Oraki & Anor v Bramston & Anor

A trustee in bankruptcy does not generally owe the bankrupt a separate common-law duty of care in negligence. The statutory regime is comprehensive. Where the estate proves solvent, however, the trustee owes duties to the bankrupt arising from the bankrupt’s entitlement to any surplus under the Insolvency Act 1986.

The trustee’s exercise of managerial discretion is judged against the standard of the reasonably skilled and careful insolvency practitioner. A trustee need not investigate or pursue speculative claims where the bankrupt has provided inadequate or contradictory information and the estate lacks funds for litigation. A trustee should, however, avoid a rigid strategy of realising substantially more property than is needed where the estate is likely to be solvent.

The claimants had been made bankrupt on petitions founded on a costs judgment later set aside following fresh evidence concerning the petitioning solicitors. Their bankruptcies were annulled conditionally, but the conditions remained unresolved while disputes continued concerning the trustees’ costs, the estates’ assets and the validity of creditors’ claims.

The claimants alleged that the defendants, as successive trustees in bankruptcy, had negligently administered the estates, failed to pursue assets and debtors, prolonged the bankruptcies, incurred excessive costs and caused financial and reputational loss. The central issues were whether the trustees owed duties outside the statutory regime, whether their decisions fell below the required professional standard, and whether the claims were barred by statutory releases and lack of permission.

1. The claim was dismissed. The defendants were not liable to the claimants.

2. The statutory scheme governing bankruptcy excluded a general common-law duty in negligence owed by the trustee to the bankrupt. Nevertheless, where the estate was solvent, the bankrupt’s statutory entitlement to any surplus under section 330(5) of the Insolvency Act 1986 gave rise to a statutory duty to the bankrupt.

3. The trustee was entitled to rely on apparently valid and repeatedly upheld court orders. Although a trustee may in an appropriate case look behind a judgment or bankruptcy order, the defendants were not required to do so here. The claimants’ information about their assets, alleged trusts, creditors and claims was contradictory and incomplete.

4. The trustee’s discretion under section 305(2) was judged by the standard of the reasonably skilled and careful insolvency practitioner. In the absence of expert evidence, applying that standard was a value judgment for the court. The trustee was not liable for declining to pursue speculative claims where there were no funds for litigation, insufficient information, uncertain prospects of recovery and a significant risk of defended litigation.

5. The trustee had failed to adopt an appropriate strategy by seeking to realise several properties together when the estate was likely to be solvent. Properties should have been realised sequentially, rather than substantially in excess of the amount required. That finding did not establish recoverable loss, because the claimants failed to prove the alleged losses.

6. The prolonged bankruptcies were substantially attributable to the claimants’ repeated applications, appeals, refusals to cooperate and insistence on annulment under section 282(1)(a), rather than payment or security under section 282(1)(b). The trustees were therefore not liable for delay or resulting mental distress. The court made no finding on whether mental-distress damages might arise on different facts, and no human-rights claim had been pleaded.

7. The statutory releases under section 299 discharged the trustees from liability except for matters falling within section 304. The closing words of section 304 did not preserve claims arising outside that section against a released trustee. Claims for mental distress, lost income, legal costs, rent and repairs were in any event outside the permitted scope and lacked the necessary permission.