Court Control of Office-Holders: Applying the Brakes?

Under the Insolvency Act 1986 (IA 1986), office-holders are given wide powers but they are subject to the control of the court. In order to allow insolvency practitioners to carry out their duties efficiently and without having constantly to look over their shoulders, this control has always been exercised with a light touch.  In recent years there have been several important cases examining these issues.[1]

This summer has seen two more landmark decisions that explore the area further, both arising out of the bankruptcy Mr and Mrs Brake: Patley Wood v Kicks[2] in the Court of Appeal and Brake v Chedington[3] in the Supreme Court.  The many-headed hydra of litigation that has sprung from the bankruptcies of the Brakes has provided a rich seam in which to mine for authoritative decisions on various matters in the field of personal insolvency.  These two recent decisions are the latest examples and have wider implications.

The court’s express power to intervene to control the office-holder is contained in various provisions of IA 1986, depending on the type of insolvency process.  In bankruptcy, for example, upon the application of the bankrupt, any of the bankrupt’s creditors or any other person who is dissatisfied with any act, omission or decision of the trustee, the court is empowered to review any such act, omission or decision and may confirm, reverse or modify it or give directions to the trustee or make any other order it considers fit.[4]  An equivalent provision is to be found with regard to controlling the supervisor of an individual voluntary arrangements (IVA)[5] or of a company voluntary arrangement (CVA),[6] and a liquidator in the context of a compulsory liquidation.[7]  A similar provision applies in relation to administrators.[8]

The wording of these provisions is intentionally broad, but the courts have consistently interpreted them narrowly, evidencing a great reluctance to interfere with the office-holder’s performance of their duties.[9]  The starting point remains the test laid down by the Court of Appeal in Re Edennote Ltd,[10] interpreted in the context of bankruptcy by Registrar Baister in Osborn v Cole.[11]  These cases show that something exceptional is required, bordering on perversity, before the court would be willing to interfere.  The slight softening of this approach that was advocated by the Court of Appeal in Brake v Lowes; Brake v Swift,[12] has now been firmly rejected by the Supreme Court on appeal from that decision.[13]

In Patley Wood v Kicks,[14] the criticism by a creditor of the refusal by the trustees to get involved in litigation against the bankrupts regarding a property within the estate was regarded as misplaced in circumstances where there would be little gain for the estate that would remain deeply in deficit and where the indemnity of the trustees’ “reasonable” costs by the creditor was inadequate.  The Court of Appeal found the judge’s reasoning flawed and allowed the trustees’ appeal.

One of the principal ways in which the courts seek to limit the impact of these provisions is by policing restrictively the issue of the standing of the applicant.  Again, the statutory wording is very wide, but it has been made clear on many occasions that this belies how narrow the gateway actually is.  This view has now be entrenched still further by these recent decisions.

In bankruptcy, the bankrupt (even after discharge,[15] or in the context of an application to annul[16]) will have standing if they can show there is or is likely to be a surplus, or would be one had the impugned decision or action not been made.  That is not the only way a bankrupt can show standing, but where there is no prospect of a surplus, the circumstances would have to be very special indeed.[17]  A similar hurdle applies to contributories in a liquidation.

Generally, creditors will have standing, but only where the application concerns their interests as creditors.  In Re Edengate Homes (Butley Hall) Ltd,[18] for example, the applicant’s complaint was that she had not been offered the opportunity to bid for an assignment by the liquidator of a cause of action against her: such a complaint did not relate to her interests as a creditor.  The additional test, mooted in that case, for the need for the applicant’s interests not to be adverse to the liquidation (or bankruptcy) and those of the creditors as a whole has now been rejected by the Supreme Court in Brake v Chedington.[19]

Although the provisions allow for the possibility of other applicants, as long as they are a person dissatisfied (or aggrieved), this category is in fact very narrow indeed.  It should be noted that the slight difference in wording between the various provisions as to a person “dissatisfied” in s 303(1) or a person “aggrieved” in s 168(5) has no significance.[20]  In either case, such a person will only have standing if they can show that their rights or interests have been directly affected by an act, omission or decision of the office-holder arising out of the exercise of their statutory duties.[21]  Such applicants will be rare.[22]

The overall conclusion to be drawn from these two recent decisions is that they continue the trend towards narrowing the chances of successfully mounting challenges to the decisions of office-holders.  In so far as the decision of the Court of Appeal in Brake v Lowes; Brake v Swift,[23] represent a slight reversal of this trend, that has now been shown to be illusory.

[1] See the discussion in Watson & Baister Bankruptcy: Law and Practice (2023), at 9.042-9.051, which deals with the law as it stood down to 31 March 2022.

[2] Patley Wood Farm LLP and Ors v Kicks and Ors [2023] EWCA Civ 901.

[3] Brake and Anor v Chedington Court Estate Ltd [2023] UKSC 29.

[4] IA 1986, s 303(1).

[5] IA 1986, s 263(3): the parallel between this provision and s 303(1) was explicitly drawn in Linfoot v Adamson [2012] BPIR 1033.

[6] IA 1986, s 7(3).  See the thorough review in Nero Holdings Ltd v Young [2021] EWHC 1453 (Ch), [2021] BPIR 1324; and Discovery (Northampton) Ltd v Debenhams Retail Ltd [2019] EWHC 2441 (Ch), [2020] BCC 9.

[7] IA 1986, s 168(5).

[8] IA 1986, Sch. B1, para 74.  See Lehman Brothers Australia Ltd v MacNamara [2020] EWCA Civ 321, [2021] Ch 1, [2020] BPIR 550.

[9] See now Brake v Chedington [2023] UKSC 29 at [7].  This has a long pedigree: see (under s 80 of the Bankruptcy Act 1914) Re a Debtor; ex parte the Debtor v Dodwell [1949] Ch 236, at 241, cited with approval in Bramston v Haut [2012] EWCA Civ 1637, [2013] BPIR 25, at [68].

[10] [1996] 2 BCLC 389, at 394.

[11] [1999] BPIR 251, at 255, approved by the Court of Appeal in Bramston v Haut [2012] EWCA Civ 1637, [2013] BPIR 25, at [69], and more recently in Patley Wood v Kicks [2023] EWCA Civ 901, at [40].

[12] [2020] EWCA Civ 1491, [2021] BPIR 1.

[13] Brake v Chedington [2023] UKSC 29.

[14] [2023] EWCA Civ 901, at [72]-[79].

[15] Brake v Lowes; Brake v Swift [2020] EWCA Civ 1491, [2021] BPIR 1, not criticised by the Supreme Court on this point.

[16] Engel v Peri [2002] EWHC 799 (Ch), [2002] BPIR 961.

[17] As they were, for example, in Engel v Peri (above), as approved by the Supreme Court in Brake v Chedington.

[18] [2022] EWCA Civ 626, [2022] 2 BCLC 1

[19] [2023] UKSC 29, at [97], noting that it also been (correctly) rejected earlier by Asplin LJ in the Court of Appeal in that case.

[20] This is well-established, but was recently confirmed by the Supreme Court in Brake v Chedington [2023] UKSC 29 at [6].

[21] Brake v Chedington [2023] UKSC 29, at [99].

[22] In Brake v Chedington, the examples of Re Hans Place Ltd [1992] BCC 737, Mohamed v Morris [2000] 2 BCLC 536 and Woodbridge v Smith [2004] BPIR 247 were cited with approval.

[23] [2020] EWCA Civ 1491, [2021] BPIR 1.

Article by Alaric Watson