In the recent case of John Roger Firth -v- Clive Everitt [2007] EWHC 1979 (Ch) it was held that the judge below had been wrong to strike out claims without first considering his powers under Civil Procedure Rule (CPR) r.3.10 to allow the debtor to rectify claims in which he had made errors of procedure. The judge had also erred in granting a bankruptcy petition without looking properly into the state of the debt relied upon by the petitioning insolvency practitioner (unpaid costs awarded to him as PVA supervisor on the occasion of a past claim which had been struck out on procedural grounds).

the facts

The applicant and his wife carried on two businesses together in partnership which became insolvent. Following advice, they instructed the petitioner (and respondent to this appeal) to set up a new company for the purpose of transferring one existing business into that company. They eventually entered into a partnership voluntary arrangement (PVA), which was accepted by creditors. The petitioner acted as nominee and supervisor. Under the PVA the petitioner’s fees were capped, but he purportedly removed the cap with the consent of the creditors. The applicant objected to an increase in fees beyond the capped figure and as a result suspended payments into the PVA. The petitioner issued a certificate of default.

The applicant brought proceedings, disputing the petitioner's entitlement to the fees and seeking recovery of fees that had already been paid. The claim was struck out under Civil Procedure Rule (CPR) 3.4 on the grounds that it had not been properly brought under the Insolvent Partnerships Order 1994. The applicant then commenced three new claims that broadly mirrored the initial claim. However, there were errors and inaccuracies in the claim forms. The petitioner then issued a bankruptcy petition against the applicant, relying on sums due from him, namely the costs awarded against him in relation to the initial (struck out) claim. The judge struck out the three claims and made a bankruptcy order against the applicant. The applicant contended the judge should have exercised his discretion pursuant to CPR r 3.10, permitting him to amend his claims.

the judgment

In dismissing the three claims it did not appear that the judge was directed or adverted at all to his powers under CPR r 3.10, which provided that an error in procedure did not, of itself, invalidate claims unless the court so ordered.

It was a material error for the judge not to have considered CPR r 3.10 and the applicant should have been given the opportunity to amend his claim as necessary. It was wrong to treat failure to use the correct procedure as a reason to prevent adjudication upon the substantive matters raised by the applicant and the claims had therefore been wrongly struck out. The proportionate means of addressing procedural defects was to provide for adverse costs in any event.

R. 6.25(1) Insolvency Rules 1986 states, in effect, that a court, when hearing a bankruptcy petition, has to conduct some positive inquiry into the state of the debt relied upon (see the interpretation given in LSC -v- Leonard [2002] EWCA Civ 744). On the evidence it did not appear that this requirement had been addressed at all by the judge below. Therefore the appeal judge felt it was appropriate – on this ground alone (but the authors bear in mind also that if the debtor’s claims had come to fruition there was a possibility of the petitioner being ordered to pay the PVA debtor’s costs) to set aside the judge's decision declaring the appellant bankrupt.

implications for insolvency practitioners

It is difficult to draw any hard and fast guidance from this case as the insolvency practitioner can perhaps rightly be regarded as the unfortunate victim of the first instance judge being perhaps too robust.

However, the case does serve as a timely reminder to insolvency professionals generally that, when dealing with litigants in person, the courts will seize upon any proper opportunity to redress the imbalance between the parties by penalising any professional who would take advantage of procedural irregularities as a means of avoiding dealing with the substance of the application.

The lesson, therefore, would appear to be that (completely spurious allegations aside) it is better to give the individual the benefit of the doubt and attempt (in so far as it is proportionate to do so) to analyse and address their substantive complaint, than to ignore it because of the defective manner of its presentation.

In particular, it serves us all well to remember that:

a litigant in person may be more likely to make a procedural error or inaccuracy in setting out their claims
the judge has a duty to consider CPR r 3.10, the language of which provides that an error in procedure does not itself invalidate matters unless the court so orders
the judge, when hearing a bankruptcy petition, must look into the state of the debt relied upon, if this is not adhered to, the bankruptcy order may be set aside
if the judge fails to properly direct himself, it is the duty (but also in the interests) of the professional attending before the court to address this at the hearing

For more information on this topic, please contact Gemma Smith or Mike Pavitt of Blake Lapthorn’ Insolvency and Business Recovery team.