Patley Wood Farm LLP & Ors v Kristina Kicks & Anor

The Court of Appeal allowed the trustees' appeal against an order made under section 303(1) of the Insolvency Act 1986 which had compelled the trustees in bankruptcy to join ongoing proceedings and take active steps to obtain possession of a cottage. The court applied the established test for interference with an insolvency office holder's decision (fraud and bad faith apart, only where the decision is so unreasonable that no reasonable person would have made it) and held that the judge below was wrong to characterise the trustees' decision as perverse.

The court identified four principal errors in the judge's reasoning: (1) failure to appreciate that trustees have a statutory discretion and are not required to act for creditors "at all costs"; (2) disregard of the key and material consideration that joinder was unlikely to produce any meaningful financial benefit to the bankruptcy estates; (3) underestimation of the real downsides to the trustees of becoming embroiled in protracted litigation and exposure to costs; and (4) insufficient recognition of genuine concerns about the trustees' independence where a non-creditor funder sought to dictate the trustees' conduct. The court concluded that the trustees' decision not to intervene was not so unreasonable as to satisfy the high threshold for interference under section 303.

Background and parties: The appeal concerned the trustees in bankruptcy (the appellants) of two bankrupts, the Brakes, and an order of the High Court (His Honour Judge Matthews) made under section 303(1) of the Insolvency Act 1986 directing the trustees to join existing proceedings (the Eviction Claim) and to file submissions and attend hearings in opposition to the bankrupts' claim for possession of a cottage.

Nature of the application: The applicants at first instance sought, pursuant to section 303(1), to compel the trustees to join and to take active procedural and substantive steps in proceedings which might lead to an immediate licence or possession order in favour of the trustees and thereby create a modest income stream for the bankruptcy estates.

Procedural posture: The High Court ordered the trustees to join and to take steps. The trustees appealed with permission. This Court heard the appeal as an appellate review of the High Court's evaluative decision about whether the trustees had acted so unreasonably as to justify intervention under section 303.

Issues framed: (i) the standard for interfering with a trustee in bankruptcy's decision under section 303; (ii) whether the judge below correctly applied that standard or committed identifiable errors of reasoning; (iii) whether the trustees' asserted reasons for not intervening (limited prospects of benefit to the estates, costs exposure and independence concerns given funding and indemnity arrangements) were lawful and rational; and (iv) the effect of third party offers of funding and indemnities on the trustees' independence.

Court's reasoning: The Court of Appeal applied the settled authorities that, absent fraud or bad faith, the court should only interfere where a trustee's conduct is so unreasonable that no reasonable trustee could have acted so. The court found four flaws in the judge's analysis: he treated the trustees' duty to act for creditors as requiring action "at all costs" rather than recognising their statutory discretion; he failed to give sufficient weight to the realistic and material fact that the bankruptcy estates were deeply in deficit and that any monetary benefit from intervention would be negligible; he underestimated the substantial procedural and costs risks to the trustees of joining hard-fought litigation; and he did not properly address genuine concerns about independence arising from the funder dictating the trustees' submissions. For those reasons the impugned decision was not sustainable.

Result: The Court allowed the trustees' appeal and set aside the order compelling them to join and to take those steps. The court's reasons emphasised the high threshold for interference with insolvency office-holders and recognised the legitimacy of trustees exercising a considered, professionally informed discretion where litigation is unlikely to benefit the estate.

Appeal allowed. The Court of Appeal held that the High Court judge was wrong to characterise the trustees' refusal to intervene as perverse. Applying the established test for interference under section 303(1) of the Insolvency Act 1986, the Court found four flaws in the judge's reasoning: (1) misapplication of the trustees' statutory discretion; (2) failure to give weight to the likely lack of financial benefit to the estates; (3) underestimation of the real downsides and costs exposure to the trustees; and (4) insufficient regard to independence concerns where a non-creditor funder sought to dictate the trustees' conduct. The trustees' decision was not so unreasonable as to justify interference under section 303.

Appeal from the High Court of Justice, Business and Property Courts in Bristol, Insolvency and Companies List (ChD) (His Honour Paul Matthews) whose order dated 25 November 2022 was given in [2022] EWHC 2973 (Ch). Permission to appeal was granted by Newey LJ. The appeal was heard in the Court of Appeal (this judgment, [2023] EWCA Civ 901). The decision engages earlier related litigation in which this Court allowed the bankrupts' appeal in the Eviction Claim (Patley Wood Farm LLP & Ors v Brakes and others) on 10 October 2022 ([2022] EWCA Civ 1302) and multiple High Court judgments of His Honour Judge Matthews cited in the judgment.