Hellard v Michael & Anor

The court may intervene in a trustee in bankruptcy’s decision where the decision is utterly unreasonable, but that is not the whole scope of its supervisory jurisdiction. The court must also ensure that the trustee acts properly and fairly towards persons affected by the decision.

A bidding process for the disposal or compromise of a bankrupt’s litigation asset must be conducted fairly and transparently. Where one bidder has material information unavailable to another, the process should not determine the disposal. The proper course is ordinarily a fresh, orderly process. Subject to fairness, the trustee’s commercial judgment as to the form and terms of the process attracts substantial weight.

The trustee in bankruptcy of Spencer Michael sought directions concerning the disposal of Mr Michael’s counterclaim against Fairview New Homes (Farnborough) Ltd. The trustee had invited bids for an assignment or compromise of the counterclaim.

Fairview knew that the trustee’s costs would be capped at £5,000, whereas Mr Michael did not. The trustee preferred Fairview’s fixed-sum bid. Mr Michael challenged the process and sought either acceptance of his later offer or a fresh bidding process. The central issues were whether the original process was fair and what directions should govern any further disposal.

1. The application was allowed to the extent necessary to prevent the trustee from proceeding on the basis of the original bidding process. The process was materially unfair because Fairview knew that the trustee’s costs were capped at £5,000, while Mr Michael did not. That information could have affected the formulation of his bid, and it could not be concluded that he would inevitably have lost the bidding process if properly informed.
2. The court accepted the test in Re Edennote Limited [1996] 2 BCLC 389 (CA), under which the court should be very slow to second-guess a trustee’s commercial decision and will intervene where the decision is utterly unreasonable. The test does not exhaust the court’s general supervisory jurisdiction. The court must also ensure that trustees behave properly and fairly as between those affected by their decisions.
3. Mr Michael was not entitled to have his later offer accepted. That offer was made after he knew Fairview’s bid, and accepting it would have been unfair to Fairview. A fresh, fair and orderly bidding process was therefore required.
4. The trustee was entitled to require bids to state a fixed sum ascertainable from the offer itself, rather than permitting a bid based partly on a percentage of recoveries. Certainty, transparency, minimising later disputes, closing the unfunded bankruptcy and avoiding further costs were legitimate considerations. The trustee’s commercial judgment attracted particularly strong weight in the circumstances.
5. The court approved the trustee’s proposed order and schedule. Each party was ordered to bear its own costs. Permission to appeal concerning the timetable was refused.