McGuire v Rose & Anor

This is an appeal against a High Court decision refusing permission under section 304(2) of the Insolvency Act 1986 for the bankrupt to bring proceedings against his trustee in bankruptcy. The Court of Appeal extended the time for appeal but refused permission to appeal. The court held that Lewison J had erred in treating the requirement for leave as involving a need to show a potential surplus available to the bankrupt, but that this error was not decisive because, on the merits, the proposed claims were, on the evidence, unlikely to yield any meaningful benefit to the estate.

The court applied and explained the relevant aspects of the Brown v Beat approach (whether a reasonably meritorious cause of action is shown and whether prosecution is reasonably likely to benefit the estate) and confirmed that those two factors are central but not exhaustive. The tribunal may consider other relevant matters, including likely defences (for example under section 23 of the Trustee Act 1925 and limitation), the realistic quantum recoverable, the claimant's conduct and the risk of vexatious or disproportionate litigation. On the facts the appellant had no credible valuation or expert evidence to support undervalue claims, limitation and other defences were likely to apply and the appellant’s past conduct indicated a real risk of disproportionate litigation; the judge’s refusal of permission was therefore upheld.

Background and procedural history

• The appellant, adjudicated bankrupt in 1996, sought leave under section 304(2) Insolvency Act 1986 to bring proceedings against his trustee for alleged misapplication of estate assets, undervalue sales and other breaches. Earlier proceedings had been struck out or dismissed at interlocutory levels and the appellant applied to Norwich County Court; DJ Sparrow dismissed the application; Lewison J allowed permission to appeal but then, on rehearing, dismissed the appeal (28 July 2010). This Court of Appeal heard a wrapped-up application for extension of time and permission to appeal from Lewison J’s decision.

Nature of the application

• The appellant sought permission to bring proceedings under section 304(1) and (2) against the trustee and sought to adduce fresh valuation evidence on appeal.

Issues framed

• Whether Lewison J misapplied the test for leave under section 304(2), notably by requiring proof of a surplus available to the bankrupt rather than a benefit to the estate.
• Whether the judge was wrong to take into account likely defences such as section 23 of the Trustee Act 1925 and limitation issues at the leave stage.
• Whether fresh valuation evidence should be admitted on second appeal.
• Whether the appeal should be permitted given the appellant’s conduct and the prospects of a meaningful recovery.

Court's reasoning and disposition

• The Court of Appeal accepted that Lewison J had, in places, expressed the test in terms of a surplus to the bankrupt rather than a benefit to the estate and that this was an error of principle. However, the Brown v Beat formulation is not an exhaustive two-part test and other relevant matters (risk of vexatious litigation, likely defences, costs, limitation) may properly be taken into account when deciding whether to grant leave.
• The court considered the merits: Lewison J’s detailed analysis of the various claims (challenging trustee and executors’ fees, alleged sales at undervalue of a number of properties) was unimpeachable on the evidence before him. The appellant had lacked expert valuation evidence to impugn the sales, limitation and likely defences (including the Trustee Act 1925 s.23) were realistically available to the trustee, and any realistic recovery would be small and likely to be absorbed by trustee costs. The court refused late admission of a single valuation prepared for the appeal, both because it had not been obtained with reasonable diligence and because admission would prejudice the respondent.
• Accordingly, even if Lewison J’s surplus formulation was erroneous, the appellant had no real prospect of success on appeal and permission to appeal was refused. The Court extended time for appealing but dismissed the application for permission to appeal.

This is an appeal against Lewison J’s refusal of permission under section 304(2) Insolvency Act 1986. The Court of Appeal extended the time for appealing but refused permission to appeal. Although the judge below may have erred in speaking of a ‘surplus’ available to the bankrupt rather than the correct focus on benefit to the estate, that error was not decisive. On the merits the proposed claims lacked credible valuation evidence, were likely to be met by real defences (including limitation and the protection in section 23 of the Trustee Act 1925), and any recovery would be insubstantial and likely absorbed by trustee costs. The appellant’s history of disproportionate and vindictive litigation further supported refusal of leave. Permission to appeal was therefore refused.

Appeal from the High Court (Chancery Division) decision of Mr Justice Lewison dated 28 July 2010 (2010 EWHC 2835 (Ch)). The matter involved earlier interlocutory decisions including a decision of District Judge Sparrow and earlier Master Teverson’s striking out order (18 December 2006). This Court treated the present matter as a wrapped-up application for extension of time and permission to appeal and refused permission.