Artman v Artman

CHANCERY DIVISION (BANKRUPTCY COURT)

The Times 27 June 1996, (Transcript: Beverley F. Nunnery & Co)

HEARING-DATES: 13 JUNE 1996

13 JUNE 1996

COUNSEL:
G Tritton for the Applicant; W Parker for the Respondent

PANEL: ROBERT WALKER J

JUDGMENTBY-1: ROBERT WALKER J

JUDGMENT-1:
ROBERT WALKER J: This is an application under s 282 (1)(a) of the Insolvency Act 1986 to annul the bankruptcy of Mr Anthony Lester Artman, on the grounds that the bankruptcy order, which was made on 4 May 1994, ought not to have been made. An unusual, though not unique, feature of the application is that it is made not by Mr Artman, but by his former wife, Mrs Deborah Artman, whose marriage was dissolved by a decree absolute granted on 14 February 1995, and that it is resisted by Mr Artman.

Mr and Mrs Artman married in 1985. They have three children, sons aged 10, 7 and 3. Mr Artman was a chartered accountant, though his membership of his professional body was terminated on his bankruptcy. He had various partnership arrangements but none of these seems to have lasted for long. In 1990 or 1991 he was in partnership, or at least association, with Mr Martin Cordell. That led to an action which Mr Cordell commenced in 1992 and in which Mr Artman counter-claimed. The action is now, it seems, in a state of suspended animation. Then Mr Artman was in partnership with Mr Michael Beaver, under the firm name of Beaver Lesters. That partnership also came to an end and Mr Artman continued to practice as a sole practitioner, but under the name of Beaver Lesters.

In the meantime, serious personal problems had arisen between Mr and Mrs Artman. She says that he was violent, but he denies it. There were certainly major differences and problems over money. At first, Mrs Artman moved out of the matrimonial home, that is 6 Curzon Avenue, Stanmore, Middlesex, with the children, but after a while she moved back with the children and Mr Artman went to live with his parents.

The differences between the parties were ventilated in matrimonial proceedings in the Willesden County Court, which Mrs Artman commenced in 1993. There was a consent order made by District Judge Morris on 12 May 1993. Mrs Artman had by then petitioned for divorce and there were hard fought, but in practical terms, inconclusive applications for ancillary relief. Mrs Artman's main complaint, in essence, is that her ex-husband has engineered, or at least submitted to his own bankruptcy as a means of frustrating her justified wish to become sole owner of the matrimonial home. I shall have to come back to these points in more detail, although I doubt whether I shall be able to get to the bottom of all the various issues that have been touched on before me.

That is, to some extent, only background, but it is background which is copiously documented in the voluminous papers before me on this application, an application in which both Mrs Artman and her former husband are legally aided. That is a rather disturbing feature of this case. It seems to have run out of control with discovery, writs of subpoena and massive exhibits of documents which, so far as they establish anything, seem to duplicate the work more properly to be undertaken by Mr Artman's trustee in bankruptcy.

On 19 January 1994, the Commissioners of Customs and Excise presented a creditor's petition against Mr Artman based on a statutory demand dated 10 November 1993, in the sum of 13,326 odd. On 3 March 1994, Mr Artman gave notice of opposition under r 6.21 of the Insolvency Rules. This stated that he was not insolvent and was well able to pay his genuine debts. Mr Artman has since, in an affidavit sworn on 5 May 1995, deposed that it was quite obvious that he was insolvent, as besides the VAT claimed, he had liabilities in excess of 260,000. This suggests that Mr Artman is not a person on whose uncorroborated statements much reliance can be placed.

In any event, Mr Artman did not appear and was not represented at the hearing of the petition and he was adjudicated bankrupt by an order of Mr Registrar Scott made on 4 May 1994. The order was amended on 17 August 1994 to correct the description of Mr Artman's address and occupation. A few days before, on 9 August 1994, the Deputy Official Receiver estimated the known assets of Mr Artman at 26,250 and the known liabilities at 216,056, giving a deficiency of over 175,000. The first meeting of creditors was held on 8 September 1994 and Mr Paul Jeffery, an insolvency practitioner at the St. Albans office at KPMG, was appointed as trustee in bankruptcy.

As I have said, the application for annulment is made by Mrs Artman, who appears by Mr Guy Tritton. The first respondent is Mr Artman, who appears by Miss Wendy Parker. The second respondent is the Official Receiver. He does not appear. The third respondent is Mr Jeffery, the trustee in bankruptcy. He appeared by counsel, Mr Aldridge, who put in a copy of Mr Artman's replies to the Insolvency Services preliminary examination questionnaire, but then, in the interest of saving costs, withdrew from the hearing. The fourth respondent is the petitioning creditor, the Commissioners of Customs and Excise. They appeared by counsel, Miss Fernanda Pirie. She told me that, apart from the costs of the petition, her clients had now been paid in full, (though not, as will appear, by Mr Artman or his trustee) and that they adopted a neutral attitude. In response to my question directed to s 271 (1)(a) of the Insolvency Act, Miss Pirie submitted that the debt which Mr Artman owed to her clients had not been secured or compounded for, by an agreement made on 3 May 1994, (that is the day before the bankruptcy order) between her clients and Mr Artman's former partner, Mr Beaver. But she did not put forward any reasoned argument in support of that view. She then withdrew from the hearing. So the main controversy has been between Mrs Artman and her former husband.

Mrs Artman seeks an order annulling the bankruptcy under s 282 (1)(a) of the Insolvency Act which provides that:

"The court may annul a bankruptcy order if it at any time appears to the court:

(a) that on any grounds existing at the time the order was made, the order ought not to have been made."

The statute does not specify who may make the application and although the bankrupt himself is, no doubt, the most usual applicant when an order has been made on a creditor's petition, that is obviously not the case when an order has been made on the debtor's own petition: see, for instance, Re Holliday (a bankcrupt), ex parte the Trustee of the bankcrupt v The Bankcrupt and Another [1981] Ch.405, [1980] 3 All ER 385. That was a case under the old law but it has not been submitted to me that the bankrupt himself is, under the new law, the only person who can apply for annulment of a bankruptcy order made on a creditor's petition.

In these circumstances, the first issue that I must address is whether, on grounds existing at the time, the bankruptcy order ought not to have been made. If it should have been made that is an end of the matter, since Mrs Artman does not rely in the alternative on s 282 (1)(b). If it should have been made, the court still has a discretion whether or not to annul the order. The statute does not lay down any particular matters to be taken into account in the exercise of the court's discretion, but the likely affect of any annulment order on the applicant, on the bankrupt where he is not the applicant, and on the bankrupt's other creditors must, it seems to me, be among the most important matters to be taken into account. So must any element of abuse of process in the obtaining or making of the bankruptcy order.

Before considering these issues, I should record that both Mrs Artman and her ex-husband were cross-examined on their affidavits. They were also allowed, by me, to give a limited amount of further evidence in chief. I found Mrs Artman a straightforward and intelligent witness. She obviously has very strong views about the way that her ex-husband has treated their children and herself, but she generally kept these feelings under control. She has (with some help, I think, from her father) put an enormous amount of time and effort into investigation and analysis of documentary material, much of it obtained by subpoenas or orders for specific discovery, (though Miss Parker points out to me that some has been obtained in rather more doubtful circumstances) relating to Mr Artman's financial affairs. But neither Mrs Artman nor her father is an accountant, and several of the points that she sought to make in her long affidavit of 7 April 1995 are, as Mr Tritton acknowledged, not sustainable.

Mr Artman was not an impressive witness, especially when asked about inconsistencies in his affidavit evidence, his statements to the Insolvency Service and certain documents which had been revealed. Whether various sums received from his parents were gifts or loans was a striking example of these inconsistencies. On some three occasions he invoked the privilege against self-incrimination, which I ruled to be available in these proceedings, although it is not available on an examination under s 235 or s 236 of the Insolvency Act. This was principally in connection with an account with the Halifax Building Society, which Mr Artman appears to have opened shortly before his bankruptcy and to have concealed from the Insolvency Service and from his trustee in bankruptcy. Furthermore, Mr Artman admitted that he had torn out from an account book pages relating to March and April 1994, shortly before his bankruptcy. The reason that he gave for this action was thoroughly unconvincing.

Nevertheless, and despite these obvious blots on his evidence, I have come to the conclusion that most of the evidence that Mr Artman gave to me was truthful. In particular, I accept that although his sole practitioner accountancy practice had quite a healthy turnover until the end, Mr Artman was subject to an increasing burden of loan interest and lawyers' fees and that his professional outgoings on wages, rent and other expenses, left a diminishing margin of profit to meet these liabilities.

I accept Mr Artman's evidence that he did not receive any lump sum from Paul de Costa & Co., the accountancy firm whom he approached shortly before his bankruptcy, but only a commission element in his periodical remuneration from working for that firm as a consultant. This was, of course, after his membership of his professional body was terminated, work as an unqualified consultant.

I accept that the goodwill of his practice, though shown at 50,000 in his balance sheet, had no further realisable value, although Mr Artman agreed that in other circumstances the goodwill of established clients might be sold for up to one year's purchase. I also accept that the suspense account entries in the balance sheet had no realisable value and that his counterclaim against Mr Cordell, his first partner or associate, was probably worthless.

On the evidence as a whole (and it would not, I think, be a useful exercise to go through the detail of all the numerous items that were explored in evidence) I have come to the clear conclusion that at the time when the bankruptcy order was made Mr Artman's liabilities, including liabilities for which he was not then being actively pressed, but which were present liabilities or became so on his bankruptcy, exceeded his assets by a very sizeable margin. The margin was most probably not as great as the sum of almost 178,000 shown in the Deputy Official Receiver's statement of 9 August 1994, but it seems unlikely to have been significantly less than 100,000. I reach this conclusion despite the principle, which I apply in accordance with F v F (Divorce: Insolvency: Annulment of Bankcruptcy Order) [1994] 1 FLR 359, at page 367, that presumptions are to be made against a debtor who prevaricates and fails to give a candid account of his affairs.

Against that background, I come to the first issue, whether the bankruptcy order should have been made. It should not have been made if at that time the petitioning creditor's debt had been paid, secured or compounded for (see s 271 (1)(a) of the Insolvency Act 1986).

The material facts appeared from an affidavit of Mrs Leonie Martin, who works in the solicitor's office of the Customs and Excise. She was then a clerical officer working on temporary promotion to executive officer. She deposes that HM Customs and Excise had a claim for just over 18,650 against Mr Artman and his former partner, Mr Beaver, for the quarter ending 31 May 1992. After some small payments on account, about 13,300 remained due on 10 November 1993, when statutory demands were made against both former partners, followed by separate bankruptcy petitions against both, presented on 19 January 1994.

Before this, Mr Artman had offered to pay 4,000 and Mr Beaver had offered to pay half the debt. After the petitions were adjourned on 15 March 1994, Mr Beaver's solicitor continued negotiations with the Customs and Excise. Mr Beaver offered to pay the whole debt by instalments, (actually effected, it seems, by post-dated cheques) over a period to December 1994 on the basis that the petition against Mr Artman would continue.

Indeed Mrs Martin's manuscript file note, dated 28 April 1994, records that a colleague of hers, at the Stratford office of the Customs and Excise:

"Wanted to confirm we would seek a bankruptcy order against Mr. Artman, as debtor [that is Mr. Beaver] would only agree to make T.T.P. [that is time to pay, or the instalment agreement] if other partner made bankrupt.

I advised him we would seek a bankruptcy order, but there is no guaranteeing a bankruptcy order would be made."

The agreement with Mr Beaver was recorded in an official letter of 10 May 1994. It seems it was actually made orally, by telephone, on 3 May 1994. Mrs Martin's notes of the hearing before Mr Registrar Scott on 4 May, record: "T.T.P. has been agreed with other partner". It is not absolutely clear whether the Registrar was told this, but as the petition against Mr Beaver was dismissed by the same Registrar on the same occasion, it seems very likely that it was drawn to the Registrar's attention.

Mr Tritton submits that the debt to the Commissioners of Customs and Excise had been compounded at the date of the hearing before Mr Registrar Scott, and that it was an abuse of process for the Commissioners to seek a bankruptcy order against Mr Artman if there was no debt to be pursued. If Mr Beaver had on 3 May 1994 paid the VAT liability in full, that submission would plainly be well founded. But, in fact, Mr Beaver agreed to pay off the liability by instalments, represented by a series of post-dated cheques, so I have to ask myself whether that arrangement related to Mr Artman's debt and whether it amounted to a compounding of that debt.

Under English law, the liability of partners in respect of partnership debts is, in general, a joint liability, see s 9 of the Partnership Act 1890, (the special position of the estate of a deceased partner is not material here). That general rule is expressly recognised and made applicable in connection with liabilities for VAT, see s 30 (5) of the Value Added Tax Act 1983.

Since the enactment of s 3 of the Civil Liability (Contribution) Act 1978, judgment against one joint obligor is no bar to an action against another joint obligor and the discharge in bankruptcy of one joint debtor does not discharge any other joint debtor, see Insolvency Act 1986 s 281 (7). But whether or not it was an amiable thing to do, it seems to me that it was open to the Commissioners of Excise to decide to proceed with their petition against Mr Artman, while coming to terms with Mr Beaver, so long as the terms agreed with Mr Beaver did not amount to payment in full or compounding of Mr Artman's debt.

It is clear from Mrs Martin's notes and from the surrounding circumstances, that the Commissioner's arrangement with Mr Beaver was not intended to affect their rights against Mr Artman, which they sought to enforce by proceeding with the separate petition against him. Their arrangement with

Mr Beaver may arguably have amounted to a compounding of his liability, though I doubt that; if anything it was an agreement to make a composition, rather than a perfected composition. There seems to be surprisingly little authority on this point or on the modern meaning of "compounding".

Miss Parker drew my attention to the decision of the Court of Appeal in Re Marr [1990] Ch.773, [1990] 2 All ER 880, but if it was concerned with a clash, since removed, between s 271 (1) and s 271 (2)(a) of the Insolvency Act 1986, and does not touch, even in passing, on this point. But I have come to the conclusion that from Mr Artman's point of view, as at 4 May 1994, (the material date for establishing any grounds for annulment under s 282 (1)(a)) his liability to the Customs and Excise represented a present liability of his which had not been paid, secured or compounded for. There was simply an agreement with his jointly liable ex-partner that it would be paid.

That is enough to conclude this application against the applicant, Mrs Artman. Even if I had been persuaded that the bankruptcy order ought not to have been made because of Mr Beaver's arrangement with the Customs and Excise, I would have been very strongly disposed against annulling the bankruptcy for three reasons in particular.

First, there is, even with Mr Artman's invocation of the privilege of self-incrimination, strong prima facie evidence that Mr Artman has concealed assets from his trustee in bankruptcy in circumstances amounting to one or more bankruptcy offences, under Pt IX Ch VI of the Insolvency Act 1986. It would strongly offend my sense of what is right and proper if the annulment of the bankruptcy were to prevent, or in any way hinder, the investigation and the taking of appropriate action in respect of this serious matter. I could not possibly regard this, though Mr Tritton urges me to do so, as making it an abuse of process and therefore a positive reason for exercising my discretion so as to order an annulment. I shall direct that a copy of this judgment should be sent to the Official Receiver in order that he can consider with the trustee in bankruptcy what is the appropriate way to proceed.

Second, it seems likely that even if his bankruptcy were annulled, Mr Artman would soon be made bankrupt again, either on a creditor's petition, or on his own petition. The requirements for a debtor's petition are, of course, more stringent now than they were under the old law but, nevertheless, Mr Artman does appear to be hopelessly insolvent.

Third, and following on from the last point, I very much doubt whether the annulment of the existing bankruptcy would, in practical terms, do Mrs Artman any good at all. I feel considerable sympathy for her and I acknowledge the great efforts that she has put into the investigation of her ex-husband's financial affairs, even if those efforts have been, in some respects, misguided. But I can see no realistic prospect of her succeeding, even if her ex-husband's bankruptcy were annulled, in obtaining an effective property adjustment order before his insolvency again supervened.

This is not the right occasion to go into all the difficulties that can arise when insolvency law and matrimonial property law threaten to collide. For an illustration of those difficulties see, in particular, Re Mordant [1995] 2 BCLC 647, [1995] BCC 209, especially what is said at p 216 of the latter report, about Re Flint (a Bankcrupt) [1993] Ch.319, [1993] 2 WLR 537.

For these reasons, I will dismiss the application and I would as a matter of discretion have dismissed it, even if I had taken a different view on the compounding point.

DISPOSITION:
Application dismissed

SOLICITORS:
Littlejohn & Co; Freedman Sharman & Co