How a Business Bankruptcy Lawyer Can Save Your Company from Financial RuinSeptember 27, 2023
The hypothetical discovery of a room temperature superconductor: Exploring environmental and legal implicationsSeptember 29, 2023
Background & Proceedings
This appeal examines the crucial issue of bankruptcies concerning their standing to challenge the trustee of a bankrupt’s estates’ decisions, acts and omissions under Section 303(1) of the Insolvency Act 1986 (“IA”). This provision empowers a dissatisfied bankrupt to apply to the court to reverse, modify or confirm said conduct of the trustee and give directions if necessary. Mr and Mrs Brake, the respondents, applied under the IA to challenge the trustee in bankruptcy, whereby the appeal involves a strike-out application in question of their standing to make such a request.
The respondents partnered with Patley Wood Farm LLP (“PWF”), carrying on a business in accommodation and events. The respondents lived in a house on a farm where the business was operating, including a cottage registered in the names of all parties in the partnership. Receivers were appointed over the farm in October 2014 due to defaults by the partnership, and it was sold in July 2015 to the appellant, Chedington Court Estate Ltd. The respondents frequently used the cottage when their house was let out and issued a claim before bankruptcy to confirm their beneficial interest in the cottage. Disputes arose, eventually resulting in arbitration between the partners, a cost order against the respondents, dissolution of the partnership and a final award for PWF. After that, the respondents were made bankrupt on 12 May 2015 upon PWF petitioning for non-payment of arbitral costs, and on 30 July 2015, the trustee was appointed. The partnership went into liquidation in 2017, and the liquidators invited bids on the cottage from the respondents and the appellant, accepting the appellants’ higher bid. The trustee and the appellant agreed to enter into arrangements resulting in the appellant acquiring the legal title to the cottage, resulting in the ‘eviction’ of the respondents.
To reverse the arrangements agreed upon between the trustee and the appellant, the respondents applied under the IA to set aside the sale of the cottage in their personal capacity and as trustees of the Brake Trust concerning their bankruptcies and another application in liquidation of the partnership. In addition, they applied to remove the trustee because their interests in the cottage had been re-vested under Section 283A(2) of the IA 1986, as the house and the cottage consisted of their principal residence.
On 30 January 2020, the appellant applied to strike out the respondent’s application on grounds of the lack of standing, which was granted as their interest was only as potential bidders in the liquidation application, and it was unlikely for there to be a surplus in the bankruptcy application. Nevertheless, the respondents appealed, and despite a dismissal on the liquidation application, the Court of Appeal granted the appeal in the bankruptcy application as the correct test as in Deloitte & Touche AG v Johnson  1 WLR 1605 and Engel v Peri  EWHC 799 (Ch) was to determine whether the bankrupt in their personal capacity has “a substantial interest which has been affected by the conduct and a direct interest”. The Justices in the Supreme Court, namely Richards, Briggs, Hamblen, Leggatt and Rose, came to a unanimous decision in allowing the appeal by the appellant as the respondents do not have standing.
The legislative framework and principles
The relevant legislation is the section mentioned earlier 303(1) of the IA, where a similar provision also entitles aggrieved creditors and others, such as members of the company in liquidation, to challenge liquidators’ conduct in compulsory winding-up contained in Section 168(5) of the IA. These provisions regarding the court’s power to intervene originated before the mid-19th century Bankruptcy Acts and since enactment of the Companies (Winding-Up) Act 1890. Both provisions present no difference in substance in the wording of “dissatisfied” and “aggrieved”. The court confirmed that despite the section permitting such application, it depends on the principle and authorities which accommodate such limitations on standing.
There are propositions proposed by authorities, which are as follows:
- A bankrupt must demonstrate that there is or is likely to be a surplus of assets upon the expenses of bankruptcy and liabilities of creditors are paid; as per James v Rutherford-Hodge  EWCA Civ 1580, their statutory right is contingent to participate in the surplus;
- A creditor or a bankrupt cannot have standing except if it is a matter which affects the party in its capacity and
- Any applicant may have standing where they have a direct and legitimate interest.
These limitations are engrained as the primary reason for bankruptcy and insolvent liquidation is for the creditors’ benefit by allowing the trustees or liquidators to administer the estate properly. The circumstances where a bankrupt or creditor has standing to apply under the provisions is where they are applying in their capacity for an issue on their rights or interests that is directly related and arising out of the bankruptcy or liquidation. Griffith and Holmes: The Law and Practice of Bankruptcy Vol II (1867) further clarifies that a bankrupt may apply for matters relating to their bankruptcy that they have a direct interest in, such as to surrender attendance at court for examination, to retrieve allowance which is the amount the court or credits can allow the bankrupt to withdraw from the estate for living expenses, surplus of the estate, or annulment of bankruptcy.
Following the arguments expounded by Asplin LJ in the Court of Appeal, her conclusion was based on the respondents having a legitimate and substantial interest in capacity as the bankrupts were directly affected by consequences of the trustee’s impugned conduct as he hired out his powers to the appellant, borrowed money from the appellant to make a nominee bid on the cottage, bought the bankruptcy estate and sold the interests to the appellant. The Supreme Court solely examined their standing in their personal capacities under Section 303(1) of the IA regarding the trustee’s conduct interfering with their right to possess the cottage, as all other grounds have been refused. The propositions on standing under this provision have been reverberated to bankrupts or creditors who apply where conduct by a trustee is adverse to their interests in the estate or as creditors, and any person whose interests arise from the bankruptcy.
The Supreme Court further clarified that bankrupts have standing where there is or is likely to be a surplus as they would benefit from the estate being administered, creditors have standing as the assets of the company in a liquidation being administered are for the creditors’ benefit, and all other parties will have standing in matters directly affecting their rights and interests, that emerge from powers exercised by trustees or liquidators such as to challenge the trustee’s remuneration as it affects securing annulment for bankruptcy. The Supreme Court concluded that the respondents had no standing as they did not fall in the categories above, and the test propounded by the previous court was “far broader” than the long-established authorities on this matter.
The Supreme Court noted that this decision applies to Section 168(5) of the IA concerning the standing of aggrieved creditors and others to challenge the conduct of liquidators. The court’s conclusion clarifies the limitations regarding the standing of various parties. It would be noteworthy for legal professionals to advise their clients on proceeding with an application under Section 303(1) and Section 168(5) of the IA.
Article by Prisha Budhrani