Out-Law / Your Daily Need-To-Know

Payments from discharged bankrupt 'should not continue after second bankruptcy'

Out-Law Legal Update | 08 Aug 2019 | 11:02 am | 2 min. read

A man does not have to continue making payments after he was discharged from a first bankruptcy and made bankrupt for a second time, the Court of Appeal in England has ruled.

The court said that the payments under an income payments order (IPO) could not be enforced for the benefit of the first bankruptcy and were provable as debts in the second bankruptcy.

  • IPO of discharged bankrupt is provable in second bankruptcy
  • Future payments are not enforceable by the first trustee in bankruptcy
  • Azuonye v Kent [2019] EWHC Civ 1289

Dr Ikechukwu Obialo Azuonye was first made bankrupt on 28 April 2015. His trustee in bankruptcy secured an IPO shortly before Azuonye's automatic discharge from bankruptcy. Azuonye was made bankrupt for a second time on 4 December 2017. The trustee in the first bankruptcy was appointed as trustee in the second bankruptcy.

Azuonye claimed that the second bankruptcy automatically discharged the IPO. The district judge and the High Court disagreed. The High Court ruled that the despite the second bankruptcy, the payments under the IPO continued to be payable and were not provable as debts in the second bankruptcy as they are inherently uncertain due to the court's continued power to vary them.

The Court of Appeal overturned the High Court decision and ruled that the future IPO payments were provable as debts in the second bankruptcy and were not enforceable by the first trustee.

The Court of Appeal examined previous case law identified by the trustee, including the case of Cartwright v Cartwright [2002] EWCA Civ 931, which the trustee claimed supported the argument that an amount payable under a court order which can be varied by the court, such as an IPO, is incapable of being a provable debt. The Court of Appeal said that Cartwright did not establish this, that it was a case involving a foreign court order and did not apply.

The Court of Appeal considered the effect of section 335(2) Insolvency Act 1986 (IA86). Had Azuonye not been discharged from his first bankruptcy when he was made bankrupt for a second time, then the IPO payments would form part of his second bankruptcy estate under s.335(2). The IA86 does not provide for the situation in which a second bankruptcy order is made after a bankrupt has been discharged from his first bankruptcy.

The Court of Appeal said that it "would produce a curious situation whereby diametrically opposed results would follow for future IPO payments, depending on whether the bankrupt was a discharged or an undischarged bankrupt at the commencement of the later bankruptcy. Where the Bankruptcy is discharged, section 335 applies and the earlier bankruptcy estate loses all benefit from the IPO except the trustee has a subordinated claim in the later bankruptcy. On the other hand, where the bankrupt is discharged, the later estate obtains no benefit from the IPO or the sums paid or payable under it, all of which are retained for the benefit for the estate in the earlier bankruptcy...It is not clear what policy reasons there might be for such different results."

The Court of Appeal said that its conclusion would not encourage bankrupts to enter bankruptcy again in order to avoid an IPO.

It said that an individual can not be made bankrupt for the sole purpose of avoiding an IPO, they have to be insolvent, otherwise the bankruptcy order can be annulled, and that any payments made under the IPO would form part of the second bankruptcy estate. It said that any outstanding and future payments under the IPO are provable in the second bankruptcy, and that the second trustee could apply for a new IPO.