Under schedule 5 of IA86, a Trustee in Bankruptcy has the power to carry on any business of a Bankrupt so far as may be necessary for winding it up beneficially – this is important to note. To assist the Trustee, he/she may also appoint the Bankrupt to carry on that business for the benefit of creditors (s.314(2) of IA86).

The court held that “the Trustee had power to continue to trade the business (and to appoint the Respondent under s.314(2) to assist in such continued trading) for the purposes of a beneficial winding up of the business (including a sale of the goodwill of the business for the benefit of the creditors as a whole).”

Overview

Upon a Bankruptcy order being made, the Bankrupt wished to continue his profitable sole trader business (cleaning services). A Trustee was appointed by the OR and gave the Trustee sanction to continue to trade (which is no longer required). The ultimate goal of trading was to generate funds to achieve an annulment, propose a IVA or achieve a sale back to the Bankrupt.

Three years into the Bankruptcy the Trustee wished to explore a sale to the Bankrupt, who was not keen. The Bankrupt then sought legal advice and adopted the position that “that at all material times from the date of the Bankruptcy order onwards, he has been carrying on the business in his own right and not on behalf of the estate. As a corollary of this, his position has been that, save for a sum representing the value of book debts at the date of the Bankruptcy order, all trading income from the business since that date belongs to him personally, rather than to the estate.”

The Trustee made an application to the court pursuant to s.303 and s.363 of IA86 against the Bankrupt for various declarations.

Judgment

Due to the lack of authority under IA86 on a business vesting in a Trustee, case law was examined and it was viewed that the clear purpose of continued trading of a sole trade business was for the effective winding up of the business. It was not a power to trade indefinitely. In this case, the Trustee continued trading for a number of years, and received income for a period more than they would had received from an IPO or IPA, if either were in effect. Although, the Trustee had acted in good faith, the Trustee acted outside of his powers when trading the business with the aim of achieving an annulment or IVA and for a period of 3 years, but not when trading with the aim of selling the business back to the Bankrupt.

The court viewed that it would be unjust to allow the Trustee to retain the trading income received from the point the Trustee concluded that the continued trading was no longer in the interest of the estate and business should be sold. The trading income received from this point was to be paid to the Bankrupt less a number of costs, including the Trustees fees and expenses and “the value of the assets making up the business.”

Other parapgraphs of interest from the judgment –

"38. In Birdi v Price [2019] Bus LR 489, HHJ Eyre QC sitting as a judge of the High Court analysed the caselaw on tools of the trade and at [58] set out a helpful summary of guiding principles. In the interests of brevity, I do not propose to repeat them all in this judgment; suffice it to state that I have considered and gratefully accept such guidance."

"39. I should however mention specifically three principles highlighted in Birdi v Price (loc cit, at [58]). The first is that the burden of proof lies on the Bankrupt to establish that a particular chattel falls within the exception. The second is that the test is one of necessity and not of convenience or desirability. The third is that to qualify, the tools in question must be used personally 'by' the Bankrupt; which in context requires physical use of the chattel in question by the Bankrupt."

"43. In IRC v Muller & Co Margarine Ltd (1901) AC 217 at pp 223-224, The House of Lords addressed the matter thus:

             'What is goodwill? It is a thing very easy to describe very difficult to define. It is the benefits and disadvantage of the good name, reputation and connection of a business. It is the attractive force which brings in custom. It is the one good thing which distinguishes an old-fashioned business from a new business at its first start. "

"44. The goodwill in a business will vest in a Trustee in Bankruptcy. The Bankrupt can be required by his Trustee to join in the assignment of the goodwill and can be restrained from using the former trade name and from representing that he is carrying on the same business as previously. The Bankrupt cannot be restrained from carrying on in his own name a similar business, from soliciting customers of the old business, or from competing with it: Muir Hunter at 3-169; Walker v Mottram (1881) 19 Ch D 355."

"131. As put by David Richards LJ at [35]:

'The principle established by the decision of the Court of Appeal in ex p James is that the courts will not permit its officers to act in a way which, although lawful and in accordance with enforceable rights, does not accord with the standards which right-thinking people or, as it may be put, society would think should govern the conduct of the court or its officers. The principle applies to a failure to act, as much as to positive acts: see In re Hall [1907] 1 KB 875, a decision of this court. As a public authority and given its role in society, the court is expected to apply standards to its own conduct which may go beyond their legal rights and duties. A specific example is a sale of property made by the court in accordance with its powers: Else v Else (1872) LR 13 Eq 196. Trustees in Bankruptcy, liquidators in compulsory liquidations and administrators are all officers of the courts. … As such, they are acting on behalf of the court and they will accordingly be held to the standards by the court."