Rulings support trustees in bankruptcy in carrying out their duties

Gemma Kaplan of Pinsent Masons was commenting after the Supreme Court handed down a judgment on Thursday (27-page / 310KB PDF) which confirmed the narrow circumstances in which a bankrupt individual has standing to make an application under section 303 of the Insolvency Act 1986 to challenge the actions of trustees in bankruptcy.

Trustees in bankruptcy are appointed to take control of assets in a bankrupt individual’s estate and realise the best value from those assets for the bankrupt individual’s creditors in accordance with directions set out in law.

Late last month, the trustees in bankruptcy in the case before the Supreme Court were successful in a separate ruling by the Court of Appeal in which their decision making in relation to the estate of bankrupt husband and wife Andrew Brake and Nihal Brake was challenged.

The Court of Appeal’s ruling confirmed the fundamental principle that officeholders, such as trustees in bankruptcy, can exercise their reasonable discretion for the benefit of an insolvent estate in their decision making. It reaffirmed that, to bring a successful challenge in relation to their decision making in this respect, it would need to be shown that the trustees have “acted in bad faith or so perversely that no trustee properly advised or properly instructing himself could so have acted, alternatively if he has acted fraudulently or in a manner so unreasonable and absurd that no reasonable person would have acted that way”.

Now the Supreme Court has confirmed in addition that a bankrupt individual will only have standing to bring such a claim “in respect of conduct by a trustee which is adverse to their interest in the estate, which necessarily requires showing a real prospect of a surplus in the estate” or where his or her “rights or interests arise specifically from the bankruptcy itself”.

Kaplan said: “These decisions will we welcomed by officeholders, in particular trustees in bankruptcy, and are the result of many years of litigation between the Brakes, their creditors, and their trustees in bankruptcy. Trustees in bankruptcy are officers of the court and have a wealth of experience in dealing with bankruptcy and the associated issues that can arise.”

“The Court of Appeal decision confirmed the fundamental principle that an officeholder can exercise their reasonable discretion for the benefit of an insolvent estate in their decision making. It places the decision making safely in the hands of officeholders and gives them comfort that only decisions that were absurd should and could be capable of challenge. The Supreme Court’s decision today confirms, as we had expected, that a bankrupt has no standing to bring an application where they have no financial interest in the decision,” she said.

“This should hopefully bring an end to claims under section 303 of the Insolvency Act 1986 against trustees in bankruptcy where the bankrupt wants to repeatedly interfere in the bankruptcy process rather than allowing the trustees to carry out their role and function for the benefit of creditors,” she said.

Jacob Hay, a litigator at Pinsent Masons, said the legal test confirmed by the Supreme Court in respect of a bankrupt’s standing to bring claims against trustees in bankruptcy was much simpler to apply than what had been set by the Court of Appeal in earlier proceedings in the case.

Hay said: “The High Court initially held that a bankrupt would need to show that there was likely to be a surplus in the bankrupt estate before they would have standing to make an application, which was not the case with the Brakes. However, the Court of Appeal was more generous in its approach – it held that while a bankrupt’s mere status as a bankrupt is insufficient to give him or her standing, it stopped short of requiring there to be a surplus in their estate, instead recognising the bankrupts’ standing on the basis of a fairly general test – that they have ‘a legitimate and substantial interest in the relief sought’.”

“This introduced uncertainty since a bankrupt may in principle claim a ‘legitimate and substantial interest’ in a host of decisions that a trustee might make. However, the Supreme Court considered that the purpose of the insolvency legislation is primarily for the benefit of creditors and that section 303 is therefore not intended to provide a means of redress to a party with no connection to the bankruptcy. It considered that it would only be ‘exceptionally’ that a bankrupt would have standing – the classic case would be where there was a surplus, but there existed a narrow category of further cases ‘in respect of matters directly affecting their rights or interests and arising from powers conferred on trustees or liquidators which are peculiar to the statutory bankruptcy or liquidation regime’,” he said.

“The practical impact of this is that questions of a bankrupt’s standing should be more easily dealt with in a summary determination by the courts in future,” Hay said, highlighting that the Supreme Court had also confirmed that the reasoning behind its decision could be read across to section 168(5) of the Insolvency Act 1986 for the purposes of liquidations and the rights of creditors or contributories.