Challenge to a Trustee in Bankruptcy’s decision overturned on appeal
[ Patley Wood Farm LLP and others v Kicks and another  EWCA Civ 901]
The Trustees in Bankruptcy successfully appealed a decision which had, in effect, forced them to become involved in litigation they had decided not to become joined into. It was not suggested that the Judge at first instance (“the Judge” / “the Court”) had made any error of law, so the Court of Appeal (“the Appeal Court) could only intervene if it found a flaw in the Judge’s reasoning, which the Appeal Court decided was so in this case.
Background to the appeal
Two material creditors in a bankruptcy had standing to make the original application as they had a legitimate interest, despite the possibility that the costs of the bankruptcy would exceed the likely realisations. The Court decided that it could take into account events that took place after the decision was made, on the basis that the Trustees could have taken them into account and altered their decision, which they did not. The Court had criticised the Trustees’ decision to remain neutral in what the Court considered to be an argument between the bankrupts and their creditors – the Court had decided that the Trustees must advance the interests of creditors against the bankrupts. The Court had considered that the Trustees striving to avoid becoming involved in litigation with the bankrupts was not a legitimate consideration in coming to their decision, which the Court found was absurd and so the perversity test for Section 303 Insolvency Act 1986 was satisfied. The Trustees appealed and the Appeal Court overturned the decision of the Court.
Written by Mark Sands, Head of Insolvency at Apex Litigation Finance Limited.
The case in more detail
Courts rarely interfere in the commercial decisions of insolvency office holders (“IPs”) and cases such as these are usually fact specific. This case does provide some guidance on how the Court will consider such challenges and how the Court should decide whether to, in effect, endorse or overrule the decision of the Trustees. Despite the positive outcome of the appeal, when a challenge is mooted the IPs should review their decision, consider whether it should be reversed and if the decision stands set out to the party threatening the challenge how and why the decision has been arrived at. Events after the decision, including exchanges with the party threatening to make a challenge, especially where they seek to address any concerns the IPs may have had about the proposed action, can and should be taken into account in deciding whether to reverse or alter the decision.
The Court commented on the Trustee’s decision to avoid litigation. When IPs are deciding whether to not to pursue litigation, how they arrive at that decision needs to be clearly documented. The comments in this case should be borne in mind. The role of the IPs is to realise the assets. However, the Appeal Court decided that it is not the Trustees’ duty to act in the interests of creditors at all costs.
Two bankrupts had been involved in long running complex litigation with numerous judgements and appeals (42 at the last count) relating to two properties. An earlier Trustee had purported to have sold his interest in one of the properties to a third party, but the sale had not been completed. The now discharged bankrupts, whose interest in that property had vested in their Trustees, were seeking possession of that property solely in their capacity as holders of the legal title. The Trustees were not a party to that litigation and chose not to seek to be joined in.
The original application was pursuant to S 303 Insolvency Act 1986 by two key creditors (one of which held a charging order over the property at issue) and the party who had bought the beneficial interest in that property. They wanted the Trustees to apply to join in the possession proceedings despite there being no equity in the property to benefit the bankruptcy estate (due to the charging order). The Trustees would then be in a position to oppose the application by the bankrupts and to make their own application for possession. Before and after the application was issued there were exchanges between the solicitors for the two sides, including concerning an indemnity to be provided to the Trustees and an offer by the purchaser to pay a monthly licence to occupy the property, which would provide a benefit to the bankruptcy estate, until the purported sale was resolved. After the original judgement, the indemnifying creditor sought to dictate to the Trustees what they should do and to influence the costs they incurred.
The Court had decided that the decision of the Trustees was absurd and that the perversity test for Section 303 Insolvency Act 1986 was satisfied. The Appeal Court decided that the Judge wrongly disregarded the reasons given by the Trustees including that it was unlikely that the proposed action would result in any benefit to the estate, and hence to the creditors, and that the Judge wrongly dismissed the downsides to the Trustees of having to be joined in. The Appeal Court decided that the financial benefit, calculated to be perhaps £36k, would be a drop in the ocean in the context of this case.
The Court had decided, in the face of no known citations to the contrary, that it could take into account events that took place after the decision was made. In this case, the Court considered at length some inter parties correspondence which sought to clarify the terms of an indemnity one of the applicants was willing to offer to the Trustees. The Court decided that the terms of the proposed indemnity were not a sufficient reason for the Trustees to decline to become a party to the litigation. The Appeal Court decided that the Judge was wrong to dismiss the Trustees’ concerns as to their independence. This was not a straight forward case of third party funding and subsequent events have shown the creditor seeking to dictate to the Trustees what they can do.
The Court had decided that the applicants (two creditors and the purchaser of the Trustees’ interest) had standing to make the application. The two material creditors in the bankruptcy had a legitimate interest in the decision as creditors with the right to be paid dividends – that the potential realisations may be insufficient to meet the unpaid costs of the bankruptcy did not deny them that legitimate interest, and so they had standing. The purchaser had a legitimate interest as the litigation would determine who was to have possession of the property pending completion of the purported sale. The Appeal Court was not asked to, and did not, rule against these decisions of the Court.
- Court: In the Court of Appeal (Civil Division)
- Judges: Lord Justice Lewison, Lady Justice Asplin and Lord Justice Arnold
- Date of judgment: 28/07/2023
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