Successful challenge to a Trustee in Bankruptcy’s decision

[Patley Wood Farm LLP and others v Kicks and another [2022] EWHC 3118 (Ch)]

Mini-summary

Two material creditors in a bankruptcy successfully challenged the decision of a Trustee in Bankruptcy to not become involved in litigation.  The creditors had standing to make the 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 Trustee could have taken them into account and altered their decision, which they did not.  The Court criticised the Trustee’s decision to remain neutral in what the Court considered to be an argument between the bankrupts and their creditors – the Trustee must advance the interests of creditors against the bankrupts.  The Court 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.

Written by Mark Sands, Head of Insolvency at Apex Litigation Finance Limited.

Patley Wood Farm LLP and others v Kicks and another [2022] EWHC 3118 (Ch)

Courts rarely interfere in the commercial decisions of insolvency office holders and cases such as these are usually fact specific.  This case does provide some guidance on how the Court will consider such challenges.  When a challenge is mooted the IP 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 IP 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 IP is to realise the assets – avoiding litigation is not a legitimate consideration when making that decision – other factors need to bear more weight.  If funding and / or indemnities are available to enable a Trustee to pursue an action, that needs to be taken into account. 

Two bankrupts had been involved in long running complex litigation with numerous judgements and appeals 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 Trustee, were seeking possession of that property solely in their capacity as holders of the legal title.  The Trustee was not a party to that litigation and chose not to seek to be joined in. 

This was an application 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 Trustee 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 Trustee would then be in a position to oppose the application by the bankrupts and to make his 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 Trustee 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.

The Court decided that the decision of the Trustee was absurd and that the perversity test for Section 303 Insolvency Act 1986 was satisfied.

The Court 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 Trustee.  The Court decided that the terms of the proposed indemnity were not a sufficient reason for the Trustee to decline to become a party to the litigation. 

 The Court decided that the applicants (two creditors and the purchaser of the Trustee’s 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. 

 Case details

• Court: Chancery Division, Bristol District Registry
• Judge: HHJ Paul Matthews (sitting as a High Court judge)
• Date of judgment: 06/12/2022