Brake v Chedington Court Estate

Key Takeaways

In welcome news for insolvency practitioners, the Supreme Court has limited the circumstances in which a dissatisfied bankrupt will have standing to challenge a trustee in bankruptcy's decisions or actions under section 303(1) of the Insolvency Act 1986 (Act), to those where there is likely to be a surplus in the bankruptcy estate (subject to only very limited exceptions). The Supreme Court acknowledged that, while this decision is about bankruptcy, the reasoning will also apply to challenges to liquidators' decisions under section 168(5) of the Act.

It is important that bankrupts and creditors are not able to interfere with an insolvency practitioner’s professional judgment or hinder the performance of their role where their rights or interests arising from the operation of those powers are not affected. The clarification in the Supreme Court decision Brake and another v The Chedington Court Estate Ltd [2023] UKSC 29 should assist insolvency practitioners to bring potentially unmeritorious claims to an early conclusion, and minimise costs to the insolvent estate, where standing cannot be established.

 

Background

A brief outline of the facts relevant to the Supreme Court decision is as follows:

Mr and Mrs Brake (the Brakes) carried on a partnership with Patley Wood Farm LLP (PWF) (an investment vehicle for a Mrs Brehme) which ran an accommodation and events business at West Axnoller Farm (the Farm). The Brakes lived on the Farm. The Farm included West Axnoller Cottage (the Cottage) which was registered in the names of the Brakes and Mrs Brehme and held as partnership property.

Following defaults by the partnership, receivers were appointed over the Farm in 2014 (but not the Cottage which was not subject to a charge). The Farm was subsequently sold in 2015 to a company which is now owned by Chedington Court Estate Ltd (Chedington), the appellant in the Supreme Court proceedings.

Differences between the partners resulted in arbitration proceedings which concluded in favour of PWF, with a costs order against the Brakes and ultimately the dissolution of the partnership. Upon failing to comply with the costs order, the Brakes were declared bankrupt in 2015. Prior to their bankruptcy, the Brakes’ issued a claim that they had a beneficial interest in the Cottage. Such claim vested in their trustee in bankruptcy (Trustee).

Two years later in 2017 the partnership entered into liquidation.

The liquidators of the partnership invited the Brakes and Chedington to bid for the Cottage, in which Chedington made the highest bid. In order for Chedington to obtain a clean title to the Cottage, the Trustee agreed to enter into various transactions with the liquidators and Chedington which ultimately resulted in Chedington acquiring the rights to the Cottage and evicting the Brakes.

In an attempt to unwind the transactions selling the Cottage to Chedington, the Brakes issued two applications:

• an application pursuant to section 168(5) of the Act in the liquidation of the partnership to set aside the sale of the Cottage by the liquidators, the application being made in their capacity as the trustees of the Brake Family Settlement (Brake Trust) (Liquidation Application); and
• an application pursuant to section 303(1) of the Act both in their personal capacities and in their capacities as trustees of the Brake Trust to set aside the transactions entered into by the Trustee to sell the Cottage to Chedington (Bankruptcy Application), together with applications that their interests in the Cottage re-vested pursuant to section 283A of the Act and an application to remove the Trustee.

 

The Strike Out Application

In early 2020, Chedington made an application to strike out both applications on the grounds that the Brakes lacked standing under sections 168(5) and 303(1) of the Act. Both strike out applications were granted by HHJ Matthews on the basis that the Brakes’ only interest (as trustees of the Brake Trust and in their personal capacities as bankrupts) was as potential bidders for the Cottage. In the case of the Bankruptcy Application, HHJ Matthews found that on the facts it was unlikely there would be a surplus in the bankruptcy estate to give them standing.

 

The Court of Appeal [2020] EWCA Civ 1491

The Brakes appealed.

The Court of Appeal dismissed the appeal in the Liquidation Application, however it granted the appeal on the Bankruptcy Application. The Court of Appeal held that the approach taken by HHJ Matthews was wrong to focus on whether there was any surplus in the bankruptcy to give a bankrupt standing. Instead, the Court of Appeal held that the test for standing should be whether the bankrupt has a substantial interest which has been affected by the conduct complained of and a direct interest in the relief sought to give them standing under section 303(1) in their personal capacities as bankrupts.

 

Supreme Court Decision

The Supreme Court held on 10 August 2023 that the test for standing propounded by the Court of Appeal was based on a far broader test than was warranted by the authorities. Aspen LJ relied on the very general terms that the applicant must have a legitimate interest in the relief sought. The Supreme Court found that this is only the beginning of the enquiry and it is necessary to examine the factors that give the applicant a legitimate interest in the relief sought.

The Supreme Court clarified that an applicant will only have standing under section 303(1) of the Act in three categories of cases:

1. Creditors - where their application concerns their interests as creditors, because the bankrupt's estate or the assets of the company in liquidation are administered under the terms of the statutory trust for their benefit as creditors.
2. Bankrupts - where there is or is likely to be a surplus, the bankrupt or contributories are also persons for whose benefit the estate or assets are being administered, and therefore they have standing in respect of their interests in the surplus.
3. There is a limited class of cases where creditors, bankrupts, contributories or others will have standing, but only in respect of matters directly affecting their right or interests and arising from powers conferred on trustees or liquidators which are peculiar to the statutory bankruptcy or liquidation regime. There is existing case law which provides good examples of those limited categories. For example in Engel v Peri [2002] EWHC 799 (Ch) the court decided that in the context of a bankrupt’s application for annulment under section 282(1)(b) of the Act, a bankrupt has standing under section 303(1) of the Act to challenge the quantum of the trustee’s remuneration and expenses, because it affects the amount of money required to be paid by the bankrupt to secure the annulment. In re Hans Place Ltd [1992] BCC 737 the court provided that it cannot have been intended for Parliament to confer a power such as disclaiming onerous property on a liquidator without providing some means for the landlord to challenge it, in circumstances where absent of a challenge under section 168(5) of the Act the landlord would be left with no means to challenge the liquidator’s decision.

The Supreme Court concluded that the Brakes did not fall within any of the above three categories and as such did not have standing to make the Bankruptcy Application.

The Supreme Court confirmed in this judgment that these principles are equally applicable to the equivalent section 168(5) of the Act relating to the standing of creditors and others to challenge a decision of the liquidators in a compulsory winding-up and will no doubt be welcomed by office holders.