The Court of Appeal affirms the importance of office holders’ discretion

There have been many reported cases in the bankruptcies of Mr and Mrs Brake (the “Brakes”) including the recent case of Patley Wood Farm LLP v Kicks [2023] EWCA Civ 901 where the Court of Appeal considered an application under s303 of the Insolvency Act 1986 (the “IA 1986”) against a decision of the trustees in bankruptcy of the Brakes (the “Trustees”).

The Court of Appeal was required to consider whether a decision by the Trustees not to apply to be joined in protracted and hostile proceedings between the Brakes and a third party, was perverse under section 303 of the IA 1986.

It is a long standing principle that the Court will only interfere with the decision of an office holder if the action taken can be shown to have been taken in bad faith or be so perverse that no trustee properly advised would have acted in the same way, or if an office holder has acted fraudulently or in a manner so unreasonable and absurd that no reasonable person would have acted that way. ⁱ

Overturning the decision at first instance, the Court of Appeal reaffirmed the position that an office holder has a statutory duty to positively manage assets in an insolvent estate in the interest of creditors but is not required to act in the interest of creditors at all costs.ⁱⁱ The judgement issued by the Court of Appeal is a further reminder of the broad discretion allowed by the Courts to insolvency practitioners in carrying out their statutory functions.

The Court of Appeal confirmed that its decision also applies to creditors and others seeking to challenge the actions of a liquidator under s168(7) of the IA 1986. The decision will therefore provide some relief for office holders as it confirms the high threshold for challenging an office holder’s decision and is welcomed after the decision at first instance appeared to fetter the discretion of the office holder to decide what steps to take in an insolvent estate.

Background

The background to this appeal is of considerable complexity.

The application relates the property known as West Axnoller House (the “House”) and the adjoining cottage (the “Cottage”) that were owned by Patley Wood Farm LLP (the “Partnership”). The Brakes resided at the House and had use of the Cottage. A dispute arose between the Brakes and the Partnership which was determined in favour of the Partnership. The Brakes were made bankrupt in 2015, after failing to meet the terms of a costs order to pay the Partnership’s costs of the litigation.

The Partnership was placed into liquidation in May 2017. The liquidators invited bids from the Brakes and The Chedington Court Estate (“Chedington”) to purchase the Cottage. Chedington’s bid was successful and, to obtain clean title to the Cottage, the Trustees entered into several agreements with Chedington to facilitate this. Chedington took possession of the Cottage in January 2019 by gaining entry and changing the locks. At that date, the Brakes did not reside in the Cottage but remained in possession of it.  

In February 2019 the Brakes commenced proceedings to challenge the actions taken by the Trustees in bankruptcy. I have previously commented on the outcome of these proceedings and the impact the case has on office holders. Please find my earlier comment here.  

In April 2019 the Brakes issued a claim against Chedington in relation to their eviction from the Cottage (the “Eviction Claim”). The Brakes asserted that they were the registered proprietors of the Cottage and entitled to exclusive possession of it. They therefore argued that their eviction from the Cottage was unlawful and that Chedington had no right to title to justify any interference with their exclusive right to occupy the Cottage.

Subsequent events

Mrs Breheme (the largest creditor in the bankruptcy estates) wrote to the Trustees and requested that the Trustees apply to join the Eviction Claim to oppose an application for an order for possession of the Cottage being made in favour of the Brakes. The Trustees declined to adopt the stance proposed on the basis that they had remained neutral in the proceedings to date and advised that any intervention would only increase costs in the bankruptcy estates, without the possibility of a return to creditors. Therefore their involvement in the proceedings could not be justified.

Chedington subsequently wrote to the Trustees and requested that they join the Eviction Claim to oppose the making of an order in favour of the Brakes. Chedington offered to pay the Trustees’ reasonable costs and to indemnify the Trustees against any adverse cost risk. Chedington also proposed to pay the Trustees a licence fee in the sum of £3,000 a month.

Following the refusal by the Trustees to join the Eviction Claim, the Partnership, Mrs Breheme and Chedington (the “Applicants”) issued an application under section 303(1) of the IA 1986 seeking to compel the Trustees to join the Eviction Claim.

High Court decision at first instance

On 10 October 2022, the High Court confirmed the well known test that the Court will only intervene where the decision making of a trustee is not merely wrong, but can properly be characterised as perverse, or so unreasonable and absurd that no reasonable trustee would have made that decision. A trustee in bankruptcy’s primary function is to “get in, realise and distribute the bankrupt’s estate”ⁱⁱⁱ. In carrying out this function, the trustee is entitled to “use his own discretion” under section 305(2) of the IA 1986. 

The Applicants did not allege bad faith or fraud on the part of the Trustees, but rather alleged perversity. Mr Justice Matthews held that under the circumstances it was difficult to see the downside to the Trustees making an application to intervene. The Judge identified the potential benefit to the bankruptcy estate in respect of the £3,000 licence fee which Chedington had proposed to pay and therefore held that the decision not to join the Eviction Claim was not justified and directed the Trustees to join the Eviction Claim. 

The Trustees appealed.

What did the Court of Appeal decide

The Court of Appeal held that the reasoning of Mr Justice Matthews in deciding that the Trustees’ decision not to join the Eviction Claim was perverse, was flawed.  The Judge failed to recognise or give enough weight to the role of the Trustees as experienced professionals who have a statutory discretion to consider and decide, in all the circumstances, what steps they should take to achieve their primary function of realising and distributing the estate.

The Court of Appeal agreed with the Trustees and considered that Mr Justice Matthews had been wrong to disregard the Trustees’ reason for not joining the Eviction Claim. There would be little to no benefit to the bankruptcy estates in joining the Eviction Claim. The bankruptcy estates were in a deficit of over £3.5 million and the licence fee offered by Chedington would be a “drop in the ocean”.^iv

The Court of Appeal held that Mr Justice Matthews had not appreciated the downside to the Trustee in applying to join the Eviction Claim, in circumstances where the downside was entirely foreseeable, not least because of the significant number of decisions already made by the courts in relation to this particular bankruptcy estate (more than 40 to date).

The High Court’s decision would have forced the Trustees to become embroiled in protracted, complex, time consuming and hostile litigation.  The Court of Appeal held that in their view, the Trustees’ decision not to apply to join the Eviction Claim could not possibly be stigmatised as perverse.

It is not the Trustees’ duty to act in the interests of the creditors at all costs. The Court of Appeal affirmed the decision in Re Edengate Homes that the test of “perversity” in section 303 of the Insolvency Act is a formidable one. If there are rational and justifiable reasons why a decision has been taken by an office holder, that decision should not be lightly overturned as perverse.^v

What are the practical implications of this case?

The Court of Appeal confirmed that an insolvency practitioner has a wide statutory discretion as to what steps they should take and that a refusal to join third party proceedings may be justified in the interests of maintaining independence.  It was apparent from the decision that the Court of Appeal recognised that insolvency practitioners, with their professional experience and full working knowledge of the estates over which they are appointed, are the most appropriate party to exercise the discretion over how they carry out their functions.

After any apparent loosening of that test by the court at first instance, this (along with the Supreme Court decision in the related case of Brake & Anor v Chedington Court Estate Limited [2023] UKSC 29 which I have recently considered ) is a welcome decision for insolvency practitioners.  It shows the continued trust that the courts place in them to make the right decisions in all the circumstances, and to allow those decisions to stand, in all except the most extreme cases.

ⁱ Bramston v Haut [2012] EWCA Civ 1637, [2013] 1 WLR 1720 
ⁱⁱ [2023] EWCA Civ 901 paragraph 73  
ⁱⁱⁱ [2023] EWCA Civ 901 paragraph 37 
^iv [2023] EWCA Civ 901 paragraph 74  
^v Affirming Re Edengate Homes (Butley Hall) Ltd [2022] EWCA Civ 626