Overview Of Trustee In Bankruptcy Section 366 Costs Application
At the end of this judgment, the judge said this Trustee In Bankruptcy Section 366 Costs Application showed evidence that:
Time after time, requested information and documentation concerning the Debtor’s dealings, affairs and property was only provided as a direct result of the continued involvement of the court.
The case of Horton v Eurobeam Services Ltd & Ors (Re Costs In the Matter of Mose Kraus) [2023] EWHC 173 (Ch) (“Horton”) circulated long after the Bankruptcy Order on 12 January 2016 of Moses Kraus (“the Debtor”). Mr Horton sought information. It seems he did not get all he wanted so he felt he needed to issue an application under Section 366 of the Insolvency Act 1986 and then did so on or around 23 December 2016.
This case is not one you will read in any textbook but it is a classic example of how Trustee In Bankruptcy investigations can mushroom when seeking information about a bankrupt’s financial affairs.
Who would have thought the investigation into a single transaction of the lending of £300,000 to an individual could develop into a five year legal wrangle? Like it or not this is litigation in the UK.
The Oliver Elliot Observation And Recommendation below suggest a change in the law might be warranted through the introduction of a statutory presumption to assist Insolvency Practitioners in their investigations. If it is presumed the request of an Insolvency Practitioner (who in Bankruptcy is an Officer of the Court) is reasonable (as it should be) then the burden could flip over to the respondent with the safeguard that they could apply to Court if they are being unfairly prejudiced. This could enable a more efficient Trustee In Bankruptcy investigation process.
What Is A 366 Application?
A Trustee In Bankruptcy investigating a Bankrupt’s financial affairs is powerless to obtain information from third parties without the provisions such as those in Section 366 of the Insolvency Act 1986, being one of the Trustee in Bankruptcy powers. It is similar in character to that of Section 236 of the Insolvency Act 1986 for company insolvency matters operated by a Liquidator.
The notion of the all powerful Trustee In Bankruptcy or Liquidator was disamantled in an earlier post How To Vault The Section 236 Investigation Hurdle – ‘Reasonable Requirement’ Tip which highlighted some limitations with these applications.
Difficulty With A Section 366 Application
The Trustee In Bankruptcy has to demonstrate why he or she reasonably requires the information sought.
A debate could rage as to whether the so-called reasonable requirement threshold that has to be shown for an application of this nature should be referred to as the absolute requirement threshold. The Courts say however the test is not an absolute requirement as articulated in Cloverbay Ltd v Bank of Credit and Commerce International SA [1991] 1 All ER 894 highlighted in the case of Jackson & Anor v Baker Tilly & Anor [2014] EWHC 1134 (Ch):
… I do not think that the test of absolute ‘need’ as opposed to a reasonable requirement for the information is a workable or appropriate test …
Perhaps it all depends on whether you define reasonableness in accordance with the man on the Clapham omnibus or whether you adopt the mindset of another legal personality that has been known to sprout in Court cases, referred to as the fair minded and informed observer.
Horton seemingly shows how these Section 366 applications can develop into lengthy affairs. Whilst Mr Horton appears to have been quick out of the starting blocks in issuing the application within a year of appointment, there may be many instances where such an application might not be issued until much later. Even if sufficient information is extracted it is perhaps not difficult for even the humble student of insolvency law to see how the limitation period could come along to disrupt a Trustee In Bankruptcy’s claims. Now if that were to make uncomfortable reading for an Insolvency Practitioner looking to investigate and fufil the function of the Trustee In Bankruptcy, just imagine how it could be viewed by a creditor sitting on the Clapham omnibus awaiting their money.
The Horton Case
Mr Horton was appointed Trustee on 23 March 2016. He commenced his investigations and issued the Section 366 application. The movement of the matter as it chugged through the UK Court system could not reasonably be described as expeditious. Three years later the Section 366 application was still floating around at which point the Trustee appears to have had enough or realised it wasn’t going much further forward anytime soon:
The Trustee was not entirely satisfied with the explanations given regarding the pre-July 2011 loans of £36,000, but at this stage (April 2020) took a commercial view and elected not to proceed with the s366 application any further.
In Horton, the case that surfaced finally before Insolvency and Companies Court Judge Barber revealed reference to a loan to the Debtor of £300,000 from Eurobeam Services Limited (“Eurobeam”) (“the Eurobeam Loan”) secured over the matrimonial home.
One does not know for sure from the judgment but it might be reasonably inferred the Trustee was concerned about the timing of the charge in favour of Eurobeam and or whether it was entitled to have such a charge over the Debtor’s matrimonial home.
The agreement relating to this was said to arise on 30 April 2015 which was less than five months before the date of the Bankruptcy Petition (“the Petition”) with a charge provided to Eurobeam on 21 July 2015, less than two months prior to the presentation of the Petition. Bank statements of the Debtor however did not unearth evidence of the Eurobeam Loan being received. This not unreasonably raised a red flag for the Trustee.
The information provided by the Debtor to Mr Horton did not seem to provide all that was sought to enable understanding of the Eurobeam Loan transaction.
The Trustee wrote to solicitors acting for Eurobeam (“BNI”) seeking details of who received the £300,000 after being informed by the Debtor it was not him. When the question went unanswered it seems he perhaps not unsurprisingly asked it again. The solicitors of Eurobeam wrote back to identify the recipient as the Debtor and then later wrote to say the sums were paid to Caruso and S Krauz (“C and S Krauz”).
The Trustee then highlighted a discrepancy between the sums evidenced as sent to C and S Krauz being £1710,315 and the £300,000 he wanted to track down.
At the time the Trustee was also running enquiries with Eurobeam direct. However, ultimately matters culminated in a Section 366 application for examination and documents to attempt to unscramble matters.
The flow of correspondence, in this case, continued to show the Trustee in some difficulty hoovering up the information he felt he needed. When information was provided it seems to have provoked further questions.
As this lugubrious tale developed matters progressed whereby the Trustee sought to add a Mr Roth to the list of parties to the application as someone apparently with knowledge at Eurobeam of the matters lurking at large. This resulted in a contested further Court hearing with Mr Roth thereafter added as a respondent to the application.
There were then further exchanges until the matter was not further pursued by the Trustee who the Court said remained “not entirely satisfied”.
The Position On Costs
Once the application died down there still remained the matter of costs.
The position was highlighted with reference to some well known case law such as Re Harvest Finance Ltd [2014] EWHC 4237 (CH) fleshed on in an earlier post Costs: Section 236 of the Insolvency Act Compliance and Hunt v Renzland [2008] BPIR 1380.
The Court summaried the test:
… whether the office-holder was reasonably entitled to conclude that there was a serious risk that the proposed examinee would not cooperate with him and attend for an interview otherwise than under the compulsion of a court order.
The Court said the Trustee should get his costs:
The evidence summarised in this judgment clearly demonstrates that the Trustee’s legitimate enquiries regarding the Eurobeam Loan, the Roth Loan and the Charge would not have been adequately addressed without the issue and continued pursuit of s.366 proceedings. The approach adopted by Eurobeam and Mr Roth was obstructive and ambiguous from the outset. Even after issue of these proceedings, there were repeated failures to respond and/or properly to engage with the Trustee. In my judgment the Trustee was reasonably entitled to conclude throughout that there was a serious ongoing risk that Eurobeam and latterly Mr Roth would not cooperate with him otherwise than under compulsion of a court order,
The Trustee was plainly justified in issuing the Application. It was not until after the Application had been issued that certain key information regarding the Eurobeam Loan was forthcoming: see for example paragraphs 48 and 49 above. Given the timing of provision of that information, set against the backdrop of the pre-issue correspondence, I consider it legitimate to conclude that the provision of such information was prompted by issue and service of the s.366 Application. None of the information in question, all of which plainly fell within the scope of s.366, had been provided to the Trustee at any stage previously, despite numerous requests.
…
Mr Roth’s witness statement of 6 December 2018 was plainly inadequate and raised more questions than it answered: see generally paragraphs 85 to 92 above. In my judgment it was entirely reasonable and proportionate for the Trustee to have invited Mr Roth to provide answers to the Trustee’s follow up questions by way of supplemental statement bearing a statement of truth: see paragraphs 93-94 above. Had Mr Roth provided the supplemental statement answering, to the best of his ability, the Trustee’s questions as requested in December 2018, the later hearing of 29 October 2019 could have been avoided and the s.366 process brought to a conclusion. Instead, Mr Roth elected to instruct his solicitors to respond by letter, addressing some matters but providing only partial information on others. This unhelpful approach prompted the hearing of 29 October 2019.
…
Mr Innes contended that the s.366 Application served no purpose. I disagree. Both Eurobeam (acting by Mr Roth) and latterly Mr Roth himself were persons ‘able to give information concerning the bankrupt or the bankrupt’s dealings, affairs or property’. The lines of enquiry regarding the bankrupt’s dealings, affairs and property pursued by the Trustee with Eurobeam and Mr Roth were entirely reasonable, legitimate and proportionate. Given the timing of the Eurobeam Loan and Charge, the Trustee was under a duty to investigate the same and also to investigate what had become of the Loan proceeds. Eurobeam and Mr Roth were under a public duty to assist him in that process.
On the evidence before me I am satisfied that the Trustee’s enquiries would not have been adequately addressed by Eurobeam or Mr Roth without the discipline imposed by court proceedings. In my judgment the Trustee was reasonably entitled to conclude throughout that there was a serious risk that Eurobeam and latterly Mr Roth would not cooperate with him otherwise than under compulsion of a court order. Time after time, requested information and documentation concerning the Debtor’s dealings, affairs and property was only provided as a direct result of the continued involvement of the court.
…
Mr Innes also observed that Eurobeam and Mr Roth were ‘not the Debtor’, but simply third parties who lent money to the Debtor. Even as third parties, however, both Eurobeam and Mr Roth were under a public duty to assist the Trustee: Harvest Finance Ltd [2014] EWHC 4237 (Ch).
Oliver Elliot Observation And Recommendation
A Section 366 application requires a “serious risk” to be shown of non-cooperation and perhaps highlights just how far the Trustee In Bankruptcy has to go before he or she can crack on with the application. There appears a serious risk this could materially add to the cost of insolvency cases run by Insolvency Practitioners and delay their administration.
Creditors could potentially lose out when cases become flooded with these legal and other costs. Delays may also render relevant the maxim ‘justice delayed in justice denied’.
To demonstrate a serious risk to the Court no doubt a lot of work is required. There is an apparent need to show a person was afforded every opportunity to provide the information. That puts a heavy burden on the Insolvency Practitioner and may risk shifting burdens away from the party that has the duty to cooperate in the first place. Why should a Trustee be required to demonstrate a serious risk as opposed to a real risk?
This case perhaps highlights a system that could be improved. The Court could conceivably step in and order the production of information and enable people to be examined so that investigations are not hampered or delayed. The costs incurred by the Trustee here are likely to have been substantial and he may have been without funds.
When the Court in general terms looks to safeguard the rights of third parties and or respondent parties to ensure the Trustee In Bankruptcy does not act with an excess of zeal, it presumably also needs to be alive to the risk when doing so of the effect on the interests of those who have already suffered loss ie. the creditors if the Trustee cannot readily and easily obtain the required information.
In a case in Australia in the case of Pioneer Australia Pty Ltd v Bettles as Trustee of the Bankrupt Estate of Quinn [2020] FCA 1788 the Court notably said:
It is to the benefit of the creditors and the administration if appropriate and necessary investigations can be undertaken in relation to a bankrupt’s affairs if, for no other reason, than that it maintains the integrity of the insolvency process.
The transaction under the microscope in Horton was one no doubt being reviewed to ensure all creditors were treated fairly.
Perhaps a change in the law might be merited to afford Insolvency Practitioners with a statutory presumption so that when they think they need information it should in principle be provided absent evidence otherwise. If however, a person is concerned about being unfairly prejudiced then they could perhaps have such interests safeguarded by being able to apply to Court to evidence how they say they might be being oppressed.
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Disclaimer: Trustee In Bankruptcy Section 366 Costs Application – Teardown Of Horton v Eurobeam Services Ltd
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