Brake and another v The Chedington Court Estate Ltd

Standing under sections 303(1) and 168(5) of the Insolvency Act 1986 depends on the applicant’s interest in the insolvency process. A creditor may challenge conduct affecting it as a creditor. A bankrupt or contributory ordinarily requires an actual or likely surplus.

A narrow additional class has standing where an office-holder exercises a power peculiar to the statutory insolvency regime which directly affects the applicant’s rights or interests. Wrongful interference with an extraneous right does not suffice merely because the wrongdoer acted as trustee or liquidator. The special statutory procedure does not replace an ordinary civil claim or permit enforcement of duties which are not owed to the applicant.

The respondents were bankrupts whose former property included interests connected with a cottage. Their trustee entered into arrangements which facilitated the appellant’s acquisition and occupation of the cottage. The respondents applied under section 303(1) of the Insolvency Act 1986, alleging unlawful conduct and interference with their possession.

The High Court struck out the relevant claims because the respondents could not demonstrate an actual or likely surplus. The Court of Appeal, [2020] EWCA Civ 1491, held that they had standing because they had a substantial interest affected by the trustee’s conduct and a direct interest in the relief sought.

The central issue was whether interference by a trustee with possessory rights unrelated to the bankruptcy gave the bankrupts standing under section 303(1).

1. Appeal allowed unanimously. Lord Richards, with whom Lord Briggs, Lord Hamblen, Lord Leggatt and Lady Rose agreed, held that the respondents lacked standing under section 303(1) of the Insolvency Act 1986 to challenge the trustee’s dealings with the cottage.

2. Sections 303(1) and 168(5) use broad language, but their references to a dissatisfied or aggrieved person cannot be read literally. The statutory procedures are confined by the applicant’s relationship to the statutory insolvency regime. They do not provide a remedy to every person affected by an office-holder’s conduct.

3. Three categories of applicant have standing. First, a creditor may challenge conduct affecting its interests as a creditor under the statutory trust. Secondly, a bankrupt or contributory may protect an interest in an actual or likely surplus. Thirdly, a narrowly confined class may challenge the exercise of a power peculiar to bankruptcy or liquidation where that exercise directly affects the applicant’s rights or interests. The third category includes challenges concerning disclaimer and the expenses payable to obtain annulment.

4. The respondents’ possessory rights were unrelated to their status as bankrupts. The trustee’s actions were directed at them as persons in possession and could equally have been directed at third parties. The trustee was relying on ordinary powers of management, rather than a power peculiar to bankruptcy. The respondents therefore fell outside all three categories.

5. A person does not acquire standing merely because a trustee acting as trustee wrongfully interferes with an existing right. If the interference is independently actionable, the ordinary civil remedy remains available. If the alleged unlawfulness consists of a breach of the trustee’s duties, a person to whom those duties are not owed cannot enforce them through section 303(1).

6. Section 304 reinforces this construction. It expressly permits a bankrupt to bring misfeasance proceedings for the estate despite the absence of a likely surplus, but requires prior permission. Parliament did not create an equivalent unrestricted route through section 303(1).

7. The Court of Appeal’s test of a substantial interest affected by the conduct and a direct interest in the relief was too broad. A legitimate interest in the relief is only the beginning of the inquiry. The interest must fall within the categories recognised by the statutory insolvency regime.

1. United Kingdom Supreme Court: Allowed the appeal and held that the respondents lacked standing under section 303(1) of the Insolvency Act 1986.
2. Court of Appeal: In [2020] EWCA Civ 1491, allowed the respondents’ appeal in their personal capacities. It held that their substantial interest had been affected and that they had a direct interest in the relief sought. It otherwise upheld the striking out of claims made as trustees of the family settlement and the liquidation application.
3. High Court: HH Judge Matthews struck out the relevant parts of the bankruptcy application because there was no evidence of an actual or likely surplus. He also struck out the liquidation application and the claims brought as trustees of the family settlement.