By-passing the effects of s.346(1) of the Insolvency Act 1986 following the bankruptcy of a judgment debtor

Sami Allan explores the decision in Stacks Living Limited & ors v The Official Receiver (as Trustee in Bankruptcy of Balvinder Shergill) & ors [2025] EWHC 2478 (Ch) and the potential to avoid the effects of a judgment debtor’s bankruptcy for the purposes of enforcing a judgment debt.

Introduction

As far as legal nightmares go, the Applicants in Stacks Living Limited & ors v The Official Receiver (as Trustee in Bankruptcy of Balvinder Shergill) & ors [2025] EWHC 2478 (Ch) were confronted with what can best be described as a “bankruptcy beast”. However, and as set out in a short yet erudite judgment of ICC Judge Burton, s.346(6) of the Insolvency Act 1986 (“the Act”) served as the Applicant’s “knight in shining armour” in this case. The purpose of this article is to explain the problem which faced the Applicants, how s.346(6) of the Act was of assistance, and why that provision is a potentially priceless tool for litigators when a judgment debtor declares bankruptcy.

The problem facing the Applicants

The 1^st and 2^nd Applicants were companies which had been wound up following the presentation of respective petitions by a local authority (“the Wound Up Companies”), whilst the 3^rd Applicant was their liquidator. The 3^rdApplicant subsequently brought proceedings in both his own name and that of the Wound Up Companies against the Respondents (“the Proceedings”), who at the time the Proceedings commenced were (1) Mr Shergill and (2) Ms Smith. The basis of the Proceedings was that the Respondents had been engaging in fraudulent trading with the Wound Up Companies, with judgment eventually being entered against the Respondents on 21 January 2025 in the sum of approximately £567,000 (“the Judgment Debt”).

Having obtained judgment against the Respondents, the 3^rd Applicant then obtained an interim charging order over Mr Shergill’s property at Cornwall Drive, Stafford (“the Property”)  on 12 February 2025 (“the Interim Charging Order”). Mr Shergill is the joint-proprietor of the Property with Ms Smith, with the latter’s interest in the Property being the subject of a final charging order dated 16 May 2025.

Unfortunately for the Applicants, however, Mr Shergill applied for his own bankruptcy shortly after the Interim Charging Order had been obtained. An adjudicator duly made a bankruptcy order against Mr Shergill on 1 May 2025 (“the Bankruptcy Order”).

The first effect of the Bankruptcy Order was to engage s.285(3) of the Act, which provides that “after the making of a bankruptcy order no person who is a creditor of the bankrupt in respect of the debt provable in the bankruptcy shall (a) have any remedy against the property or person of the bankrupt in respect of that debt…”. The second, and interrelated, effect of the Bankruptcy Order was to bring s.346(1) of the Act into play, with that provision preventing a creditor from, inter alia, seeking a charging order against property which has vested in the Official Receiver following the debtor’s bankruptcy. In other words, the Applicants were seemingly unable to continue in enforcing the Judgment Debt following the Bankruptcy Order, but would instead have to wait in line with other creditors to see what they could extract from the bankrupt’s estate.

Before considering how the Applicants were able to by-pass this problem, it is worth noting, as ICC Judge Burton did at [13] of her judgment, that the principle behind the aforementioned provisions under the Act is “directed at preventing a judgment creditor, following the making of a bankruptcy order, from upsetting the pari passu by enforcing its judgment potentially to the detriment of other creditors”. As a matter of general  public policy, this is obviously right. However, as will become clear in the next section of this article, there are circumstances in which the Court will consider it appropriate to depart from this general rule.

How the Applicants evaded the effect of the Bankruptcy Order

The starting point of this analysis is s.346(6) of the Act, which states that:

The rights conferred by subsections (1) to (3) on the official receiver or the trustee may, to such extent and on such terms as it thinks fit, be set aside by the court in favour of the creditor who has issued the execution or attached the debt.

It was therefore incumbent on the Applicants to demonstrate why the Court should exercise its discretion under this provision to reverse the effects of the Bankruptcy Order and permit the conversion of the Interim Charging Order into one that was final. Of assistance in this regard is the decision of Mann J in Tagore Investments SA v Official Receiver [2008] EWHC 3495 (Ch), where, in considering the facts of that case, noted that the primary factor was the post-judgment reason as to why the enforcement of the judgment debt had been frustrated. Adopting this approach, ICC Judge Burton also observed at [40] that such a discretion will only be exercised in “exceptional circumstances”.

Turning to the facts of the present case, ICC Judge Burton then went on to hold that she should exercise her discretion under s.346(6) of the Act. Her reasons can be summarised as follows:

1. 1. It was of primary importance that the Applicants had demonstrated that Mr Shergill had obtained the Bankruptcy Order to frustrate the attempts to obtain a final charging order against his Property. This was because (i) no other creditors appeared to have been chasing for payment at the time the Bankruptcy Order was obtained, (ii) Mr Shergill was aware that the Interim Charging Order had already been obtained; and (iii) the speed at which Mr Shergill applied for the Bankruptcy Order, along with open correspondence from his solicitors which appeared to use the insolvency process as a litigation threat.
   2. Moving away from Mr Shergill’s motivations for obtaining the Bankruptcy Order, the Applicants had acted swiftly in making an application under s.346(6) of the Act; and
   3. In balancing the interests of other creditors, it was particularly significant that the Applicants would have likely obtained a final charging order against Mr Shergill’s Property had the Bankruptcy Order not been obtained, and this needed to be viewed in light of the fact that the Applicants represented 96% by value of Mr Shergill’s unsecured creditors.

Practitioner take-aways

Hopefully, the above analysis has made clear that a judgment debtor’s decision to enter bankruptcy is not necessarily the end of the road for the purposes of enforcing a judgment debt. That being said, it is important to reiterate ICC Judge Burton’s view that the Court will only exercise its discretion under s.346(6) of the Act in exceptional cases. Nevertheless, her judgment in Stacks Living Limited & ors v The Official Receiver (as Trustee in Bankruptcy of Balvinder Shergill) & ors provides a useful summary of the factors to take into account when advising clients as to whether to make such an application.