Diana McFadzean v Ricardo Cacho Martinez & Anor

Leave under section 304(2) of the Insolvency Act 1986 is a flexible filter. The court must consider whether the applicant has shown a reasonably meritorious cause of action reasonably likely to benefit the estate, together with other relevant circumstances, including delay, vexation and costs. The court must avoid a mini-trial, but the claim must have a proper evidential foundation. Expert evidence is not invariably required, although its absence may be fatal where value, professional standards or specialist law is central. A trustee must take reasonable steps to obtain a proper price, but receives generous latitude when exercising commercial judgment or negotiating, absent bad faith, fraud or perversity. The claim failed because it lacked expert evidence and the evidence supported the trustees’ decisions.

The applicant, a former bankrupt, sought leave under section 304 of the Insolvency Act 1986 to pursue compensation claims against two trustees in bankruptcy. She alleged that the first trustee negligently failed to obtain appropriate French planning advice, market a French development plot adequately and negotiate better sale terms. She alleged that the second trustee negligently failed to challenge the sale under the French seven-twelfths rule and failed to obtain proper valuation evidence.

The trustees had been released, making leave necessary. The central issue was whether the proposed claims were reasonably meritorious and reasonably likely to benefit the estate, and whether the trustees’ conduct fell outside the latitude afforded to office-holders exercising professional and commercial judgment.

1. Application dismissed. The applicant had not shown a reasonably meritorious cause of action reasonably likely to result in a benefit to the estate. The absence of expert evidence concerning French planning law, the seven-twelfths rule, valuation, litigation prospects and relevant professional standards was significantly damaging and, on the central issues, fatal.
2. The section 304(2) leave jurisdiction is a flexible filter. The court must consider the merits and likely benefit of the claim, together with relevant circumstances such as delay, vexation and costs. It must assess whether the case has a proper foundation without conducting a mini-trial. There is no rigid or universally high hurdle, and no absolute requirement for expert valuation evidence.
3. A trustee owes a duty to take reasonable steps, judged by the standard of an ordinary, reasonably skilled and careful insolvency practitioner, to obtain a proper price for estate assets. Under section 305(2) of the Insolvency Act 1986, however, the trustee may use his own discretion. Commercial and negotiating decisions attract generous latitude unless affected by bad faith, fraud or perversity.
4. Mr Cacho had obtained and acted on apparently reliable advice about the works required to preserve the planning permission. His decision to sell rather than fund uncertain works, his limited marketing process and his negotiations were rational and within his professional discretion. The accepted offer was the highest unconditional offer available after the higher offer had withdrawn.
5. Mr Waghorn had received legal advice that the sale agreement was binding and beneficial to the estate. There was no evidence that the plot was worth the threshold required for the seven-twelfths rule. Even if such a valuation had been arguable, challenging the binding sale would have required costly and speculative litigation and might have resulted in recovery of land without the relevant permission. The alleged valuation defects therefore made no consequential difference.
6. The court would have granted leave if the claims had been sufficiently meritorious. It did not refuse leave because of alleged vexatiousness or delay. The application was dismissed.