Brake v Chedington: The Supreme Court Clarifies Standing Under Section 303(1) Insolvency Act 1986

Background and Proceedings

Mr and Mrs Brake were partners in Patley Wood Farm LLP, a business operating accommodation and events on a farm that included a cottage registered in the names of all partners. Receivers were appointed in October 2014 due to partnership defaults, and the farm was sold in July 2015 to Chedington Court Estate Ltd. The respondents frequently used the cottage and issued a pre‑bankruptcy claim asserting a beneficial interest.

Arbitration between the partners resulted in a cost order against the respondents, dissolution of the partnership and a final award in favour of PWF. The respondents were made bankrupt on 12 May 2015 after failing to pay the arbitral costs. A trustee was appointed on 30 July 2015. In 2017, the partnership entered liquidation, and the trustee invited bids for the cottage. The trustee accepted the appellant's higher bid. The trustee and the appellant entered arrangements transferring legal title to the appellant, leading to the respondents' eviction.

The respondents applied under section 303(1) to reverse the trustee's arrangements and set aside the sale, both personally and as trustees of the Brake Trust. They also sought removal of the trustee, arguing that their interests in the cottage had re‑vested under section 283A(2) because the cottage formed part of their principal residence.

On 30 January 2020, the appellant applied to strike out the respondents' application for lack of standing. The strike‑out was granted. The respondents appealed. The Court of Appeal dismissed the liquidation application. Still, it allowed the bankruptcy appeal, applying the test in Deloitte & Touche AG v Johnson and Engel v Peri, holding that a bankrupt has standing where they have "a substantial interest which has been affected by the conduct and a direct interest".

The Supreme Court, comprising Lord Richards, Lord Briggs, Lord Hamblen, Lord Leggatt and Lady Rose, unanimously allowed the appellant's appeal and held that the respondents lacked standing.

Legislative Framework and Principles

The relevant provision is section 303(1) of the Insolvency Act 1986, which allows a dissatisfied bankrupt to apply to the Court to reverse, modify or confirm the trustee's conduct. A parallel provision exists for creditors and others in compulsory winding‑up under section 168(5) Insolvency Act 1986. Both provisions derive from nineteenth‑century bankruptcy legislation and the Companies (Winding‑Up) Act 1890.

Although the wording "dissatisfied" and "aggrieved" appears broad, longstanding authorities limit standing. The key propositions are:

• A bankrupt must show that there is, or is likely to be, a surplus after payment of expenses and creditors, as in James v Rutherford‑Hodge. Their statutory right is contingent on participating in that surplus.
• A creditor or bankrupt has standing only where the matter affects them in that capacity.
• Any applicant may have standing where they have a direct and legitimate interest arising from the bankruptcy or liquidation.

These limitations reflect the purpose of bankruptcy and liquidation: to administer the estate for creditors' benefit. Griffith and Holmes, The Law and Practice of Bankruptcy (1867), confirm that bankrupts may apply only in matters directly affecting their rights, such as surrender for examination, allowance for living expenses, surplus or annulment.

Judgment

The Court of Appeal had held that the respondents had a legitimate and substantial interest because the trustee's conduct affected their possession of the cottage. Asplin LJ emphasised that the trustee had borrowed money from the appellant, made a nominee bid and sold the estate's interests to the appellant.

The Supreme Court disagreed. It examined only the respondents' standing in their personal capacities under section 303(1). The Court reaffirmed that standing arises only where the applicant's rights or interests emerge from the bankruptcy itself. Bankrupts have standing where a surplus exists or is likely to arise. Creditors have standing because the estate is administered for their benefit. Other parties have standing only where the trustee's powers directly affect rights arising from the bankruptcy, such as remuneration challenges linked to annulment.

The respondents did not fall within any of these categories. Their interest in the cottage was not an interest arising from the bankruptcy estate but an external proprietary dispute. The Court held that the Court of Appeal's test was "far broader" than established authority and reinstated the strike‑out.

Commentary

The Supreme Court's decision confirms that the limitations on standing under section 303(1) also apply to section 168(5). The judgment clarifies standing for practitioners advising bankrupts, creditors, and other parties seeking to challenge trustee or liquidator conduct. It reinforces that only interests arising from the bankruptcy or liquidation itself can ground standing, preventing the supervisory jurisdiction from becoming a vehicle for collateral disputes.