Inspiration Finance Ltd v Cadwallader & Anor

On bankruptcy, property comprised in the bankrupt’s estate vests in the trustee, and the bankrupt ordinarily lacks standing to litigate claims concerning that property. A secured creditor may nevertheless enforce its security against the property, subject to the trustee being properly joined and bound by the outcome. A dispute about the validity or priority of that proprietary security remains for the court ordinarily having jurisdiction over the claim; it does not become a bankruptcy matter merely because the chargor has become bankrupt. The bankruptcy court’s general-control jurisdiction cannot be used to displace ordinary procedural routes or to circumvent Insolvency Act 1986, section 303. Where a bankrupt seeks to challenge a trustee’s decision not to defend proceedings, the court must determine that application and explain any preference for an alternative course.

Inspiration Finance sought possession of a bankrupt’s home under a legal charge and also sought a personal money judgment. The proceedings were initially brought against the bankrupt alone, although the trustee in bankruptcy was not joined. Following procedural steps in the County Court, the trustee decided not to oppose the possession claim.

The bankrupt applied under section 303 of the Insolvency Act 1986 for directions requiring the trustee to contest the proceedings. The trustee also applied for a charge over the property under section 313. Instead of determining the section 303 application, the Insolvency and Companies Court transferred and stayed the possession proceedings and directed a separate determination of the underlying dispute under sections 303 and 363. Inspiration appealed against those orders. The central issue was whether that course was legally available and, if so, properly exercised.

1. Appeal allowed. The First Barber Order and Second Barber Order were set aside.
2. Under sections 306 and 283 of the Insolvency Act 1986, the bankrupt’s interest in the property vested in the trustee. Under section 285(3), creditors must prove in the bankruptcy for provable debts. Consistently with Heath v Tang [1993] 1 WLR 1421, the bankrupt therefore had no interest or standing to prosecute or defend claims concerning property vested in the trustee, subject to claims directed personally against the bankrupt and other recognised exceptions.
3. The trustee takes the bankrupt’s property subject to existing equities and proprietary interests. A legal or equitable charge continues to encumber the property and may be enforced by its holder. The court applied the principle illustrated by Lloyd v David Lloyd & Co (1877) 6 Ch 339 and referred to Re Wallis [1902] 1 KB 719.
4. The possession proceedings concerned the enforcement of Inspiration’s proprietary rights against property vested in the trustee. They did not arise in or under the bankruptcy merely because the charged property had vested in the trustee or because the existence of the security was disputed. The proper forum remained the County Court. Sections 303 and 363 did not confer jurisdiction to modify rights acquired independently of the bankruptcy. The court followed the reasoning in Revenue and Customs Commissioners v Ariel [2016] EWHC 1674 (Ch).
5. The proper route for protecting the bankrupt and deciding whether the trustee should defend the proceedings was the section 303 application. The judge erred by failing to determine that application and by directing litigation between Inspiration and the bankrupt, thereby circumventing the statutory protection and exposing the bankrupt’s resources to uncontrolled litigation.
6. The proceedings had procedural irregularities, but these had been appropriately addressed by Judge Gerald: the trustee should be joined, the bankrupt could remain a party because he was in possession, and the personal money claim against him could not proceed. Nationwide Building Society v Purvis [1998] BPIR 625 did not qualify or undermine Heath v Tang.
7. The proceedings were to be transferred back to the County Court. The bankrupt’s section 303 application was to be determined, and the trustee was to be enabled to reconsider his position. There should be no further substantive movement until those matters had been addressed, and delay should not ordinarily exceed 28 days.

• Insolvency and Companies Court: Orders dated 17 January and 28 June 2019 transferred and stayed the possession proceedings and directed a determination of the underlying dispute under sections 303 and 363 of the Insolvency Act 1986.
• High Court (Chancery Division): The appeal was allowed. The two orders were set aside, with directions for the proceedings to return to the County Court and for the section 303 application to be determined.