Bankruptcy

Bankruptcy debt - discharge - repayment of loan procured by undue influence - not obligation incurred in respect of fraud to which defendant partyMander v Evans: ChD (Ferris J): 15 May 2000Between 1989 and 1992 the claimant made unsecured loans totalling 140,000 to the defendant, who was also her solicitor.The loans were never repaid.

The defendant was made bankrupt in December 1992 and discharged from bankruptcy in 1995.In July 2000 the claimant commenced proceedings against the defendant seeking repayment of the loans and/or rescission of certain deeds relating to the loans and the return of certain moneys loaned to the defendant in reliance thereon.The claimant contended that since the loans were procured by the undue influence of the defendant, by operation of section 281(3) of the Insolvency Act 1986 the debts were not extinguished by the defendant's discharge from bankruptcy as the debts were incurred in respect of fraud to which the defendant was a party.At the trial of the action the judge ordered that the question of whether the defendant's liabilities survived his discharge from bankruptcy by operation of section 281(3) of the 1986 Act be tried as a preliminary issue.Hedley Marten (instructed by Arnold Rosen & Co) for the claimant; the defendant did not appear and was not represented.Held, declaring that the claimant's claim did not come within section 281(3), that section 281(3) had no application unless the debt was 'incurred in respect of' fraud to which the defendant was a party; that the advantage the defendant allegedly procured in the present case was the making of loans to himself which were repayable upon demand; that assuming that the claimant was induced by undue influence to make the loans, also that 'fraud' in this context included the exercise of undue influence, it was difficult to see how the repayment obligation was one which was 'incurred in respect of fraud'; that the presumed undue influence in the present case did not amount to actual fraud but was instead a variety of equitable fraud; that section 281(3) had to be construed in accordance with ordinary principles; that it was readily comprehensible that the legislature should consider that a bankrupt who had obtained his discharge should not be relieved of liability for actual fraud committed before the bankruptcy, but that it was less comprehensible that he should remain equally liable for equitable fraud, which covered a wide range of conduct regarded by equity as unconscionable, though not actually dishonest; and that the reference to 'fraud or fraudulent breach of trust' indicated that unconscionability was not of itself enough to take one into such an area.