Insolvency – Liquidation – Trustee in bankruptcy – Respondent bankrupts seeking to apply under section 303(1) of Insolvency Act 1986 to challenge decision of trustee in bankruptcy to facilitate sale of cottage in their possession – Appeal court holding respondents had standing to challenge decision in personal capacity – Appellant purchaser appealing – Whether respondents having standing to bring application – Appeal allowed
The respondents and PWF, an investment vehicle for B, were partners.
The partnership’s property included a farm which included West Axnoller House from which the partnership carried on an accommodation and events business.
The partnership’s property included a cottage, adjacent to the house, registered in the names of the respondents and B. The respondents lived in the house but sometimes used the cottage.
In October 2014, the holder of a first legal charge appointed receivers of the farm (but not the cottage, which was not subject to a charge).
In 2015, the respondents were made bankrupt, and a trustee appointed. In July 2015, receivers of the partnership property sold the property to AEL. The partnership went into administration in July 2016 and into liquidation in May 2017.
In February 2017, AEL was acquired by the appellant, a company owned by G and his wife. In November 2018, the appellant and AEL gave the respondents notice to quit the house.
In December 2018, G and the respondents made bids for the cottage. The liquidators accepted the appellant’s higher bid, subject to contract. Agents of the appellant entered the cottage and changed the locks on 18 January 2019.
The liquidators were unwilling to apply for an order removing the respondents as registered proprietors of the cottage. But it was agreed that the trustee would purchase the cottage from the liquidator with funds lent by the appellant and then sell it to the appellant. The trustee would make the necessary application to the court to obtain clean legal title to the cottage.
The respondents applied under section 303(1) of the Insolvency Act 1986, both in their personal capacity as bankrupts and in their capacity as trustees of the Brake Trust, alleging that the trustee wrongfully enabled the appellant to interfere with their right of possession of the cottage.
The High Court held that the respondents lacked standing under section 303(1) of the 1986 Act.
The Court of Appeal dismissed the respondents’ appeal in their capacity as trustees but held that, in their personal capacity, they had standing because their interests were substantially affected by the conduct of the trustee, as bankrupts with a direct interest in the relief sought: [2020] EWCA Civ 149. The appellant appealed.
Held: The appeal was allowed.
(1) The respondents’ possessory rights to the cottage were unconnected to their position as bankrupts. The actions of the trustee which they challenged were directed to them as persons in possession of the cottage, not as bankrupts.
The same actions could have been taken by the trustee if third parties had been in possession. Equally, the interest that the trustee was asserting as regards the cottage did not derive from any special powers conferred on trustees in bankruptcy, as opposed to their general powers of management.
The respondents embraced the logical and necessary consequence of the submission that any person whose rights were wrongfully interfered with by a trustee could apply for relief under section 303(1), provided only that the trustee was acting as trustee, and not in a personal capacity.
If correct, that would have far-reaching effects on the scope of section 303(1) and, by a parity of reasoning, section 168(5) of the 1986 Act.
(2) It appears that the respondents used “wrongfully” to mean “unlawfully” in two senses.
In one sense, it referred to conduct which was directly actionable by the complainant in any event. For example, if a trustee in that capacity occupied land forming part of the bankrupt’s estate and caused or failed to abate a nuisance to adjacent land, the person in possession or occupation of the adjacent land could, on the respondents’ case, make a claim against the trustee not only in an ordinary civil action for nuisance, but also by an application for relief under section 303(1) of 1986 Act.
In the second sense, a complainant would have standing if the rights of the complainant were interfered with by the trustee acting beyond the trustee’s statutory powers or in breach of duty as trustee.
In both cases, that would enable an application to be made, whether by a bankrupt, a creditor or a stranger to the bankruptcy, under section 303(1) in respect of a right or interest which was extraneous to the bankruptcy.
(3) If the alleged wrongful action was in any event actionable by the complainant, such as by an action in tort, there was no sound basis for affording to the complainant an alternative procedure for pursuing the claim just because the wrongdoer happened to be a trustee acting in that capacity, and there was no reason to think that the legislative intention behind section 303(1) was to provide any such alternative procedure.
If the alleged wrongful action was not otherwise actionable but was unlawful as an abuse of the trustee’s powers, the respondents’ submission would enable a person to whom the duties governing the exercise of those powers were not owed to seek relief in respect of such abuse.
It was contrary to principle for a person to whom a duty was not owed to be able to seek relief in respect of a breach of that duty.
There was no reason to suppose that there was any legislative intention to enable such relief to be sought by third parties uniquely against trustees in bankruptcy under section 303(1) or against liquidators under section 168(5). The enactment of section 304 of the 1986 Act demonstrated that that was not the intention.
The inclusion of the bankrupt as a possible applicant, even in the absence of any likely surplus, was significant because it extended the class of applicants to a person who had no interest in the bankrupt’s estate.
(4) Under the principles underlying the standing of applicants under section 303(1), and section 168(5) of the 1986 Act, creditors had standing where their application concerned their interests as creditors, because the bankrupt’s estate or the assets of the company in liquidation were administered under the terms of the statutory trust for their benefit as creditors.
Where there was or was likely to be a surplus, the bankrupt or contributories were also persons for whose benefit the estate or assets were being administered and they had standing in respect of their interests in the surplus. Beyond that, there was a limited class of cases where creditors, the bankrupt, contributories or others would have standing, but only in respect of matters directly affecting their rights or interests and arising from powers conferred on trustees or liquidators which were peculiar to the statutory bankruptcy or liquidation regime.
The respondents did not fall within any of those categories and therefore did not have standing to make the bankruptcy application insofar as it dealt with the trustee’s dealings with the cottage in December 2018 and January 2019. Accordingly, the appeal would be allowed.
Andrew Sutcliffe KC, William Day and Gretel Scott (instructed by Stewarts Law LLP) appeared for the appellants; Joseph Curl KC and Jon Colclough (instructed by RSW Law) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of Brake and another v Chedington Court Estate Ltd
