This month we review the court's view on open ended suspension of discharge from bankruptcy and the difficulty of 'substituting' a defendant in proceedings where the relevant limitation period has expired:

Suspension of discharge from bankruptcy should not be open ended

The High Court has held that only in the most serious cases of non-co-operation should a discharge from bankruptcy be suspended otherwise than on a specified period or condition basis.

In Weir (as trustee in bankruptcy of C E Hilsdon) v Hilsdon, the trustee considered the bankrupt had not fully co-operated and made an application for an order suspending the bankrupt's discharge from bankruptcy.

The District Judge accepted that the trustee (and the court) did not have all the relevant information and that it would be wrong to allow discharge at the end of the 12 month period. The court made an order pursuant to s 279(3) of the Insolvency Act 1986 (s 279(3) IA), in Mawer v Bland terms, that the suspension from discharge would not cease until "the trustee in bankruptcy confirms to the court by filing a report that the bankrupt has complied with her duties and obligations or until the court orders otherwise".

The bankrupt appealed arguing amongst other things that her failure to comply with a particular letter was not a failure to co-operate with the trustee; the trustee's real purpose in seeking the extension was to apply for an income payments order (IPO) which can only be made before discharge of the bankrupt; the suspension was contrary to s 279(3) IA which refers to the 12 month period ceasing to run until the end of a specified period or until the fulfilment of a specified condition. The bankrupt argued that the wording of the order meant that it was, in effect, an order for indefinite suspension.

The High Court held that as the bankrupt had made an unqualified admission that she had failed to provide information as she should have done, the District Judge had been entitled to make an order under s 279(3) IA.

In relation to the IPO, the court held that if the trustee had been unable to assess whether it was appropriate to apply for an IPO because of the bankrupt's failure to supply the information requested, suspension of the discharge should not be refused just because that would extend the time for making an IPO. It was only right for a bankrupt to continue to suffer the disabilities arising from the undischarged bankruptcy if their non-compliance was the reason for extending time.

An order in the terms made was not wrong in principle or contrary to s 279(3) IA, but did put the bankrupt at the mercy of the trustee as it did not provide the trustee with any incentive to pursue enquiries diligently. There was a tension between the desirability of the bankrupt knowing exactly what needed to be done to achieve discharge and of preventing an un-co-operative bankrupt from frustrating legitimate enquiries. As an order under s 279(3) IA was penal in nature, it should reflect the seriousness of the failing. An order with this form of wording should not be the default position but should only be imposed if really justified.

The District Judge at first instance had not considered the range of possible orders available under s 279(3) IA, nor whether the bankrupt's failings really justified the order made. The High Court held the District Judge's decision was flawed and it should be set aside.

Things to consider

A bankrupt does not fail to comply for the purposes of s 279 IA if he or she has done all that could reasonably be done to fulfil his/her statutory obligation to provide such information as is reasonably required. In accordance with the policy of the reforms introduced by the Enterprise Act 2002, that a bankrupt should be able to know with some precision when their discharge will take place so that they can move on and rebuild their financial lives, the court should only exercise its discretion and make an order in Mawer v Bland terms where the circumstances of the bankrupt's behaviour merits it. Ordinarily, if a case merits a suspension under s 279(3) IA, a suspension for a fixed period, or until some specifically identified condition has been fulfilled, will suffice.

Substitution of a party after limitation may be possible, addition is not

It is not uncommon for a claimant to amend its claim in terms of who it is suing after it has served the claim form and the Civil Procedure Rules (CPR) set out the procedure for doing so (CPR 17 and 19). Whereas the CPR enables mistakes to be rectified, the ability to do so after limitation has expired is limited (CPR 17.4 and 19.5). Substitution of a party is permitted, but simple addition is not.

In Godfrey Morgan Solicitors (a firm) v Armes, Armes issued a claim for professional negligence against Godrey Morgan Solicitors Ltd (the company) on the last day before limitation expired. After issue but before service, Armes amended the claim form to add Godfrey Morgan Solicitors (a firm) (the firm) as a defendant and sought to pursue both the company and the firm jointly or in the alternative.

Following service upon it, the firm applied to have the amendment joining it as a defendant set aside. It argued that the amendment was outside the limitation period and outside the strict provisions of CPR 19.5 and s 35 of the Limitation Act 1980 (s 35 LA), which provide for the substitution of a party whose name was given in the original action in mistake for the new party where limitation has expired. The firm argued that it was being added to the claim, not substituted; that substitution in the alternative was not envisaged by CPR 19.5 or s 35 LA; and there was no evidence of a relevant mistake.

Armes had instructed the firm in 2006 in relation to personal injury and employment law claims, and out of which a professional negligence claim arose. The company had been incorporated in 2007, initially under a different name but had then changed to its current name. Armes had never had a retainer with the company, only the firm. The firm and company had run in parallel as two distinct businesses.

The amendments were permitted and upheld on first appeal.

The Court of Appeal allowed the firm's second appeal and disallowed the amendment. It held that this was not a case of mistaken identity. The company had not been named in mistake for the firm. There had to be a mistake in nomenclature. Armes had to have intended to sue the firm instead of the company, not in addition to it. Substitution connoted replacement of one thing or person by another. Armes was attempting to add a new party after limitation had expired until it could work out who was actually liable. That was not sanctioned by s 35 LA or the CPR which required the party named by mistake to drop out of the proceedings and for the new, correctly named party to stand in its place. The court would not accept the argument that the company and the firm had both been substituted for the company alone. The amendment was disallowed and the claim was statue barred against the firm. The court also held that the concept of 'substitution in the alternative' does not have any basis in CPR Part 19.5.

Things to consider

This is not an unusual situation for finance companies to find themselves in, especially in relation to professional negligence claims. Where proceedings are issued at the end of the relevant limitation period, a claimant has to decide which potential defendant is the correct defendant, or name more than one and then discontinue as against the incorrect defendant - with the costs consequences that that entails - at a later date.

A claimant will get no sympathy from the court if it seeks to add a defendant after the end of the limitation period. Parties are entitled to rely on limitation as providing protection and s 35 LA and the CPR do not provide the court with the power to allow an amendment to bring in a new (correct) party out of time even though it might consider it equitable to do so.

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