in the bankruptcies claimed to be paid the from the fund, which constituted almost the entire of his estate. Mr Justice Channell in the Court of Appeal said that the creditors' action was statute-barred. While the fund and the appointment represented a new fund and a new mode of proceeding in order to get it, this was merely a new remedy. The cause of action was still the old debt. Furthermore, Mr Justice Chanell held that causes of action which were provable in a bankruptcy, and which were not barred at the commencement of the bankruptcy, were kept alive for the purposes of being proved in the bankruptcy. There was no authority on whether the statue ceased to run as regards recovery by means other than in the bankruptcy.

Miss Justice Laffoy said that in Cotterell v Price [1960] 3 All ER 135 there was means of recovering a debt provable in bankruptcy other than under the machinery of the bankruptcy. In that case, the claim was by a mortgagee who was relying on his security. Mr Justice Buckley held that time continued to run as against those rights and remedies which secured creditors have outside the bankruptcy.

In the instant case, the applicant was seeking to prove the debts in the bankruptcy. Miss Justice Laffoy said that if she was satisfied that those sums represented a debt due by the bankrupt to the applicant, even though the debt accrued before the date of adjudication, there could be no question of the debt being statute-barred. A provable debt against which time is running but which had not been statute-barred at the date of adjudication remained provable in the bankruptcy even after the ordinary limitation period had elapsed. This was a necessary corollary to section 136 of the 1988 Act, which, on the making of an order of adjudication, precluded a creditor of the bankrupt from any remedy against the property or person of the bankrupt in respect of the debt apart from his rights under the 1988 Act.

Solicitors: Chief State Solicitor for the applicant; Gabrielle M. Wolfe (Dublin) for the bankrupt.