Failure to elect fatal to proof of debt?

Dixon v Lehane (Official Assignee in Bankruptcy of the Estate of Henry Dixon) & Anor [2022] IECA 220What are the rights and responsibilities of secured creditors and bankrupts in the review of proofs of debt?

Overview

This case considers the appropriate procedure to be adopted in reviewing proofs of debt in the administration of a bankrupt’s estate, the role of the bankrupt in the process, and the duties and obligations of a secured party in electing what is to be done with the security.

Background

In 2018, Mr. Dixon was adjudicated bankrupt on application by the Revenue Commissioners (“the Revenue”) as petitioning creditor. Prior to the bankruptcy, the Revenue obtained three judgment mortgages which were charged against Mr. Dixon’s interest in certain lands – in April 2002, in the Circuit Court (“the 2002 Circuit Court proceedings”); in October 2002, in the High Court (“the 2002 High Court proceedings”); and in February 2009, in the High Court (“the 2008 High Court proceedings”). The amounts owing under each judgment were recited as follows:

1. the 2002 Circuit Court proceedings: €26,518.45 plus interest and costs;

2. the 2002 High Court proceedings: €532,776.07 plus interest and costs; and

3. the 2008 High Court proceedings: €55,960.43 plus interest and costs.

In the bankruptcy petition, the Revenue sought the sum arising on foot of the 2008 High Court judgment only. The bankruptcy petition stated: “Your petitioner holds security for the payment of (or part of) the said sum but he will give up such security for the benefit of the creditors of the Debtor in the event of the Debtor’s being adjudged a bankrupt.” Upon Mr. Dixon’s adjudication as a bankrupt, the amount arising pursuant to the 2008 High Court judgment was proven as a debt within the bankruptcy.

The Revenue submitted a proof of debt to the Official Assignee (“OA”) in September 2019 in the amount of €784,501.60, which was admitted by the OA. In December 2020, Mr. Dixon issued a notice of motion seeking an order pursuant to Section 79 of the Bankruptcy Act 1988 disallowing the claim of the Revenue in so far as it exceeded the sum of €82,821.44 or, in the alternative, an order pursuant to paragraph 23(e) of the First Schedule to Bankruptcy Act 1988 appealing the OA’s decision to admit the Revenue as a creditor in the sum of €784,501.60.

In March 2021, the Revenue submitted a revised proof of debt in the amount of €472,154.96. It was accepted by the OA in the context of an existing court application and in the knowledge that it, plus Mr. Dixon’s objections, would form part of the High Court’s deliberation.

The High Court Decision

The High Court disallowed the proofs of debt, finding that:

1. the OA should not have accepted the original proof of debt because it did not contain an election as to what was to be done with the security; and

2. the OA should not have accepted the revised proof of debt without telling the bankrupt about it first because to do so deprived the bankrupt of the opportunity to argue that the matter should be referred to the court prior to being accepted.

The Court of Appeal Decision

With respect to the second conclusion, both the Revenue and OA took particular issue with the High Court’s finding that section 23(c), in requiring the OA to refer disputed debts to court for adjudication, must mean that the bankrupt must be made aware of the debt and be given an opportunity to dispute it. The Court of Appeal agreed, finding that there is no provision within section 23(c), or anywhere within the 1988 Act, for a referral of a proof of debt to a bankrupt prior to the OA’s initial determination in respect of that debt.

There are clearly defined rights of recourse open to any bankrupt aggrieved with the decision of the OA pursuant to section 23(e) or Order 79 of the 1988 Act (the section grounding Mr. Dixon’s notice of motion). Section 23(e) states that any person aggrieved by the decision of the OA may appeal to the Court – this alone makes it clear that the OA has the power to make any such adjudication in the first place. If all claims were initially to be submitted by the OA to a bankrupt for his/her decision, then it would not be the OA who has made any decision, but rather the bankrupt in accepting or disputing the debt or seeking a referral to the Court for some other reason.

The Court of Appeal then turned to the High Court’s first finding with respect to Mr. Dixon’s argument that the Revenue’s failure to elect impugned the OA’s administration of this estate in admitting it as a proof of debt at all. Upon adjudication, the rights of any creditor against a bankrupt are limited to its rights within the 1988 Act. The options open to a secured creditor within section 24 are as follows.

The rules provide that, if a secured creditor realises his security, he may lodge a proof of debt for the balance due to him after crediting the proceeds of realisation against the debt. He can then share in dividends but cannot upset any dividends which have already been declared. Alternatively, the creditor may surrender his security for the benefit of the general creditors and then claim for the full amount of his debt as an unsecured creditor. The third option open to the secured creditor is to keep the security (either permanently or for sale at a later date), while putting a value on it. In this case, the creditor, in his proof of debt for the difference between the estimated value and the debt due to him, must give particulars of the security, the date on which it was given and the value he puts upon it. The creditor is then entitled to receive dividends only in respect of the balance.

The only restriction set out as to the potential surrender of security by a secured creditor is within paragraph 24(3), which provides that a secured creditor shall not be entitled to surrender his security after the time fixed by the OA for receipt of proofs of debt, except by order of the court. On the facts of this case, the High Court rejected the argument that any time limit had been fixed for the surrender of security. That conclusion was not appealed. No sanction is set out within section 24, the 1988 Act or within the proof of debt form itself, for a failure to properly complete it and specifically in circumstances where a secured creditor has failed to elect within the bankruptcy process.

Accordingly, the appeal was allowed.

Judges: Barniville P., Haughton J. and Pilkington J.