Does A Bankrupt Have Standing To Challenge The Trustee?

Overview Of Bankrupt’s Standing To Challenge The Trustee

The provocation for this post is the well known Bankruptcy cases of Mr and Mrs Brake which addresses the answer to the question Does A Bankrupt Have Standing To Challenge The Trustee?. The answer to this question is only in limited circumstances does a Bankrupt have standing to challenge the actions of their Trustee in Bankruptcy, largely confined to when there is a likely surplus for them from their Bankruptcy estate.

The Bankrupt is insolvent and their estate is being administered for the benefit of creditors who are most unlikely to receive 100 pence in the £.

The latest instalment of the Brakes’ Bankruptcy litigation was a trip to the highest Court in the land for a hearing before Lord Briggs, Lord Hamble, Lord Leggatt, Lady Rose and Lord Richards. 

Lord Richards set out the unanimous Judgment in Brake & Anor v The Chedington Court Estate Ltd [2023] UKSC 29 in effect rejecting the Brakes’ application on the basis that they did not have standing and allowing the other side’s appeal.

Financial Frontline and this site generally has devoted more posts and articles to the Bankruptcy of Mr and Mrs Brake than any other Bankruptcy case. Such is the catalogue of litigation it served to date to be hoovered up. 

The resolution of the litigation in this case appears to be moving somewhat slowly. The Bankruptcies commenced on 12 May 2015 and are now rapidly approaching their ninth year with the farrago of legal disputes showing no sign of dissipating. 

What Is Standing?

In a nutshell, standing is having sufficient interest to be in a position to involve yourself legally in a case to be heard by the Court for the purpose of obtaining the relief sought.

Challenging A Trustee In Bankruptcy’s Decisions

Leaving aside matters of a Trustee’s misfeasance for which Section 304 of the Insolvency Act 1986 is the statutory door to knock on in cases of Bankruptcy (but which is firmly closed for the purposes of this post), in order to challenge the actions or inactions of a Trustee in Bankruptcy, Section 303 of the Insolvency Act 1986 is the Yellow Brick Road that is the gateway for relevant parties to challenge a Trustee in Bankruptcy they are not happy with:

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.

It has been considered that the reference to “any other person” was not an open sesame for all and sundry to jump in a join in to create a festival of litigation. This point was made by Peter Gibson LJ in Mahomed v Morris [2000] EWCA Civ 46, [2000] 2 BCLC 536: 

It could not have been the intention of Parliament that any outsider to the liquidation, dissatisfied with some act or decision of the liquidator, could attack that act or decision by the special procedure of section168(5)…

How Will Standing Apply?

In order for standing to apply to the Bankrupt, generally it does not apply unless it is likely for there to be a surplus of assets after the cost of Bankruptcy and creditors have been fully paid. The point here is that if the Bankrupt is unaffected by the action or inaction of the Trustee why should they have the right to involve themselves in the proceedings as their role is not to regulate the Trustee but to cooperate with him or her pursuant to Section 333 of the Insolvency Act 1986.

In order for standing to apply to creditors there has to be a matter that affects the creditor in their position as a creditor of the estate. 

The Supreme Court noted the following:

This principle is illustrated by two decisions of the Court of Appeal.

In In re Edennote Ltd [1996] 2 BCLC 389, three creditors applied to set aside a sale of an asset by the liquidator on the grounds that the sale was at an undervalue. The applicants said that, if offered the opportunity, they would have been willing to pay a higher price. The applicants’ standing under section 168(5) was challenged. The Court of Appeal held that, because the sale was alleged to have been at an undervalue, they had standing as creditors of an insolvent company, but that they would have lacked standing as disappointed prospective purchasers of the asset. Nourse LJ said at p.393:

“…it is perfectly clear that unless and until there proves to be a surplus available for contributories (a most improbable event), ‘persons aggrieved’ must include the company’s unsecured creditors. If the liquidator disposes of an asset of the company at an undervalue, their interests are prejudiced and each of them can claim to be a person aggrieved by his act. Such was the position of the applicants here. Mr Rayner James submitted that they brought the application not as creditors but as persons who had not been given an opportunity to make an offer for the asset. In the latter capacity alone, like any other outsider to the liquidation, they would not have had the locus standi to apply under section 168(5).”

The second case, In re Edengate Homes (Butley Hall) Ltd (in liquidation), Lock v Stanley [2022] EWCA Civ 626, [2022] 2 BCLC 1, was decided after the Court of Appeal had given judgment in the present case. It concerned an application under section 168(5) of the IA 1986 by a creditor and former director of a company in liquidation to set aside the assignment of claims by the liquidator to a third party. The claims, totalling some £1.2 million, were against the applicant and members of her family. The liquidator had no funds to proceed with the claims but under the terms of the assignment the company could receive some £800,000 if the claims were fully successful. The application was made on the basis that the applicant and her family had not been given the opportunity to buy the claims and thereby bring them to an end. However, there had been no suggestion that the applicant was prepared to match or beat the third party’s offer.

The judgment was given by Males LJ, with whom Asplin and Stuart-Smith LJJ agreed. The decision of the judge below to dismiss the application on the grounds that the applicant lacked standing under section 168(5) of the IA 1986 was affirmed. Although the applicant was a creditor of the company, she was not making the application to advance the interests of the creditors by increasing the funds that might be available for distribution, but she was instead seeking to advance her personal interests and those of her family as defendants to the proceedings brought by the assignee. The fact that she was a creditor did not therefore give her standing.

The effect of the principles discussed above is that it is only exceptionally the case that a bankrupt will have standing to make an application under section 303(1).

When Could A Bankrupt Have Standing When There Is No Surplus?

There could be instances where a Bankrupt has standing notwithstanding the absence of a surplus:

… The decision of Ferris J in Engel v Peri [2002] EWHC 799 (Ch), [2002] BPIR 961 is an example. The bankrupt applied under section 282(1)(b) to annul his bankruptcy on the basis that all his debts would be paid in full out of third-party funds or would be secured by a payment into court. The bankrupt was required under the section to pay or secure the expenses of the bankruptcy. He considered the trustee’s remuneration and legal fees to be excessive and applied under section 303(1) for them to be fixed by the court. The trustee objected that the bankrupt had no standing to make the application, on the grounds that there was and would be no surplus after payment of all the debts and expenses. Ferris J rejected the submission that this was a universal requirement, holding that what a bankrupt had to show was “some substantial interest which has been adversely affected by whatever is complained of” (para 14). Whether a bankrupt could do this depended on the facts of the particular case. As regards the case before him, he said at para 19:

“In the context of an application for annulment under section 282(1)(b) the amount of the trustee’s remuneration and expenses may be a matter of considerable significance, because it affects the amount of money required to be paid in order to satisfy the court of the matters referred to in the subsection. In my view the bankrupt has a clear interest in this, for he will want the annulment to be obtained as cheaply as possible. This will clearly be the case where the bankrupt is persuading a third party to lend him the money or intends to enter into an obligation to indemnify a third party who puts up the necessary funds. I consider that it will also be so even where there is to be no formal obligation as between the bankrupt and the third party. The prospects of the third party making funds available are likely to be increased if the amount required is kept to a minimum. Further the bankrupt is likely to feel under a moral obligation to indemnify the third party even where he is under no legal obligation.”

Did The Brakes’ Have Standing?

The Brakes’ case involved a Cottage and its adjoining land. It was the land that formed the Section 303(1) application by the Brakes. 

They sought to set aside a sale agreement entered into by the Trustee in Bankruptcy:

…they sought orders setting aside the Bankruptcy Sale Agreement, the Adjacent Land Sale Agreement and the Licence; declarations that all the Trustee’s interest in the Cottage had re-vested in Mr and Mrs Brake and all his interest in the Adjacent Land had re-vested in Mrs Brake pursuant to section 283A(2) of the IA 1986 on or about 15 May 2018 on the ground that, together with the House, they comprised the Brakes’ principal residence; and, as an alternative to such declarations, a sale of the Trustee’s interests in those properties under the direction of the court.

The matter dealt with by the Supreme Court was confined to:

…the claim by the Brakes in their personal capacities that the Trustee interfered with their right to possession of the Cottage by entering into various contractual arrangements with Chedington.

The Supreme Court said that standing was not merely having a legitimate interest in the relief sought under Section 303(1) of the Insolvency Act 1986:

What matters is the examination of the factors that give the applicant a legitimate interest in the relief sought….when Lord Millett came to apply that general principle to the particular case, he did so in a way entirely consistent with those authorities: only those interested in the assets of the company – which meant its creditors, as the company was clearly insolvent – had standing. The contributories would not have had standing to make the application nor did the former auditor, a stranger to the liquidation.

Supreme Court’s Conclusion On The Standing Of A Bankrupt

The Supreme Court’s conclusion on the standing of a Bankrupt was as follows:

…Creditors have standing where their application concerns their interests as creditors, because the bankrupt’s estate or the assets of the company in liquidation are administered under the terms of the statutory trust for their benefit as creditors. Likewise, where there is or there is likely to be a surplus, the bankrupt or contributories are also persons for whose benefit the estate or assets are being administered and they have standing in respect of their interests in the surplus. Beyond that, there is a limited class of cases where creditors, the bankrupt, contributories or others will have standing, but only in respect of matters directly affecting their rights or interests and arising from powers conferred on trustees or liquidators which are peculiar to the statutory bankruptcy or liquidation regime…

If an individual is facing Bankruptcy but has assets with greater value than debts (“a Surplus Case”) it may well be in their interests to liquidate them expeditiously to avoid the risk of going Bankrupt. Bankruptcy is certainly not a cheap option for a person with greater assets than debts.

If they hold onto assets and do not discharge creditors when they fall due, such a person risks being unable to realise their assets quickly enough to avoid a Bankruptcy Order. Once they go Bankrupt their assets are surrendered to the Bankruptcy regime. The individual loses control of the same along with control over the costs of them being realised. So long as they stay out of Bankruptcy, they generally will largely have unfettered standing to deal with their unencumbered assets. Prevention appears therefore potentially better than cure for such a case where standing is concerned. They may take a hit on an asset that needs to be realised quickly but in a complex case, this might be a drop in the ocean compared with the costs that Bankruptcy might cause to sprout.

The Brakes’ Bankruptcies do not appear to be a Surplus Case but they however do seem to demonstrate the legal wrangle over standing can give rise to a complex, lengthy and expensive position with an uncertain outcome.