Bank of Baroda v Patel

On an appeal under the insolvency practice direction, the appellate court reviews the lower court’s decision and intervenes where it was wrong or unjust because of serious procedural irregularity. An application under section 303 of the Insolvency Act 1986 is not a rehearing on the merits. The court asks whether the trustee acted in bad faith, perversely, fraudulently, or in a manner so unreasonable that no reasonable trustee would have acted likewise. A payment expressed as consideration for releasing a charging order does not discharge the underlying debt unless the agreement clearly says so. A non-party cannot ordinarily be ordered to pay costs without clear notice and a fair opportunity to respond.

The Bank of Baroda appealed against District Judge Freeborough’s order concerning the bankruptcy of Subhashchandra Patel. The district judge had prevented the bank from proving for the balance of its debt and ordered it to pay certain costs. The dispute concerned whether Mrs Patel’s payment of £22,000 in 1997 was full and final settlement of the underlying debt or consideration for releasing the bank’s charging order over the matrimonial home.

The appeal also raised whether the district judge had applied the correct test under section 303 of the Insolvency Act 1986, whether Mrs Patel had standing to challenge the trustee’s decision, and whether the costs orders had been made fairly.

The appeal was allowed and the district judge’s order was set aside.

1. Appellate approach. The appeal was limited to a review. It could succeed if the decision was wrong or unjust because of a serious procedural or other irregularity.
2. Applicable insolvency test. Rule 6.105 of the Insolvency Rules 1986 permits examination of the underlying merits of a trustee’s decision on proof. Section 303 of the Insolvency Act 1986 is materially different. The court does not conduct a rehearing. It intervenes only where the trustee acted in bad faith, perversely, fraudulently, or in a manner so unreasonable and absurd that no reasonable trustee would have acted in that way. The district judge applied the wrong test. The trustee had reasonably investigated the matter and was entitled to admit the continuing debt to proof.
3. Standing. Mrs Patel had a substantial interest because removal of the bank as the principal creditor could materially improve her prospects of avoiding a sale of the matrimonial home. She could therefore apply under section 303.
4. Construction of the agreement. Objectively construed, the 1997 correspondence made the £22,000 payment consideration for release of the charging order. It did not settle Mr Patel’s underlying debt. The security and the unsecured debt were legally and commercially distinct. Clearer language would have been needed to discharge the underlying obligation.
5. Costs and procedural fairness. A non-party should be joined and given clear notice before being ordered to pay costs under CPR 48.2. Departure from the ordinary rule that bankruptcy costs are paid out of the estate also required clear notice and an opportunity to present evidence and argument. Those requirements were not met.

• High Court (Chancery Division). Appeal from the order of District Judge Freeborough dated 19 December 2007. The order was set aside.