Uncooperative bankrupts – Court of Appeal upholds an extension of the bankruptcy period

Monday, 20 February 2017

In McFeely v Official Assignee in Bankruptcy [2017] IECA 21, a judgment delivered by Mr. Justice Peart on 2nd February 2017, the Court of Appeal has reiterated the importance of maintaining the integrity of the bankruptcy process in Ireland, and in so doing has provided a useful overview of the law relating to the circumstances in which the Court will order an extension of the bankruptcy period under the Bankruptcy Act 1988 (as amended) (the “Act”).

Background
Section 85 of the Act provides for the automatic discharge of a bankrupt on the 1st anniversary of adjudication. However, it is possible in certain prescribed circumstances to extend that period under Section 85A of the Act, which provides at relevant part as follows:

“The Official Assignee, the trustee in bankruptcy or a creditor of the bankrupt may, prior to the discharge of a bankrupt pursuant to section 85, apply to the Court to object to the discharge of a bankrupt from bankruptcy in accordance with section 85 where the Official Assignee, the trustee in bankruptcy or the creditor concerned believes that the bankrupt has:-  

(a) failed to co-operate with the Official Assignee in the realisation of the assets of the bankrupt, or  

(b) hidden from or failed to disclose to the Official Assignee income or assets which could be realised for the benefit of the creditors of the bankrupt…

Section 85A (4) goes on to provide that where the Court is satisfied that the bankrupt has so failed to co-operate or has so hidden or failed to disclose assets, the Court “may where it considers it appropriate to do so” order that the period of bankruptcy be extended to an outer date which is no later than the 8th anniversary of the date of the making of the adjudication order. 

In the McFeely case, upon the application of the Official Assignee in Bankruptcy (the “OA”), Costello J in the High Court granted an Order under Section 85A of the Act extending the period of bankruptcy by the maximum period of 8 years from adjudication. The application had been advanced by the OA on, inter alia, the following grounds:

1. The bankrupt refused to furnish the OA with his actual address throughout the period of his bankruptcy, failed to file a statement of affairs, and had misled the OA in his initial interview with him.  
   


2. The bankrupt failed to disclose his interest in certain properties.

The High Court, having considered all of the evidence before it, concluded on the facts that there was “ample, cogent evidence” of failure to co-operate and hiding of assets which was “deliberate and…persisted despite the attempts by the Official Assignee to secure….co-operation”.

In considering the length of the extension to be imposed, the Court cited the Supreme Court decision in Killally (a bankrupt) v. The Official Assignee [2014] 4 I.R. 365, in which it was held that the Court is empowered to extend the bankruptcy period under Section 85A of the Act as a deterrent sanction, and not just in situations where such extension is required in order to complete or conduct further investigations. In this regard the Supreme Court held that “the maintenance of the integrity of the bankruptcy process is of the utmost importance and requires to be encouraged by the imposition of sanctions for breach”¹. Costello J considered that the behaviour of the bankrupt in the present case was at the “very grave end of the spectrum” and accordingly made an order for the maximum extension permissible under the Act.

Grounds of Appeal
The appeal centred on three main grounds. Firstly, it was submitted that the OA had illegally obtained documents in circumstances where he had gathered them from a search of premises without first obtaining a warrant under Section 28 of the Act. In those circumstances it was submitted that the High Court had erred in admitting those documents into evidence, and that the OA had engaged in a “knowing, reckless or negligence breach of constitutional rights”. The bankrupt was formerly a director of the company which held a lease of the premises in question, and had managed his business affairs from the premises. The Court ultimately held that while the search itself was unlawful the evidence obtained as a result of same was admissible in circumstances where there had been no breach of the constitutional rights of the bankrupt.

Secondly it was submitted that the High Court had applied a disproportionate sanction in the circumstances. The Court of Appeal upheld the decision of the High Court and saw no reason to depart from the conclusion reached as to the gravity of the behaviour of the bankrupt in this case, and upheld the proportionality of the extension imposed.

The third ground of appeal focussed on the reviewability or otherwise of the decision of the OA to make an application under Section 85A in the first place. This was summarily rejected by the Court of Appeal, Peart J concluding that it was “frankly a ludicrous contention” that such a decision was open to judicial review.

Conclusion
The Court of Appeal has made it clear that the Courts will impose extensions on the period an individual remains a bankrupt in order to encourage transparency and full co-operation by bankrupts with the OA.

Individuals either currently in bankruptcy (or under threat of bankruptcy) and indeed their creditors, who it should be remembered have locus to bring an application under Section 85 of the Act, should take careful heed of this decision and related case law. Unsecured creditors and secured creditors claiming for the shortfall in debt owed to them post realisation of their security outside of the bankruptcy process will have a particular interest in any pressure that can be brought to bear on an uncooperative bankrupt, particularly where it is apparent that there are undisclosed assets at play.   

For further information, contact John Fitzgerald from the ByrneWallace Restructuring & Insolvency team.