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Most litigators will have experienced the frustration of suing a defendant who goes bankrupt. Under Section 285 (3) of the Insolvency Act 1986, once a bankruptcy order is made no creditor of the bankrupt has any remedy or can start any action or legal proceedings against the bankrupt, if the debt is provable.
But what does the plaintiff do if the bankruptcy order is made after the proceedings have been commenced?
Unlike Section 130 of the Act, which applies in the winding up of companies, there is no automatic stay of proceedings on the making of a bankruptcy order. The plaintiff is, therefore, left with proceedings which remain active but which cannot result in a remedy.
Section 285 (1) allows an application to be made to have the proceedings stayed. Since the proceedings no longer represent a risk to the debtor's estate it will usually be left to the plaintiff. This necessarily involves the plaintiff in the effort and expense of either obtaining agreement to a consent order or, in the absence of co-operation (for example, where the trustee mistakenly thinks an order is unnecessary), having to make an application to court.
The problem for the plaintiff is that the costs of disposing of the proceedings will not be recovered but, even if awarded in the plaintiff's favour, will only be added to the amount for which the plaintiff can prove in the bankruptcy.
Nor is it safe just to abandon the proceedings. In county court proceedings the automatic directions under order 17 rule 11 will result in the striking out of an action and give the debtor's estate a right to apply for an order for costs against the plaintiff.
The plaintiff loses accordingly in all ways: he loses his remedy; the costs he has invested so far; and he also has to incur the costs of having the proceedings stayed or dismissed.
The intervening insolvency of the defendant debtor is an inherent risk of commencing proceedings.
At least an automatic stay in the event of a bankruptcy order being made would save the plaintiff extra costs.