Leopard v Robinson

A trustee in bankruptcy may continue the bankrupt’s business only so far as necessary for its beneficial winding up, including realising work in progress, book debts or goodwill. The power is not a licence for indefinite trading to assist the bankrupt’s discharge or an IVA. Section 314(2)(b) is read subject to Schedule 5 and enables the trustee to appoint the bankrupt to assist with authorised trading. Trading outside those purposes may be irregular as between the trustee and creditors without making the trustee’s dealings with third parties void. The rule in ex parte James applies an objective fairness standard to court officers. In an appropriate case, a trustee may be directed not to take full advantage of strict legal rights where doing so would be unfair.

The applicant, Adrian John Leopard, was trustee in bankruptcy of Eric Andrew Robinson. Robinson operated a sole-trader cleaning business when he was made bankrupt in October 2014. The trustee obtained sanction to continue trading and Robinson operated the business under the trustee’s supervision until July 2019.

The trustee sought declarations concerning the vesting of the business and its assets, the ownership of trading income, the trustee’s powers and the legal effect of the parties’ arrangements. Robinson contended that he had traded in his own right and that the trustee had acted outside his powers. The central issues were whether the trustee had traded the business through Robinson as his appointee, whether the trading was authorised by the Insolvency Act 1986, and whether fairness required adjustment of the parties’ strict legal rights.

1. Assets and goodwill. Property belonging to or vested in the bankrupt formed part of the bankruptcy estate unless it was exempt property under section 283(2)(a) of the Insolvency Act 1986. Tools of the trade had to be necessary and personal to the bankrupt. The burden was on the bankrupt. Items used by employees and choses in action did not qualify. Customer contracts, staff and supplier contracts, customer lists, most vehicles, stock and goodwill vested in the estate. The business had realisable goodwill.
2. Trading powers. Section 314(2)(b) was subject to Part 1 of Schedule 5. The trustee could trade only so far as necessary for the beneficial winding up of the business, including completing work in progress, collecting book debts or preparing a sale of goodwill. The power did not authorise indefinite trading to assist an IVA or annulment. The Secretary of State’s sanction was construed as authorising the trustee to appoint Robinson to assist in trading.
3. Application to the facts. From 24 October 2014 to 31 July 2019 the trustee traded the business, with Robinson acting as his appointee. Trading income therefore belonged to the estate. Trading from October 2014 to June 2017 pursued purposes outside Schedule 5, but that irregularity did not render the trading void or prevent the trustee creating legal relations with third parties. From June 2017 the intended sale of the business was an authorised purpose.
4. Agreement and estoppel. The parties had agreed by October 2014 that Robinson would assist the trustee in trading for the estate. The contractual issue was academic and the arrangement was terminable. Robinson was not estopped from challenging the trustee’s powers, but the evidence established his agreement to the arrangements.
5. Rule in ex parte James. The court applied an objective fairness standard. Given the prolonged trading, the trustee’s earlier error of judgment, Robinson’s contribution and the income generated beyond the period of a possible income payments order or agreement, it would be unfair for the trustee to retain all income from 10 October 2017 to 31 July 2019. The trustee was directed to account for that income to Robinson, subject to proper costs, the value of the estate’s assets and further directions.

First-instance decision. No prior appellate decision is stated in the judgment.