Patley Wood Farm LLP & Ors v Kristina Kicks & Anor

Under the Insolvency Act 1986 section 303(1), court supervision of a trustee in bankruptcy is exceptional. Intervention requires bad faith or fraud, or a decision so perverse, unreasonable or absurd that no properly advised trustee could have made it. A trustee’s duty to act in creditors’ interests is not a duty to pursue every possible benefit at all costs. A trustee may rationally decline to intervene in litigation where the likely gain is minimal and intervention risks substantial cost, delay or compromise of independence. An evaluative decision may be disturbed on appeal only for an identifiable flaw undermining its cogency. Trustees are not barred from appealing merely because they sought the court’s protection.

The Trustees were joint trustees in bankruptcy of Andrew and Nihal Brake. The High Court, on an application under section 303(1) of the Insolvency Act 1986, ordered them to join pending eviction proceedings concerning a cottage and to oppose the bankrupts’ claim for possession.

The application was made by Patley Wood Farm LLP, Lorraine Brehme and The Chedington Court Estate Ltd. The High Court held that the Trustees’ refusal to intervene was perverse, principally because third-party funding and a possible income stream were available.

The Trustees appealed from the order reported at [2022] EWHC 2973 (Ch). The central issues were whether the High Court had applied the correct threshold for intervention in a trustee’s discretionary decision and whether the Trustees’ appeal was competent.

Arnold LJ gave the leading judgment, with Asplin and Lewison LJJ agreeing. The appeal was allowed.

1. Under section 303(1) of the Insolvency Act 1986, the court may interfere with a trustee’s act, omission or decision for bad faith or fraud, or where the decision is so perverse, unreasonable or absurd that no properly advised trustee or reasonable person could have acted in that way. The test is deliberately formidable: Re Edennote Ltd, Bramston v Haut, Osborne v Cole and Re Edengate Homes (Butley Hall) Ltd.
2. Because the decision was evaluative, appellate intervention also required an identifiable flaw in the reasoning, such as a gap in logic, inconsistency or failure to take account of a material factor, undermining the cogency of the conclusion: Re Sprintroom Ltd.
3. The judge identified four such flaws. He treated the Trustees’ duty to act for creditors as an obligation to act at all costs, disregarded their rational view that intervention was unlikely to benefit the heavily insolvent estates, failed to recognise the foreseeable burdens and costs of hostile litigation, and dismissed legitimate concerns about independence. The availability of funding and a possible licence fee did not compel intervention, particularly where the funder sought to control the Trustees’ submissions.
4. The Applicants’ preliminary objection failed. Re Londonderry’s Settlement did not establish that an appeal by trustees was incompetent; at most, it concerned the circumstances in which trustees might lose an indemnity from trust funds. The approach in Re R & RA Trusts was persuasive and supported the conclusion that trustees may appeal where they consider an appeal necessary to protect beneficiaries.

The Trustees’ decision could not be characterised as perverse. The order requiring them to join the eviction proceedings and make specified submissions was therefore set aside.

• Court of Appeal (Civil Division): In [2023] EWCA Civ 901, allowed the Trustees’ appeal.
• High Court of Justice, Chancery Division: In [2022] EWHC 2973 (Ch), ordered the Trustees under section 303(1) of the Insolvency Act 1986 to join the eviction proceedings and make submissions concerning possession.