Who has standing to challenge office holder decisions?
Brake and another (Respondents) v The Chedington Court Estate Ltd (Appellant)  UKSC 29
In our last Insolvency Quarterly Newsletter, we discussed the case of Patley Wood Farm LLP and others v Kristina Kicks and Blair Carnegie Nimmo (as trustees in bankruptcy of Nihal Mohamed Kamel Brake and Andrew Young Brake)  EWHC 2973 (Ch)  EWHC 3118 (Ch) in the context of applications under Section 303(1) of the Insolvency Act 1986 and some of the current trends of costs recovery when office holders engage in litigation.
The issue of Section 303(1) applications was recently considered again by the Supreme Court in another related case involving the Brakes and their Trustees.
In the case of Brake and another (Respondents) v The Chedington Court Estate Ltd (Appellant)  UKSC 29, the Supreme Court provided office holders with clarity on the three categories of cases where a person has standing to make an application under Section 303(1) of the Act (and also Section 168(5) of the Act) to challenge a decision made by an office holder.
By way of reminder, Section 303(1) of the Act provides:
"If a bankrupt or any of his creditors or any other person is dissatisfied by any act, omission or decision of a trustee of the bankrupt's estate, he may apply to the court; and on such an application the court may confirm, reverse or modify any act or decision of the trustee, may give him directions or may make such other order as it thinks fit.
Section 168(5) of the Act provides:
"If any person is aggrieved by an act or decision of the liquidator, that person may apply to the court; and the court may confirm, reverse or modify the act or decision complained of, and make such order in the case as it thinks just."
The background to the Supreme Court's judgment is as follows.
Mr and Mrs Brake (the Brakes) and Patley Wood Farm LLP (PWF) were in a partnership (the Partnership) that was engaged in an accommodation and events business, through which the Partnership owned a large farm (the Farm) which included West Axnoller House (the House) and an adjoining cottage (the Cottage). The Brakes lived in the House, but would also use the Cottage when the House was otherwise occupied by paying guests.
A dispute arose between the Brakes and PWF which led to legal proceedings that were eventually determined in favour of PWF. Having failed to pay PWF's costs of the proceedings, the Brakes were subsequently made bankrupt in May 2015, with the trustee in bankruptcy being appointed in July 2015 (the Trustee).
During this period, receivers were appointed over the Farm due to defaults by the Partnership on a legal charge which was secured over the Farm (although notably not the Cottage). The receivers duly sold the Farm to Axnoller Events Ltd, who in turn were acquired by Cheddington in February 2017.
The Partnership was placed in administration, and eventually liquidation in May 2017. The Liquidators for the Partnership invited bids from both the Brakes (in their capacity as trustees of a separate family trust) (the Brake Trust) and one of the owners of Cheddington (Dr Guy) to purchase the Cottage. Dr Guy's bid was ultimately successful and, in order to obtain a clean title to the Cottage, the Trustees entered into a number of agreements with Dr Guy and Cheddington to facilitate this (the Trustee Transactions). Cheddington then took possession of the Cottage and were able to evict the Brakes.
The Brakes then issued two applications pursuant to Section 168(5) and Section 303(1), asking the Court to:
- set aside the sale of the Cottage to Cheddington and to compel the Liquidators of the Partnership to accept the bid by the Brakes Trust (the s168 Application); and
- set aside the Trustee Transactions (the s303 Application).
Both of these applications were struck out by the High Court in the first instance on the basis that the Brakes did not have the requisite standing under those sections of the Act.
The case went to the Court of Appeal, who confirmed the decision to dismiss the s168 Application but allowed the Brakes' appeal in respect of the s303 Application, finding that the Brakes had standing because their interests were substantially affected by the impugned conduct of the Trustee and because, as bankrupts, they had a direct interest in the relief being sought by them.
Cheddington appealed to the Supreme Court, which disagreed with the Court of Appeal's decision. In particular, the Supreme Court held that the Brakes did not have any legitimate and substantial interest in the relief sought because their possessory rights to the Cottage were unconnected to their position as bankrupts. The Supreme Court went on to say that the actions of the Trustee which the Brakes were challenging were directed to them as persons in possession of the Cottage, and not as bankrupts.
The Supreme Court went on to confirm that an applicant will only have standing to bring an application under Section 303(1) or Section 168(5) of the Act in three cases:
- 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.
- where there is or is likely to be a surplus, the bankrupt or contributories are also persons for whose benefit the estate or assets are being administered, and therefore they have standing in respect of their interests in the surplus.
- there is a limited class of cases where creditors, bankrupts, contributories or others will have standing, but only in respect of matters directly affecting their right or interests and arising from powers conferred on trustees or liquidators which are peculiar to the statutory bankruptcy or liquidation regime
The Supreme Court found that the Brakes did not fall into any of these categories, and therefore allowed Cheddingtons' appeal to succeed.
Consequently, this judgment should provide reassurance to office holders that the decisions that they make can only be challenged through the Court by specific persons and in specific circumstances which need to be directly relevant to a bankruptcy or liquidation (as the case may be), thus narrowing the scope through which any such applications may be pursued.