Section 303 Trustee In Bankruptcy Application Overview
In Patley Wood Farm LLP & Ors v Kicks & Ors [2022] EWHC 2973 (Ch) a Section 303 Trustee In Bankruptcy Application arose. In a long running Bankruptcy creditors challenged the decision of the Trustees in Bankruptcy who did not intervene in Court proceedings.
The issue was that of a property West Axnoller Cottage (“the Cottage”) that the Bankrupts might regain possession of and which was an asset in the Bankruptcy estate.
Certain creditors of the Bankruptcy estates opposed the bankrupts being able to obtain possession of the Cottage and wanted the Trustees to intervene in the proceedings between the creditors and the bankrupts that were working their way through the Court of Appeal.
There had been a lot of litigation in this case.
The Trustees in Bankruptcy did not wish to become a party to the proceedings notwithstanding that they had offers of funding and an indemnity from the third applicant, The Chedington Court Estate Limited.
As a result, certain creditors issued an application under Section 303 of the Insolvency Act 1986 to change the decision of the Trustees in Bankruptcy on the matter of the intervention in the Court of Appeal proceedings.
Court’s Section 303 Application Assessment
The Court did not endorse the approach of the Trustees:
So the court intervenes only where there is fraud or bad faith on the part of the trustee, or the conduct or decision-making of the trustee is not merely wrong, but can properly be characterised as perverse, that is, so utterly unreasonable and absurd that no reasonable trustee would have done it. I emphasise that in this context ‘perversity’ is not related to fraud or bad faith. It does not imply any dishonesty. But perversity much resembles the test in relation to private law trusts: Scott v National Trust [1998] 2 All ER 708, 717-18; Saffil Pension Scheme Trustees v Curzon [2005] EWHC 293 (Ch), [24]. Nevertheless, this kind of unreasonableness is not to be equated with public law Wednesbury unreasonableness: see Bramston v Haut, at [68], [71].
Thus, for example, in ordinary circumstances an officeholder who lacks funds or risks paying costs will not be required to enter into litigation. In Seear v Lawson (1880) 15 Ch D 426, a decision that it was lawful for a trustee in bankruptcy to sell a right of action for the benefit of the estate, despite the common law doctrine of champerty, Sir George Jessel MR (with whom James LJ “entirely” agreed) said, at page 433:
“The proper office of the trustee is to realise the property for the sake of distributing the proceeds amongst the creditors. Why should we hold as a matter of policy that it is necessary for him to sue in his own name ? He may have no funds, or he may be disinclined to run the risk of having to pay costs, or he may consider it undesirable to delay the winding-up of the bankruptcy till the end of the litigation.”
…
I say at once that in my judgment it is not “perverse” for a trustee in bankruptcy to make a mistake, or accidentally to make a decision without taking into account all and only relevant considerations. It is not perverse simply to get things wrong. Trustees are like anyone else, and everyone makes mistakes from time to time. But I do think it is possible for a trustee to be perverse in maintaining a decision even when the relevant mistakes have been corrected. And, in considering whether a decision is one which no reasonable trustee could have made, I think the court is entitled to assume that the trustee does not consider that it has to be neutral or impartial as between the creditors and the bankrupt(s).
Moreover, in looking at the evidence and following the sequence of events, I have to say that what I see is these trustees striving at all costs not to have to take part in litigation against the Brakes. This is to my mind an entirely illegitimate consideration. These trustees (like their predecessor) are professional officeholders, experienced in what they do, as the first respondent is indeed at pains to point out in her witness statement (at [18]-[21]). They are remunerated at professional levels to take on difficult jobs, and they chose to take on this one. As Sir George Jessel MR said in Seear,
“The proper office of the trustee is to realise the property for the sake of distributing the proceeds amongst the creditors.”
My assessment of the situation is this. The respondent trustees initially refused to apply to intervene in the Eviction Proceedings currently before the Court of Appeal, despite the comments of that court (referred to earlier in this judgment) set out in its judgment handed down on 10 October 2022. They did so on the basis of a large number of factors summarised in both the first respondent’s witness statement and in the respondent’s counsel’s skeleton argument. The applicants say that these are all factors were in effect mistaken, because they had been dealt with by the letter sent on their behalf to the trustees’ solicitors on 3 November 2022. Whether that is so or not, the trustees themselves accepted in their solicitors’ letter of 16 November 2022 that by 15 November 2022 some at least of trustees’ concerns had been met. However, it was said that “the concerns set out at paragraph 16(a), (d) and (e)” of their counsel’s skeleton argument had still not been addressed. (I think the reference should more properly be to paragraph 16(ii)(a), (d) and (e), but it is clear enough.)
In my judgment, all of these remaining concerns had also been addressed. Paragraph 16(ii)(a) (financing involvement in the proceedings and subsequent appeals or hearings) was clearly dealt with in the letters of 3 November 2022 and 15 November 2022 (though in the latter incorrectly labelled, as para 16(b)(i)). Paragraph 16(ii)(d) (possible challenges being made by the Brakes and allegations of preferential treatment) was addressed in the letter of 15 November 2022 (though again incorrectly labelled, as para 16(b)(iv)). Stewarts said that they did not consider there to be any risk of challenge from the Brakes if the trustees were acting pursuant to the directions of the court. I respectfully agree. Any trustee, but especially professional trustees in bankruptcy, ought to possess a certain degree of robustness. You are looking after someone else’s interests, not your own. As I have said, it goes with the territory. Paragraph 16(ii)(e) (non-legal expenses and time occurred) was also expressly addressed in the letter (though again incorrectly labelled, as para 16(b)(v)). Stewarts said that Chedington’s offer of funding was not limited to legal expenses and time. In the circumstances, it is difficult to see the downside to the trustees in making an application to intervene.
On the other side, the trustees’ intervention, if successful, would have several benefits. One obviously is the ability to obtain an income stream from the cottage in the near future, until the question of any challenge by the Brakes to the original trustee in bankruptcy’s transaction with Chedington is finally concluded. This contrasts with the position if the Brakes retake possession, but (so far as the evidence goes) without any intention to make any payment for the benefit of the estates. A second benefit is to avoid the possibility of further deterioration of the cottage to take place, bearing in mind the impecuniosity of the Brakes, which would not allow them to spend money on maintenance and repairs. A further benefit is that it does not expose the trustees to any risk that, if the appeal to the Supreme Court succeeds, or if it fails but the Brakes do not succeed in upsetting the sale transaction between Mr Swift and Chedington, the Brakes will refuse to leave the cottage, just as they refused to leave Axnoller House. On this point the trustees rely on the undertaking offered by the Brakes to leave in certain circumstances. But a bird in the hand is worth two in the bush.
The trustees submit that there is a chance that the Court of Appeal will resolve the problem in Chedington’s or the trustees’ favour without the necessity of their intervention. Of course there is always a chance. But to put this essentially speculative idea into the balance in deciding what is in the interests of the creditors to do is pure Micawberism. The trustees simply hope that something will turn up to get them out of what they perceive to be an awkward situation. This is unimpressive. Equally unimpressive is the trustees’ failure to appreciate that it is their job not to be neutral as between the creditors and the bankrupts. It is their job to advance the interests of the creditors against the bankrupts. The trustees may say they want to be neutral and impartial as between Chedington and the Brakes, but that is irrelevant to the question what is in the best interests of the creditors. They say that their independence would be at risk if they accepted funding from Chedington. But that is simply absurd. Trustees in bankruptcy and other insolvency officeholders accept funding from third parties every day, without compromising their independence. Indeed, one of the current trustees and a predecessor (not Mr Swift) accepted £200,000 in funding from the Brakes themselves.
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.
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