UK court ruling confirms former trustees in bankruptcy open to challenge after release

The case concerned a dissatisfied former bankrupt person, who applied to the High Court to challenge the decisions made by his former trustees in bankruptcy. This is the first time such an application against released trustees has been directly dealt with in case law.

The application was struck out due the bankrupt person having no standing to make the application and no reasonable grounds for the challenge. However, the court found that a trustee’s actions and decisions during the bankruptcy can still be open to challenge under section 303 of the Insolvency Act even where they have been released from office, whether by obtaining an early release by order of the court or when the bankruptcy has concluded, especially where the decision being challenged took place shortly before the trustees’ release took effect.

Restructuring experts Gemma Kaplan and Stephen Cope of Pinsent Masons, which represented the former trustees in the case, said the decision is of great importance for trustees in bankruptcy and will cause concerns for them as their decisions will remain open to challenge after they have left office.

Trustees in bankruptcy are appointed to manage the assets of a bankrupt person’s estate. Their role is to maximise the value of these assets for the benefit of the creditors, following legal guidelines and directions. This includes selling assets and distributing the proceeds according to the law. However, a dissatisfied bankrupt person can make an application under section 303 to the court to confirm, reverse or modify any act or decision of the trustee.

In this case, the bankruptcy came to an end in 2022 and no trustees have been in office since. The judge, however, suggested if these circumstances are to arise in the future, the official receiver should be a party to the section 303 application, rather than the former trustees.

“This may create a burden on the official receiver to deal with challenges against former trustees, where they had no knowledge of the background or have any funding to deal with any section 303 application being brought against them or the consequences of any subsequent ordered made,” said Kaplan.

In the judgment, the court also considered the release of a trustee in bankruptcy and the definition of “liability” in section 299 of the Act, which the former trustees tried to rely on to argue that a section 303 application could not be brought against trustees who have been released from office.

The provision states that “where the official receiver or the trustee has his release under this section, he shall, with effect from the time specified in the preceding provisions of this section, be discharged from all liability both in respect of acts or omissions of his in the administration of the estate and otherwise in relation to his conduct as trustee.”

The former trustees claimed that while this provision operates to hold released trustees liable indefinitely under section 304 of the Act for wrongdoings and breach of duty, a wider dictionary definition of liability should be used to read section 299 to release trustees from “a wrong which needs to be put right”, so they are not open to challenge under section 303.

They argued: “Allowing a section 303 application to be brought in these circumstances would bring considerable adverse consequences for the trustees, including the burden of costs and expenses without recourse to the bankruptcy estate.”

On the interpretation of section 299, the judge concluded that it does not require the court to apply a wider definitely of liability, and so the former trustees’ release would not have prevented the challenge brought by the applicant.