Introduction

The background to this appeal is of considerable complexity, however, in essence it is an appeal of an order made against the Trustees directing them to make an application to join a claim with regard to possession proceedings between the bankrupts and a creditor, following the purported sale of the bankrupts’ interest in a property.

 

His Honor Justice Matthews made an order under s303(1) Insolvency Act 1986 directing the Trustees to make an application to join the above mentioned claim, file and serve written submissions and/or a witness statement in opposition to one ground of the appeal and in support of a possession order for a cottage in their favour, and to attend and make submissions at any hearing of those matters. 

 

"In this case the trustees have funding, indemnities, encouraging comments from the Court of Appeal, and a clear opportunity to monetise the cottage for the benefit of the estates. However, they have chosen to fold their arms and do nothing. All in all, I am entirely satisfied that the decision not to intervene in the Eviction Proceedings, even if it were originally justified (which I doubt), was certainly not justified by the time of the hearing before me. In my assessment, by that stage it had become an absurd decision, to which no reasonable trustee could have come. In that sense, it is perverse, and the test for section 303 is satisfied."

 

On 2 February 2023 Newey LJ granted the Trustees permission to appeal and ordered that the hearing of the appeal be expedited.

 

Section 303 of the Insolvency Act 1986, ‘General control of trustee by the court’

 

“(1)If a bankrupt or any of his creditors or any other person is dissatisfied by any act, omission or decision of a trustee of the bankrupt’s estate, he may apply to the court; and on such an application the court may confirm, reverse or modify any act or decision of the trustee, may give him directions or may make such other order as it thinks fit.

(2)The trustee of a bankrupt’s estate may apply to the court for directions in relation to any particular matter arising under the bankruptcy.

(2A)Where at any time after a bankruptcy petition has been presented to the court against any person, whether under the provisions of the Insolvent Partnerships Order 1994 or not, the attention of the court is drawn to the fact that the person in question is a member of an insolvent partnership, the court may make an order as to the future conduct of the insolvency proceedings and any such order may apply any provisions of that Order with any necessary modifications.

(2B)Where a bankruptcy petition has been presented against more than one individual in the circumstances mentioned in subsection (2A) above, the court may give such directions for consolidating the proceedings, or any of them, as it thinks just.

(2C)Any order or directions under subsection (2A) or (2B) may be made or given on the application of the official receiver, any responsible insolvency practitioner, the trustee of the partnership or any other interested person and may include provisions as to the administration of the joint estate of the partnership, and in particular how it and the separate estate of any member are to be administered.”

 

The judgment in respect of this appeal provided some useful commentary about this section of the act, which members may find supportive in respect of a Trustee’s action. See below –

 

39. In Re Edennote Ltd 1996] 2 BCLC 389 at 394 Nourse LJ said that, fraud and bad faith apart, the court will only interfere with the act of a liquidator "if he has done something so utterly unreasonable and absurd that no reasonable man would have done it". It is common ground that the same test applies to a trustee in bankruptcy.

 

40. In Bramston v Haut 2012] EWCA Civ 1637, 2013] 1 WLR 1720 Kitchin LJ (as he then was) cited Nourse LJ's statement at [68] and went on in [69] to approve the test set out by Registrar Baister in Osborne v Cole [1999] BPIR 251 at 255:

 

"It follows that it can only be right for the court to interfere with the decision the official receiver has taken if it can be shown he has acted in bad faith or so perversely that no trustee properly advised or properly instructing himself could so have acted, alternatively if he has acted fraudulently or in a manner so unreasonable and absurd that no reasonable person would have acted that way."

41. In Re Edengate Homes (Butley Hall) Ltd 2022] EWCA Civ 626, 2022] 2 BCLC 1 Males LJ cited Nourse LJ's statement at [43], describing it at [44] as "a formidable test" and noting that it left "a potentially large category of cases where the liquidator's conduct may be open to valid criticism but where that conduct cannot be so characterised".

 

Decision

 

The appeal was upheld, which will be a relief for trustees and a reminder of the high bar set out in case law for the court to control a trustee in bankruptcy.

 

“In my view the Trustees' decision not to apply to join the Eviction Claim appeal cannot possibly be stigmatised as perverse.”

 

Whilst it was not suggested that His Honor Justice Matthews made any error of law (1), it was agreed that there was four identifiable flaws in the judge's reasoning. Those flaws were as follows –

 

(1) A Trustee does have a duty to act in the interests of the creditors, it is not the Trustee’s duty to act in the interests of the creditors at all costs.

 

“First, while the judge was correct to say that it is the Trustees' duty to act in the interests of the creditors, what the judge failed to recognise is that the Trustees are experienced professionals who have a statutory discretion as to what steps they should take. It is not the Trustees' duty to act in the interests of the creditors at all costs.”

 

(2) The judge had disregarded the key reason given by the trustees for not applying to join the appeal, namely that it was unlikely that it would result in any benefit to the bankruptcy estates, and hence to the creditors.

 

 

“In some cases it might, I suppose, be argued that it would be of some benefit to the bankruptcy estate to reduce the size of the deficit even if that did not result in any payment to creditors. In the present case, however, it seems clear that the only possible benefit would be to increase the sums available for payment of the Trustees’ own fees. The Trustees are at least entitled to take the view that this is not a course of action that they wish to pursue.”

 

(3) The judge had said that it was difficult to see the downside to the trustees in making an application for joinder. 

 

“With all due respect to the judge, the downsides were obvious and have been confirmed by subsequent events. The Trustees have been forced to become embroiled in protracted, complex, time-consuming and hostile litigation. […] [T]he Trustees’ concern about their exposure to costs has been amply vindicated by what has happened subsequently.”

 

(4) The judge had dismissed the trustees’ concerns as to their independence as “absurd.” 

 

“ I acknowledge that the present case cannot be equated with cases such as Re Ng [1997] BCC 507 and Trustee in Bankruptcy of Bukhari v Bukhari [1999] BPIR 157 which were relied on by counsel for the Trustees. Even so, it seems to me that the Trustees were entitled to be concerned about their independence being compromised. This is not a straightforward case of third party funding. The reality of the situation, as events since the judge's decision have confirmed, is that Chedington, which is not a creditor, has not merely been funding the Trustees' application, but also dictating to the Trustees what submissions they can and cannot make to the court regardless of the legal advice the Trustees have received.”

 

 

The judgment is available here.

 

 

(1) Paragraph 72 “It is common ground that the judge's decision was an evaluative one. It follows that, given that it is not suggested that the judge made any error of law, this Court can only intervene if there is some identifiable flaw in the judge's reasoning, such as a gap in the logic, a lack of consistency or a failure to take account of some material factor, that undermines the cogency of the conclusion: see Re Sprintroom Ltd [2019] EWCA Civ 932, [2019] BCC 1031 at [72]-[78] (McCombe, Leggatt and Rose LJJ, as they then were).”