Balancing Justice and Consistency by Neil Stewart

Recent insolvency case law has demonstrated that the English legal system seeks to achieve both justice and consistency. The trouble is, those principles can, on occasion, pull in opposite directions.

Consistency is achieved largely through the doctrine of judicial precedent. Just about any law student can tell you this means lower courts must follow the decisions of higher courts when faced with similar cases. But what if that produces an unfair outcome?

From that question, others arise, including:

• How do you determine whether an outcome is unfair or unjust?
• Unfair to whom?
• When does a case resemble a previous one closely enough to invoke precedent?
• Conversely, which facts are "material" and when do they differ sufficiently to warrant distinguishing a case and reaching a different conclusion?

Add to this the difficulties of interpretation of statute and you have a complex set of questions which delight legal scholars and infuriate just about everyone else.

Case in point: exceptional circumstances
Consider the trustee in bankruptcy seeking possession and sale of a matrimonial home, or former matrimonial home. Section 335A(3) of the Insolvency Act 1986 provides that after the end of one year following the first vesting of the bankrupt’s estate in a trustee, the interests of the bankrupt’s creditors outweigh all other considerations unless the circumstances of the case are exceptional.

An obvious question – what qualifies as “exceptional”? Unfortunately, there is no definition or even guidance in section 335 on that. So, we turn to judicial precedent, to see whether that helps. In Re Citro [1991] (Ch) 142, Lord Justice Nourse said the circumstances have to be outside the usual “melancholy consequences of debt and improvidence” to be deemed exceptional.

In the line of cases that followed, most of those in which the courts found there to be exceptional circumstances involved severe or terminal illnesses, often where the home had been adapted as a consequence.

Then in Re Gudmundsson [2024] EWHC 759 the court found the circumstances were exceptional where misconduct of the bankrupt had frustrated the effect of a property adjustment order made in the family court whereby the bankrupt’s wife would have become entitled to the former matrimonial home.

That was just one of the effects of the bankrupt’s misconduct, but how could the trustees in bankruptcy have known these features would qualify as exceptional circumstances? The simple answer is they couldn’t.

Interpretation rules
More generally, how do you know how a court will interpret the wording of a statute? The starting point is the literal rule which says that words should be given their ordinary and natural meaning … but in context (you see where this is going). Then there’s the golden rule and the mischief rule, but let’s keep it simple.

Just one example: section 1157 of the Companies Act 2006 gives a defence to directors or auditors who are or may be liable for negligence, default, breach of duty or breach of trust where they acted “honestly and reasonably and ought fairly to be excused”.

There shouldn’t be any real doubt as to the ordinary and natural meaning of “honestly”, whatever the context, but what amounts to acting reasonably? And how does a court decide when it is fair to excuse, for example, a director who has breached his duty to the company to consider and act in its best interests or his duty to exercise reasonable (there’s that word again) care, skill and diligence? No, we don’t know.

The message is that you can never be sure how a court will decide a case, even where the facts are undisputed, particularly when statute itself allows for the court’s discretion - which is why, when litigating, a solid, reliable indemnity is your lifeline.