Brake and another v The Chedington Court Estate Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Richards,Lord Briggs,Lord Hamblen,Lord Leggatt,Lady Rose |
| Judgment Date | 10 August 2023 |
| Neutral Citation | [2023] UKSC 29 |
| Court | Supreme Court |
[2023] UKSC 29
Lord Briggs
Lord Hamblen
Lord Leggatt
Lady Rose
Lord Richards
Supreme Court
On appeal from: [2020] EWCA Civ 1491
Appellant
Andrew Sutcliffe KC
William Day
Gretel Scott
(Instructed by Stewarts Law LLP)
Respondents
Joseph Curl KC
Jon Colclough
(Instructed by RSW Law)
Heard on 1 November 2022
Lord Richards ( with whom Lord Briggs, Lord Hamblen, Lord Leggatt and Lady Rose agree):
This appeal concerns the standing of a bankrupt to challenge the acts, omissions or decisions of the trustee of the bankrupt's estate under section 303(1) of the Insolvency Act 1986. More particularly, it concerns the standing of two bankrupts to challenge steps taken by their trustee to facilitate their eviction from a property which was in their possession (but was not occupied by them).
The facts are not straightforward, and it is convenient to consider first the relevant legislation and the authorities which have considered its interpretation and application.
Section 303(1) of the Insolvency Act 1986 (“IA 1986”) provides:
“If a bankrupt or any of his creditors or any other person is dissatisfied by any act, omission or decision of a trustee of the bankrupt's estate, he may apply to the court; and on such an application the court may confirm, reverse or modify any act or decision of the trustee, may give him directions or may make such other order as it thinks fit.”
The power of the court to intervene in the conduct of a bankruptcy on the application of the bankrupt, now contained in section 303(1), has its origins in the inherent jurisdiction of the court as it existed prior to the enactment of the mid-19 th century Bankruptcy Acts. A provision to much the same effect as section 303(1) was included in the Bankruptcy Act 1869 (32 & 33 Vict, c 71) and repeated in the Bankruptcy Act 1883 (46 & 47 Vict, c 52) and in the Bankruptcy Act 1914. Section 303 of the IA 1986 replaced section 80 of the 1914 Act.
Similar provisions entitling creditors and others to challenge liquidators in a compulsory winding-up have applied since the enactment of section 24 of the Companies (Winding-Up) Act 1890 (53 & 54 Vict, c 63). The current provision is section 168(5) of the IA 1986 which provides:
“If any person is aggrieved by an act or decision of the liquidator, that person may apply to the court; and the court may confirm, reverse or modify the act or decision complained of, and make such order in the case as it thinks just.”
The differences in the language of sections 168(5) and 303(1) make no difference to the scope of the two provisions. While the reference in section 303(1) to the bankrupt is appropriate only to personal insolvency, the general term “any person … aggrieved” in section 168(5) will encompass creditors and, where appropriate, members of the company in liquidation as well as any other person who can qualify as a “person aggrieved”. There is no difference of substance between an “aggrieved” and a “dissatisfied” person. “Aggrieved” was the word used in the Bankruptcy Acts and was updated to “dissatisfied” in the extensive re-drafting of the personal insolvency provisions first enacted in the Insolvency Act 1985 and brought into force as part of the IA 1986. A similar process was not undertaken as regards many of the provisions governing corporate insolvency previously contained in successive Companies Acts, including what is now section 168.
Both section 303(1) and section 168(5) of the IA 1986 express in very broad terms the persons who may apply to challenge a trustee or liquidator, as did their predecessor sections. The express terms are not, however, to be given a literal reading. On both principle and authority, there are limitations on the persons who have standing to apply under these provisions.
Neither section is intended to provide a means of redress to a party with no connection to the bankruptcy or liquidation. I agree with the observation of Peter Gibson LJ in Mahomed v Morris [2000] EWCA Civ 46, [2000] 2 BCLC 536 at para 26: “It could not have been the intention of Parliament that any outsider to the liquidation, dissatisfied with some act or decision of the liquidator, could attack that act or decision by the special procedure of section168(5)”.
Limitations apply also to bankrupts, creditors and others who are connected with the bankruptcy or liquidation. In accordance with the principles that serve to confine standing under these sections, the authorities have established the following propositions. First, subject to very limited exceptions discussed below, a bankrupt must show that there is or is likely to be a surplus of assets once all liabilities to creditors, and the costs and expenses of the bankruptcy, have been paid. The same is true of a contributory of a company holding fully paid shares, although there has been no decided authority on this point. Second, a creditor will not have standing, except as regards a matter which affects the creditor in its capacity as such. As a matter of principle, this limitation applies also to bankrupts, even when they can demonstrate a surplus. Third, there are other, very limited, circumstances which will provide standing to an applicant, whether or not the applicant is the bankrupt, a creditor or a contributory. So far as the authorities go, those circumstances are confined to cases where the challenge concerns a matter which could only arise in a bankruptcy or liquidation and in which the applicant has a direct and legitimate interest.
The general requirement that a bankrupt must show there is or is likely to be a surplus necessarily follows from the structure and purposes of bankruptcy and from the functions and duties of a trustee in bankruptcy. On the making of a bankruptcy order, all property belonging to the bankrupt, with a few exceptions, vests in the official receiver or other trustee of the bankrupt's estate. The property is held by the trustee on a statutory trust to be administered in accordance with the provisions of the IA 1986 and the applicable Insolvency Rules. Section 305(2) sets out the function of the trustee as being “to get in, realise and distribute the bankrupt's estate in accordance with the following provisions of this Chapter [Chapter IV of Part IX]; and in the carrying out of that function and in the management of the bankrupt's estate the trustee is entitled, subject to those provisions, to use his own discretion”.
The bankrupt ceases to have any beneficial interest in his former property, now constituting “the bankrupt's estate”. Under the IA 1986, as under its statutory predecessors, “the principle that the bankrupt is divested of an interest in his property and liability for his debts remains fundamental”: Heath v Tang [1993] 1 WLR 1421, 1427, per Hoffmann LJ. The bankrupt has only a contingent statutory right to participate in any eventual surplus after payment in full and with interest of all creditors in the bankruptcy and the payment of the costs and expenses of the bankruptcy, including the trustee's remuneration: James v Rutherford-Hodge [2005] EWCA Civ 1580 at para 12 per Chadwick LJ. Unless, therefore, there is or is likely to be a surplus, the bankrupt has no legitimate interest in the administration of the estate. It follows that he lacks standing under section 303(1) to challenge the administration by the trustee of the estate. Parliament cannot have intended the bankrupt to be able to interfere in the administration of an estate in which he has no interest. For a robust exposition of the principle, see the judgment of Harman J in In re A Debtor, Ex p The Debtor v Dodwell (The Trustee) [1949] Ch 236, 240–241.
Accordingly, for example, a bankrupt cannot require a trustee to commence or continue proceedings in respect of any claim that forms part of the bankrupt's estate, nor can a bankrupt require the trustee to lend his name to proceedings to be prosecuted by the bankrupt, unless there is or is likely to be a surplus in the estate: Benfield v Solomons (1803) 9 Ves 77, 83–84 (Lord Eldon LC), cited by Hoffmann LJ in Heath v Tang [1993] 1 WLR 1421, 1424. Similarly, the bankrupt cannot require the trustee to defend claims to property forming part of the bankrupt's estate or claims for sums payable only out of the bankrupt's estate: Heath v Tang (supra) at p 1424–1425.
The processes of bankruptcy and insolvent liquidation are primarily for the benefit of creditors. They necessarily have an interest in the proper administration by the trustee or liquidator of that process. Equally, though, their standing to challenge the trustee or liquidator is limited to matters which affect their interests as creditors under the statutory trust, and not in some other capacity.
This principle is illustrated by two decisions of the Court of Appeal.
In In re Edennote Ltd [1996] 2 BCLC 389, three creditors applied to set aside a sale of an asset by the liquidator on the grounds that the sale was at an undervalue. The applicants said that, if offered the opportunity, they would have been willing to pay a higher price. The applicants' standing under section 168(5) was challenged. The Court of Appeal held that, because the sale was alleged to have been at an undervalue, they had standing as creditors of an insolvent company, but that they would have lacked standing as disappointed prospective purchasers of the asset. Nourse LJ said at p.393:
“…it is perfectly clear that unless and until there proves to be a surplus available for contributories (a most improbable event), ‘persons aggrieved’ must include the company's unsecured creditors. If the liquidator disposes of an asset of the company at an undervalue, their interests are prejudiced and each of them...
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