McGuire v Rose & Anor

On an application by a bankrupt for permission to sue a trustee under section 304(2) of the Insolvency Act 1986, the court must assess whether the proposed litigation is reasonably meritorious and reasonably likely to benefit the estate. Those are central considerations, not exclusive criteria. The court may also consider the risk of vexatious, disproportionate or improperly conducted litigation, likely defences, limitation and the practical value of the claims. Section 304(2) does not require a likely surplus for the bankrupt, although the prospect of benefit to the estate remains relevant. An error in imposing a surplus requirement did not justify permission to appeal where the proposed claims had no real prospect of producing worthwhile recovery, lacked necessary valuation evidence and would expose the trustee to unjustifiable litigation.

The bankrupt appealed from Lewison J’s decision on an appeal from DJ Sparrow concerning applications under sections 303, 304 and 363 of the Insolvency Act 1986. The principal issue was whether permission should be given under section 304(2) to bring proceedings against the former trustee in bankruptcy for alleged misfeasance, breach of duty, failure to challenge fees and sales at an undervalue.

The Court of Appeal extended the time for appealing, treated the proposed submissions as the substance of the appeal, and considered whether there was an important point of principle or another compelling reason for a second appeal. The central questions were whether Lewison J had applied an impermissible surplus requirement and whether he had been entitled to consider the merits, likely defences, limitation and the proposed conduct of the litigation.

1. The court allowed the appeal to be lodged out of time but refused permission for the second appeal. The proposed appeal had no real prospect of success.
2. Section 304(2) of the Insolvency Act 1986 expressly permits a bankrupt to apply whether or not there is, or is likely to be, a surplus for the purposes of section 330(5). Lewison J therefore appeared to have erred in treating a surplus available to the bankrupt as a requirement. The error raised an important point of principle, but did not determine the application for permission.
3. The two considerations identified in Brown v Beat—whether a reasonably meritorious cause of action is shown and whether the proceedings are reasonably likely to benefit the estate—are central but not exhaustive. The wider inquiry is whether the material justifies a reasonable litigant pursuing the proposed litigation. The court may consider the risk of vexation, disproportionate conduct, likely costs and risks, and other relevant circumstances.
4. The judge was entitled to consider section 23 of the Trustee Act 1925 as a possible defence where the trustee had employed agents in good faith. He was also entitled to take limitation into account. A leave application may be considered in the round, and an applicant should identify any apparent answer to an obvious defence.
5. The proposed claims concerning fees, remuneration and alleged undervalue sales were either unmaintainable, unlikely to yield worthwhile recovery or unsupported by necessary evidence. An undervalue claim required more than assertion; the absence of expert valuation evidence was fundamental. The late valuation report was excluded because it could have been obtained earlier, would not materially transform the case and was unfairly served on the trustee.
6. The manner in which proceedings would be conducted was a relevant consideration under the section 304 filter. The evidence of disproportionate and inappropriate conduct, combined with the weak financial value of the claims, justified protection of the trustee from the proposed litigation.

• Court of Appeal (Civil Division): [2013] EWCA Civ 429. Time for appealing was extended, but permission for the second appeal was refused.
• High Court: 2010 EWHC 2835 (Ch). Lewison J dismissed the appeal from DJ Sparrow and refused permission to pursue proceedings against the trustee under section 304.
• Norwich County Court: DJ Sparrow dismissed the bankrupt’s section 304 application.