Brake v Lowes

The Court of Appeal considered who has standing to challenge the acts of an insolvency officeholder under s.303(1) and s.168(5) of the Insolvency Act 1986. It applied established authorities (including Dodwell, Deloitte and Edennote) to hold that a person seeking relief under those statutory provisions must show a substantial and legitimate interest in the relief sought; mere status as a bidder or outsider to the insolvency is not enough.

The court held that the Brakes, in their personal capacity as former bankrupts, did have sufficient interest (on the pleaded facts alleging unlawful conduct by the trustee) to invoke s.303(1). By contrast the Brakes, acting as trustees of a family settlement, and the unsecured creditors who were plainly acting to advance the Brakes' case, were outsiders to the liquidation and lacked standing under s.168(5). The court therefore allowed the bankruptcy appeal in part (standing for the former bankrupts) and dismissed the liquidation appeal.

Background and parties: The appeals arose from two related applications (the "Bankruptcy Application" and the "Liquidation Application") concerning the sale of interests in a property known as West Axnoller Cottage. The appellants included Mr and Mrs Brake (the Brakes) both in their personal capacities as former bankrupts and as trustees of the Brake Family Settlement; the respondents included the trustee in bankruptcy (Mr Swift) and the successful purchaser Chedington Court Estate Limited. At first instance HHJ Paul Matthews struck out substantial parts of both applications for want of standing. The judge gave permission to appeal.

Nature of the claims / relief sought:

• The Brakes sought to impugn sales and other acts said to have been carried out by the trustee in bankruptcy and the joint liquidators, to set aside the sale conveying interests in the Cottage to Chedington, and alternatively to have the interests sold under the court's direction. They advanced applications under s.303(1) Insolvency Act 1986 (complaints about acts of a trustee in bankruptcy) and under s.168(5) Insolvency Act 1986 (complaints about acts of a liquidator).

Issues framed: (i) Whether discharged bankrupts in their personal capacity or as trustees of a family trust have standing under s.303(1) to challenge their former trustee in bankruptcy; (ii) whether discharged bankrupts as trustees of a family trust, or unsecured creditors in a compulsory winding up, are "persons aggrieved" with standing to challenge a liquidator under s.168(5).

Procedural posture: The High Court struck out the Liquidation Application in its entirety and substantial parts of the Bankruptcy Application for lack of standing ([2020] EWHC 537 (Ch) and [2020] EWHC 538 (Ch)). The Court of Appeal heard the appeals and handed down the approved judgment on 13 November 2020.

Court's reasoning and conclusions:

• The Court of Appeal reviewed authorities including Re Edennote, Mahomed v Morris, Dodwell, Deloitte and related cases. It emphasised that s.303(1) and s.168(5) are special statutory procedures and that the applicant must show a legitimate and substantial interest in the relief sought to be a proper person to invoke the court's jurisdiction.
• As trustees of the Settlement the Brakes were treated as outsiders to the bankruptcy and the liquidation: their only interest in the Cottage in that capacity was as prospective bidders. The court held that mere disappointed bidders do not, by that fact alone, have standing under s.303(1) or s.168(5).
• In respect of the Brakes in their personal capacity as former bankrupts the court rejected an absolute rule that standing requires a likely surplus; instead a bankrupt must demonstrate "some substantial interest" affected by the trustee's conduct. On the pleaded facts (alleging collusion, unlawful nominee bidding and a consequential licence of occupation), the Brakes had a sufficient and direct interest to found an application under s.303(1). The bankruptcy appeal was therefore allowed in that respect.
• The unsecured creditors were held to lack standing because the judge found (on unchallenged evidence) they were advancing the Brakes' case and had been funded/instructed by the Brakes; they were not acting in an independent creditor capacity adverse to the estate. The liquidation appeal was dismissed.

Wider point: The court reiterated the supervisory jurisdiction of the court over its officers but emphasised that such jurisdiction does not confer standing on outsiders who lack a legitimate interest in the insolvency estate.

Appeal allowed in part and dismissed in part. The Court of Appeal allowed the bankruptcy appeal insofar as the Brakes, in their personal capacity as former bankrupts, were held to have standing to apply under s.303(1) Insolvency Act 1986 because, on the pleaded facts, they had a substantial and direct interest in the relief sought. The court dismissed the appeals in relation to the Liquidation Application and the Brakes as trustees of the Settlement and the unsecured creditors, holding they were outsiders to the insolvency process and lacked the requisite standing under s.168(5). The court applied established authorities (Dodwell, Deloitte, Edennote, Mahomed) and emphasised that an applicant must have a legitimate interest in the relief sought.

The matters came from two High Court (Chancery Division) strike-out judgments of HHJ Paul Matthews: the Bankruptcy Judgment [2020] EWHC 537 (Ch) and the Liquidation Judgment [2020] EWHC 538 (Ch). Those orders striking out parts of the applications were subject to permission to appeal; the Court of Appeal [2020] EWCA Civ 1491 allowed the bankruptcy appeal in part and dismissed the liquidation appeal.