Brake & Anor v The Chedington Court Estate Ltd [2023] UKSC 29

The Supreme Court considered when bankrupts have standing to challenge their trustee's actions under section 303(1) of the Insolvency Act 1986. The Brakes sought to challenge their trustee's dealings with a cottage they possessed. The Court held bankrupts only have standing where there is likely to be a surplus in the estate, or where the challenge concerns matters arising from powers peculiar to the bankruptcy regime.

Facts

Mr and Mrs Brake were made bankrupt in May 2015 following unpaid arbitration costs. They had been in partnership operating an accommodation business. The partnership property included West Axnoller Farm and the adjacent West Axnoller Cottage. Following their bankruptcy, disputes arose with The Chedington Court Estate Ltd (Chedington) and its owner Dr Guy.

In December 2018 and January 2019, the trustee in bankruptcy entered into arrangements with Chedington and Dr Guy regarding the Cottage, including purchasing the partnership’s interest in the Cottage (funded by a loan from Dr Guy), contracting to sell the combined interests to Chedington, and granting Chedington a licence to occupy the Cottage. Agents of Chedington subsequently entered the Cottage and changed the locks while the Brakes were in possession.

The Brakes applied under section 303(1) of the Insolvency Act 1986 to challenge these arrangements, alleging the trustee acted to assist Dr Guy in his disputes with them, without regard for the proper purposes of the bankruptcy.

Issues

The central issue was whether the Brakes had standing under section 303(1) of the Insolvency Act 1986 to challenge the trustee’s acts, omissions or decisions concerning the Cottage. This required consideration of the circumstances in which a bankrupt has standing to make such an application.

Key Sub-Issues

• Whether a bankrupt must demonstrate a surplus or likely surplus in the estate to have standing
• Whether possession of legal rights interfered with by the trustee is sufficient to confer standing
• The scope and limits of section 303(1) applications

Judgment

The Supreme Court allowed the appeal, holding that the Brakes lacked standing to make the bankruptcy application. Lord Richards delivered the judgment with which all other Justices agreed.

Principles of Standing

Lord Richards summarised the principles underlying standing under section 303(1):

Creditors have standing where their application concerns their interests as creditors, because the bankrupt’s estate or the assets of the company in liquidation are administered under the terms of the statutory trust for their benefit as creditors. Likewise, where there is or there is likely to be a surplus, the bankrupt or contributories are also persons for whose benefit the estate or assets are being administered and they have standing in respect of their interests in the surplus.

A limited third category exists:

Beyond that, there is a limited class of cases where creditors, the bankrupt, contributories or others will have standing, but only in respect of matters directly affecting their rights or interests and arising from powers conferred on trustees or liquidators which are peculiar to the statutory bankruptcy or liquidation regime.

Rejection of Broader Test

The Court rejected the broader test formulated by the Court of Appeal. Lord Richards stated:

The test for standing propounded by the Court of Appeal in the present case is placed on a basis that is far broader than is warranted by any prior authority.

Regarding the Brakes’ claim based on possessory rights to the Cottage, Lord Richards held:

The Brakes’ possessory rights to the Cottage were unconnected to their position as bankrupts. The actions of the Trustee which they challenge were directed to them as persons in possession of the Cottage, not as bankrupts. Precisely the same actions could have been taken by the Trustee if third parties had been in possession.

Policy Considerations

Lord Richards noted that allowing the Brakes’ broader interpretation would have far-reaching effects:

Insofar as the alleged wrongful action was in any event actionable by the complainant, such as by an action in tort, there is no sound basis for affording to the complainant an alternative procedure for pursuing the claim just because the wrongdoer happens to be a trustee acting in that capacity, and there is no reason to think that the legislative intention behind section 303(1) was to provide any such alternative procedure.

Implications

This judgment clarifies and restricts the circumstances in which bankrupts and third parties may challenge trustees under section 303(1) of the Insolvency Act 1986. Standing is confined to: (1) creditors concerning their interests as creditors; (2) bankrupts where there is or is likely to be a surplus; and (3) persons whose rights arise from powers peculiar to the statutory bankruptcy regime.

The decision confirms that section 303(1) is not intended to provide a general remedy for anyone whose rights are affected by a trustee’s actions, but is limited to those with a specific interest in the bankruptcy process itself. Those with other grievances against trustees must pursue ordinary civil remedies rather than the special insolvency procedure.

Verdict: Appeal allowed. The Brakes did not have standing under section 303(1) of the Insolvency Act 1986 to make the bankruptcy application concerning the Trustee’s dealings with the Cottage.

Source: Brake & Anor v The Chedington Court Estate Ltd [2023] UKSC 29