Brake & Ors v Lowes & Ors

Standing under sections 303(1) and 168(5) of the Insolvency Act 1986 requires more than inclusion within the statutory wording. The applicant must have a substantial interest affected by the conduct complained of and a direct interest in the relief sought. A potential surplus is one route by which a bankrupt may show that interest, but it is not exclusive.

A mere outsider who is only a bidder for an insolvency asset lacks standing. An invitation to bid does not alter that position where the bid is made in another legal capacity. Creditors must also show a legitimate interest in the relief. The court may consider unchallenged evidence that they are pursuing another person’s interests.

Two appeals arose from applications concerning the sale of interests in West Axnoller Cottage and adjoining land. The appellants included discharged bankrupts, acting personally and as trustees of the Brake Family Settlement, and unsecured creditors of a partnership in liquidation.

The High Court struck out the bankruptcy application under section 303(1) of the Insolvency Act 1986 and the liquidation application under section 168(5), holding that the applicants lacked standing. The decisions were reported at [2020] EWHC 537 (Ch) and [2020] EWHC 538 (Ch). The central questions were whether the former bankrupts, trustees, and unsecured creditors had a sufficient interest in challenging the trustee’s or liquidators’ conduct.

1. Bankruptcy appeal. The appeal was dismissed insofar as pursued by the Brakes as trustees of the Settlement, but allowed insofar as pursued by them as former bankrupts.
2. Sections 303(1) and 168(5) of the Insolvency Act 1986 use different terminology but have substantial overlap. The authorities, including In re A Debtor (No 400 of 1940) The Debtor v Dodwell [1949] Ch 276, Deloitte & Touche v AG Johnson [1999] 1 WLR 1605, Re Edennote Ltd, Tottenham Hotspur plc & Ors v Ryman & Anr [1996] 2 BCLC 389 and Mahomed v Morris [2000] BCLC 536, establish that statutory status alone is insufficient. A bankrupt must show a substantial interest affected by the conduct and a direct interest in the relief sought. A surplus is a sufficient route, but not the only route.
3. The Brakes as trustees were outsiders to both insolvency processes. They had no direct interest in the bankruptcy estate or the liquidation and were merely bidders. Their personal connection with the bankrupts could not be elided with the Settlement’s legal position. The invitation to bid did not change that analysis, particularly because the bid was made in the Settlement’s name.
4. The court has power to intervene where an insolvency office-holder has acted unfairly or outside his powers, and it retains supervisory jurisdiction over its officers. The principle explained in Lehman Bros Australia Ltd v MacNamara & Ors [2020] EWCA Civ 321, however, does not remove the separate requirement of standing. The merits of the alleged wrongdoing and the threshold question of standing must be kept distinct.
5. On the pleaded facts, the former bankrupts had a legitimate and substantial interest in the relief sought. The alleged grant of the Licence, its consequences, and the trustee’s alleged unlawful conduct directly affected their interests. The case was not merely an attempt to second-guess ordinary commercial administration. There was therefore no need to rely on common-law fraud. Fraud on a power in the equitable sense was not the same as common-law fraud.
6. Liquidation appeal. The appeal was dismissed. The trustees of the Settlement remained outsiders to the liquidation. The unsecured creditors were creditors in form, but unchallenged evidence showed that they were funded and instructed by the Brakes and were pursuing the Brakes’ interests. Their application was therefore not pursued in a genuine dual capacity. The judge was entitled to determine that issue at the standing stage, applying the approach in Walker Morris v Khalastchi [2001] 1 BCLC 1.

• Court of Appeal (Civil Division) Allowed the bankruptcy appeal in the former bankrupts’ personal capacity, dismissed it in their capacity as trustees, and dismissed the liquidation appeal.
• High Court of Justice (Chancery Division) HHJ Matthews struck out substantial parts of the Bankruptcy Application and the entirety of the Liquidation Application: [2020] EWHC 537 (Ch) and [2020] EWHC 538 (Ch).