Nicholas William Nicholson & Anor v Insolvency Practitioners Association & Ors

The functions of a recognised professional body in relation to insolvency practitioner bonds are not public merely because the bonding regime is recognised by legislation or serves a public benefit. The court must focus on the specific function, identify its source, and weigh its characteristics. Functions assumed voluntarily under contractual arrangements, without direct statutory obligation, statutory underpinning or governmental character, are private functions.

An insolvency practitioner association named as beneficiary of bonds may nevertheless hold the contractual claim rights on trust for the insolvency estates protected by the bonds. The trust may arise where the bonds objectively show an intention to benefit those estates, the association cannot take the benefit for itself, and the arrangement is made pursuant to contractual or fiduciary obligations. Contractual claim rights are property for the purposes of section 234(2) of the Insolvency Act 1986.

The claimants were liquidators of three companies whose previous insolvency practitioners were alleged to have dishonestly claimed excessive fees through time dumping. Insolvency practitioner bonds issued by Intact Insurance UK Ltd named the Insolvency Practitioners Association as beneficiary and provided security for losses caused by fraud or dishonesty.

The claimants sought declarations that the IPA held the contractual claim rights against Intact on trust for the companies’ insolvency estates. They also sought transfer orders under section 234(2) of the Insolvency Act 1986. The defendants argued that the IPA’s functions concerning the bonds were public functions and that no trust existed. The principal issues were whether the IPA exercised public powers, whether the bonds created a trust, and whether the claim rights could be transferred to the liquidators.

1. Public functions. The court applied the two complementary approaches summarised in De Smith: first, the source of the power; and, where necessary, the characteristics of the function. The specific functions were entering into bonds, holding the contractual rights, considering assignment, and entering into tripartite agreements. The IPA did not investigate, manage, pursue, collect or distribute bond claims in practice.
2. The relevant functions were not imposed or conferred by sections 390 or 391 of the Insolvency Act 1986, the regulatory objectives in section 391B, or the Insolvency Practitioner Regulations. Those provisions required security and regulated the profession, but did not require an RPB to become bondholder or prescribe how it should exercise bond rights. The MOU was voluntary and was not primary or secondary legislation.
3. The characteristics of the functions also pointed against a public character. The functions arose from voluntary contractual arrangements, were not governmental in nature, were not woven into public regulation, and would not inevitably have been undertaken directly by government. The absence of direct statutory obligation was given additional, though limited, weight. The balance therefore established that the IPA was not exercising public powers or functions.
4. Trust. Construed objectively against the relevant 2010–2012 factual matrix, the bonds showed that the IPA was to hold the benefit of Intact’s promises for insolvency estates identified in cover schedules and suffering loss through fraud or dishonesty. The claim rights were sufficiently certain, and the companies’ insolvency estates were sufficiently certain beneficiaries. The IPA entered into the bonds pursuant to contractual and/or fiduciary obligations arising from the MOU. It could not divert the benefit to itself or another except for the estates’ benefit. The bonds therefore created a trust.
5. The court also held that, if necessary, terms should be implied requiring the IPA to segregate any bond proceeds, remit them for the relevant loss, or return them to the surety, and not use them for another purpose. These terms were obvious, necessary for practical coherence and consistent with the bonds.
6. Relief. The claimants were entitled to declarations that the IPA held the claim rights on trust and that the companies could sue Intact under the bonds, subject to joining the IPA as trustee. The claimants could call for transfer of the rights relating to their estates. Section 234(2) applied to contractual rights and other intangible property, and the claimants were entitled to transfer orders.