Re C, an Arranging Debtor

• Jurisdiction: Ireland
• Court: Supreme Court (Irish Free State)
• Judgment Date: 01 January 1926
• Date: 01 January 1926

In re C., An Arranging Debtor

In re C., An Arranging Debtor (1)

Bankruptcy - Arrangement - Acceptance of arrangement by statutory majority of creditors - Whether "reasonable and proper to be executed under the direction of the Court" - Discretion of Bankruptcy Judge - Irish Bankrupt and Insolvent Act, 1857 (20 & 21 Vict. c. 60), sect. 353.

C., a retail trader, finding himself in difficulties in the year 1923, wrote to his principal creditors (a group of firms who supplied him with goods) stating his position. They agreed not to press their claims then, and C. continued to trade. His position not improving, he wrote in the following year to all his creditors informing them of his position, and offered to pay 2s. in the £1. This offer was not accepted, and C. continued to trade, but in the following year he was compelled to take protection. His statement showed a large number of creditors, a very large total debt, and trivial assets not likely to produce more than about 8d. in the £1. He offered (with the assistance of friends) to pay 2s. in the £1, and this was accepted by a large majority in number of his creditors and of more than the statutory three-fifths in value, but was opposed by other creditors (including the group of firms who had known of his position since 1923), they alleging reckless trading on C.'s part since 1923. C. had not kept proper books of account, but from his bank books and his invoices the result of his trading could be ascertained. Johnston J., in the exercise of the discretion vested in him under sect. 353 of the Irish Bankrupt and Insolvent Act, 1857, refused to sanction the arrangement on the ground that "it was not reasonable and proper to be executed under the direction of the Court,"holding that there was evidence of reckless, not to say dishonest, trading on C.'s part for some years previously, and he adjudged C. bankrupt.

Held by the Supreme Court (reversing Johnston J.) that, on the facts, there was no sufficient ground for overruling the wishes of the majority of the creditors accepting C.'s proposal for an arrangement, and that the order of adjudication must be discharged.

Principles which should guide the Court in dealing with arrangements under the Irish Bankrupt and Insolvent Act, 1857, considered.

Appeal by C., an arranging debtor, from an order of Johnston J., sitting as Bankruptcy Judge, dated March 13th, 1925, made upon the adjourned first Private Sitting, whereby it was ordered that he (the appellant) should be adjudged bankrupt. The notice of appeal asked that this order be reversed, and that it might be ordered that the first Private Sitting in the arrangement matter in pursuance of the petition of the bankrupt should be passed.

The debtor C. had carried on business in Dublin as a tobacconist for a period of some seventeen years. Early in the year 1923 he found himself in financial difficulties, and wrote to his principal creditors, the Imperial Tobacco Combine, stating how he stood, and informing them that he proposed to sell one of the two premises in which he carried on his business, and asking for further time to meet his obligations. The Imperial Tobacco Combine replied stating that their claim could remain

in abeyance for the present, on the assurance that the proceeds of the sale of the business premises would be divided amongst the creditors, and that no preference would be given to any creditors. His position not improving, on the 6th of March, 1924, he called a meeting of his creditors and submitted for their consideration an offer of 2s. in the £1 in settlement of his liabilities to them. This offer was refused by the creditors. Negotiations, however, were continued, and extended over a period of eight months, but eventually proved unsuccessful. On the 6th of January, 1925, the debtor took the protection of the Court, and made a proposal to pay his creditors 2s. in the £1 in cash within one month of acceptance. The statement of his affairs disclosed unsecured debts amounting to £3,020 12s. 8d., which were largely for goods sold and delivered to him. In addition, he owed the Hibernian Bank, Ltd., a sum of £745 11s. 6d., which was secured by two policies of life assurance to the extent of £132. His total debts amounted to £3,634 4s. 2d. The assets amounted to £133 9s. 7d., and consisted of stock-in-trade, £90 3s. 2d.; shop furniture, £27 10s.; and debts, £15 16s. 5d. The offer of 2s. in the £1 was accepted by the statutory three-fifths in number and value of the creditors, as twenty-eight creditors out of a total of thirty-two, and representing £1,701 out of a total of £2,738 10s. 6d., supported the debtor's proposal. The debtor kept no books of account. He kept an account with the Bank, and this bank account and the invoices and receipts in his possession furnished sufficient data to reveal the true position of his affairs. The further facts appear from the judgments.

Johnston J., sitting as Bankruptcy Judge, found, as a fact, that there was "reckless, not to say dishonest, trading" on the part of the debtor, and in the exercise of his discretion under sect. 353 of the Irish Bankrupt and Insolvent Act, 1857 (20 & 21 Vict. c. 60), refused to sanction the arrangement, and adjudged the debtor bankrupt, as the proposal, in his opinion, was "not reasonable and proper to be executed under the direction of the Court." From that decision the debtor appealed.

Cur. adv. vult.

Kennedy C.J. :—

I confess that I have had some doubt whether we should disturb the exercise of the Judge's discretion in refusing to sanction this arrangement; not doubt as to the legal principles governing the exercise of that discretion under sect. 353 of the Irish Bankrupt and Insolvent Act, 1857, but rather a difficulty as to the application of those principles to the special facts of the present case. Upon further careful consideration of all the facts, however, my difficulty, which would be serious if the actual facts were somewhat varied, has disappeared.

The section gives power to override the majority of the creditors in an arrangement, and to adjudge the petitioner bankrupt in certain cases. One is a case where it is shown that the affidavit filed with the petition is wilfully untrue as to the debtor's assets. Counsel for the opposing creditors here have expressly disclaimed the making of that charge. Another case is where it is shown that the petitioner has not made a full disclosure of his debts and credits, estate and effects, and is not desirous of making a bona fide arrangement with all his creditors. The opposing creditors here refrain from committing themselves to a charge of such non-disclosure by the debtor.

Another case is where is it shown that the debtor's proposal for an arrangement "is not reasonable and proper to be executed under the direction of the Court." The opposing creditors say, and Johnston J. held, that on the facts the arrangement proposed here is within that case, and ought not to receive the sanction of the Court.

Several cases are reported in which the principles governing the application of these provisions have been considered. The earliest reported case appears to be In re Beck(1), in which the Bankruptcy Judge, Berwick J., in face of an overwhelming majority of creditors, adjudged a petitioner bankrupt on the demand of an opposing creditor whose claim was in respect of valuable machinery supplied to the debtor, and then forming a substantial part of his assets. The assenting creditors were to have a benefit at the expense of the opposing creditor. The arrangement was held not to be a bona fide proposal for the benefit of all the creditors, and not a proposal reasonable or proper to receive the sanction of the Court.

In re Max Schroeder, a Bankrupt (2), was a case where the debtor had no assets in this country, and his proposed composition rested upon moneys raised by friends. He had, however, a contingent interest in valuable property abroad, which was not proposed to be brought in as an asset. The Court of Appeal refused to reverse Boyd J., who adjudged the petitioner bankrupt on the ground that the proposal, though accepted by the necessary majority of creditors, was not reasonable and proper to be executed by the Court. Ashbourne L.C. emphasised the discretionary character of the jurisdiction of the Bankruptcy Judge in such a case.

In re A. and B., Arranging Debtors (3), was a case where debtors went on trading after they knew they were insolvent. The Recorder of Belfast, notwithstanding the majority supporting the proposed arrangement, adjudged the debtors bankrupt, and was affirmed by the Court of Appeal on the ground that the debtors' conduct was not commercially honest, and that the case called for the fullest investigation which would be open in bankruptcy.

In Pelan's Case (not reported, but stated by Holmes L.J., [1913] 2 I.R. 279, and in a note in 46 I.L.T.R. 290) the Recorder of Belfast adjudged the debtor bankrupt notwithstanding the majority supporting his proposed arrangement. He did so on the ground that the debtor kept no books or accounts, had been given to bet at races, and was careless and extravagant. The Court of Appeal reversed the Recorder on the ground that it was the ordinary case of a proposal accepted by a statutory majority of creditors, which ought to be acted on by the Court in the absence of any specific ground for rejecting it.

The latest case appears to be In re Fry(1), where the Court of Appeal reversed the decision of the Recorder of Belfast adjudging the debtor bankrupt, notwithstanding a statutory majority in favour of accepting his proposal for an arrangement. The facts upon which the Recorder acted were that the debtor, at a time when he had sanguine...