How to avoid losing your creditor rights

How to avoid losing your creditor rights is a post that flows from the case of Brake & Ors v Lowes & Ors (Ruling on strike out of Liquidation Application) [2020] EWHC 538 (Ch).

This appears to be a fascinating case with potential promises of plenty more judgment(s) to come in the not too distant future, so watch this Blog (subscribe!) if you want to catch up on further developments.

There have been a series of judgments in this case issued by His Honour Judge Paul Matthews. The judge set out the background as an application by Mr and Mrs Brake, both of whom had been made the subject of a bankruptcy order, challenging the sale of a property (referred to for convenience as the Cottage).

Perhaps even the incurious mind might conceivably not overlook that the challenge was in relation to the sale of the Cottage by the liquidators of a partnership involving the bankrupts, that was in liquidation. The sale was to the Trustee in Bankruptcy:

“The partnership was also in liquidation, and in early 2019 the liquidators entered into a transaction, and sold the cottage to the trustee in bankruptcy at that time, Mr Duncan Swift. It is that transaction which is sought to be impugned. Mr Swift then immediately sold, or subsold, such interest as he might have had in the property to the Chedington Court Estate.“

In this judgment an interesting observation was made in relation the general effect of ex parte James (the requirement for officers of the court to act in a fair and reasonable manner notwithstanding discrete legal rights which may arise):

“Mr Davies QC also emphasised the importance of natural justice, especially where officers of the court are involved, and he referred to Re Condon, ex parte James (1874) LR 9 Ch App 609, a well-known case, and others of that kind, saying, “The court should not contemplate that its officers behave in an unfair manner”. I quite understand that. The problem, as it seems to me, is that, to say that where insolvency officials behave badly it gives the court the power to award remedies to persons who are otherwise outsiders to the process, opens the door to all kinds of interferences with the administration of insolvency processes, because there is no way to test those cases without actually trying them, and that would be very resource-intensive.“

The Court held that the Brakes’ did not have standing to make the application but what was perhaps even more fascinating was that it seemed that they had procured the support of creditors of the liquidation of The Chedington Court Estate Limited (“Chedington”). The liquidators of that company sought to strike out the Brakes’ claim. The argument that was at large was the suggested deployment of these creditors of Chedington by the Brakes’ for the benefit of the Brakes’ themselves.

Evidence put before the Court appeared to support this position and appeared connected to the funding arrangements concerning the litigation. So this appears to be an issue as to how to avoid losing your creditor rights – well some of them.

The court looked at the evidence and had this to say:

“Now, in the face of all of that material, if it stood alone, I would hold that that was sufficient to persuade me that Mrs Brake was indeed pulling the strings, and that the creditors were her nominees. The other creditors, however, say, “Well, we are creditors”, and Chedington does not deny that. They say “We therefore have standing, unless we are complaining otherwise than in our capacity as creditors, but that is not so in this case”. In order to show that the creditors are acting otherwise than in the capacity of creditors, they say that the test is that you have to show, not only that there is no benefit to be gained by them as creditors, but also that their application is advancing interests which are adverse to the liquidation. They rely on a trio of cases — Walker Morris v Khalastchi, to which I have already referred, the Eastern Caribbean Court of Appeal case of Re Fairfield Sentry Ltd, unreported, 20 November 2017, and the decision of Mr Jeremy Cousins QC in Re Core VCT [2019] BCC 845. I have read these cases. There is not time for me to set out the salient passages, but, in my judgment, read fairly, they do not support this novel two-stage test. In my judgment, the test is simply one of legitimate interest as stated, as it happens, very clearly by Mr Strauss QC in Walker Morris (at page 7g). In my judgment, it is purely fortuitous that these three cases happen to include statements at various points in the judgments which can be picked out of their context and put together to make some support for the idea of a two-limb test. I do not accept that that is the English law.“

A problem which appeared to sprout was one of the creditors, Mr Ritchie, put in a witness statement denying that he was nominee for the Brakes’. However, the witness statement it seems, did not a lot more than serve up to the Court evidence seeking to suggest various criticisms of the former Trustee in Bankruptcy. It is perhaps this which sparks the notion of how to avoid losing your creditor rights ie. by not putting forward at least a denial of certain of the facts put forward in Chedington’s evidence.

It was interesting that the creditors sought to suggest that absent cross examination, the court could not make a finding about the creditors being nominees for the Brakes’:

“21. So the question arises whether it is open to the court in these circumstances to find, without there having been any cross-examination of the various witnesses on their witness statements, that, in fact, the creditors are acting as nominees of Mrs Brake. The other creditors say, “You cannot do that”. They refer to cases such as Long v Farrer & Co [2004] EWHC 1774 (Ch), which say that, ordinarily, except in cases where you find that the evidence is not credible, you cannot find that somebody is not telling the truth in a witness statement without there being cross-examination, and so on.

22. However, the answer given by Chedington is that none of the actual factual allegations that are made in their evidence have been denied by any of the other creditors. What is denied, instead, is the legal conclusion; that is, that the creditors are nominees of the Brakes. In this connection, I notice that the other creditors rely on the decision of Mr Justice Newey in Chuku v Chuku [2017] 1 WLR 3137. That is an authority, and a very clear one, on the meaning of the phrase “nominal claimant” for the purposes of the jurisdiction to order security for costs (CPR rules 25.12ff). It is clear from the authorities that bear on that, including Chuku, that you need to show an element of a deliberate duplicity or window dressing in order to show that someone is acting as a “nominal claimant” for the purposes of that jurisdiction.

23. But in my judgment, that is not the test which is apt to decide when you are talking about whether one person is, in a general sense, the nominee of another. For example, it is clear on the old authorities which are discussed by Mr Justice Newey in his decision in Chuku that trustees, as such, are not without more “nominal claimants” and, therefore, not subject as such to the security for costs jurisdiction. But, as everybody knows, they are often nominees of one sort or another in that general law sense. Yet being a trustee does not necessitate any duplicity or window dressing. So it is clear to me that I should not adopt the test in Chuku v Chuku for this purpose.“

The Court concluded (albeit it also gave permission to appeal its decision) that by virtue of the funding arrangements and instruction of lawyers, the creditors who were joined into the application were not acting in their own interests but those of the Brakes’. As a consequence the Court held that because the Brakes’ did not have standing, the creditors did not have standing either. It struck out the application.

Observation

If you are a creditor who wishes to avoid losing your creditor rights in insolvency proceedings perhaps consider avoiding letting someone else instruct your lawyers and fund the litigation for you. You might otherwise risk being seen to run it for the other party. The message seemingly being sent out is that a party seeking to run litigation must presumably run it in their own interest, not for the purposes of another.

Disclaimer: This post “How to avoid losing your creditor rights” is not legal advice and not to be relied upon as such. No liability is accepted by the author or the author’s firm, Oliver Elliot Chartered Accountants for any reliance place upon the same. You should seek independent legal advice on the facts of your case.