Bankruptcy – Official receiver – Sale at undervalue – Appellant seeking permission to apply under section 304 of Insolvency Act 1986 for compensation from respondent official receiver for negligent sale of land at undervalue – District judge refusing permission – Appellant appealing – Whether appellant showing reasonably meritorious cause of action – Whether grant of permission reasonably likely to result in benefit to estate – Appeal allowed
Land to the east of 163 Brookbank Road, London SE13 was purchased in 1994 for £15,000 and registered in the appellant’s sole name. By a declaration of trust, he declared that he held the property on trust for himself and his parents in equal shares.
The appellant was declared bankrupt in January 1997. The value of the land was estimated as being between £15,000 and £20,000. The respondent was appointed as trustee in bankruptcy. The appellant was discharged in 2006 and there was no distribution to creditors. The appellant disclosed the declaration and his one-third beneficial interest in the land.
In 2013, B approached the respondent about purchasing the land. The respondent believed that, in view of the lapse of time, the original bankruptcy file had been destroyed. In the absence of contrary information, she concluded that all the land remained part of the appellant’s estate in bankruptcy. In 2014, she sold the land to B for £20,000, based on two independent professional valuations provided by B, without notifying the appellant or his parents. In 2019, the land was sold for £175,000.
The appellant sought permission to apply for compensation from the respondent under section 304 of the Insolvency Act 1986 on the basis that she had sold the land at an undervalue. He alleged that the land was worth £325,000 as, unknown to the respondent, it had planning permission. Further, the respondent had since found the original bankruptcy file, confirming that the appellant had only a one-third interest in the land.
A district judge dismissed the application, refused permission to appeal and awarded the respondent costs, summarily assessed at £10,000. The appellant sought permission to appeal out of time.
Held: The appeal was allowed.
(1) Section 304 of the 1986 Act provided that the court might order a trustee to pay compensation where it was satisfied that a bankrupt’s estate had suffered loss through misfeasance or breach of duty by the trustee in carrying out its functions. An application might be made by the bankrupt himself, but that required the leave of the court.
The factors which the court had to bear in mind in deciding whether or not to grant leave to apply for compensation were: whether or not a reasonably meritorious cause of action had been shown; and whether giving permission for its prosecution was reasonably likely to result in a benefit to the estate: McGuire v Rose [2013] EWCA Civ 249 followed.
(2) The land was held by the appellant as trustee. On his bankruptcy, only his one-third beneficial interest in the land vested in the respondent for the time being. The effect of section 283 of the 1986 Act was that the legal title remained vested in the appellant. Without an order for sale under section 14 of the Trusts of Land and Appointment of Trustees Act 1996, the respondent had no power to sell the land.
Having intermeddled with trust property without authority, she was liable to account for the consequences of her dealings as a trustee de son tort. On an application of trust principles, she was therefore liable (subject to the limited defences available) to reconstitute the trust fund by replacing the land or its value to put the trust back into the position it would be in if the land had not been sold.
(3) The district judge had considered the application on the mistaken footing that the legal title to the land had vested in the respondent, who had the power as trustee in bankruptcy to sell the land. She approached the application on the basis that she was considering a potential claim that the respondent had been negligent in selling the land for £20,000 on the information and valuations she then had. Negligence might be relevant to the defences available to the respondent, but the appellant did not need to establish it as part of his cause of action.
Accordingly, the district judge’s exercise of discretion was flawed. She misdirected herself in law by not addressing the correct legal questions raised by the application and failed to take into account relevant matters. Therefore, the court would grant permission to appeal, allow the appeal and consider the application for permission afresh.
(4) The respondent accepted that the appellant’s cause of action on liability was established subject to two statutory provisions. She maintained that she was entitled to rely on section 61 of the Trustee Act 1925, under which the court might relieve the official receiver if she had “acted honestly and reasonably, and ought fairly to be excused”. She also claimed a statutory defence under section 304(3) which gave protection to a trustee who, believing he had reasonable grounds for believing he was entitled to do so, innocently disposed of property belonging to a third party, and did not act negligently in doing so.
The respondent had failed to appreciate that she had the original bankruptcy file in her possession. That file showed the correct legal analysis, and the reasons why the respondent did not inspect that file before the sale had not been fully explained.
At this stage, the court could not conclude that the respondent would show that she had acted honestly and reasonably and ought fairly to be excused or that she had reasonable grounds for believing that she was entitled to dispose of the property or did so without negligence.
(5) If the respondent was liable to account to the beneficiaries, it would be on the basis that she had to reconstitute the trust fund which was depleted by her wrongful sale of the land. It would be an answer to that claim, so far as it related to the appellant’s one-third share, to show that the land was sold at or above its true value. There was clearly a case that it was, and the appellant had a reasonably meritorious claim in respect of his one-third interest.
Furthermore, the application was reasonably likely, if successful, to produce a benefit for the estate in the sum of at least £38,000, as the respondent had suggested.
Andrew Peebles (instructed by Amphlett Lissimore) appeared for the appellant; Camilla Chorfi (instructed by the official receiver) appeared for the respondent.
Eileen O’Grady, barrister
