Supreme Court rules on challenges to officeholder decisions: the bar is set high

Supreme Court rules on challenges to officeholder decisions: the bar is set high

LIBOR transition November 2020

The court has the power to challenge any decision of the officeholder in an insolvency process on application by a dissatisfied party. The ambit of that power depends upon the nature of the insolvency process but, broadly, the following categories of people will be entitled to apply:

  • A creditor
  • The debtor (in the case of a bankruptcy or IVA) or the members of the corporate debtor (in the case of an administration or liquidation), and/or
  • Any other person dissatisfied or aggrieved by any act or decision of the officeholder*

*This category of person does not have standing to make an application in the context of administration. 

The relevant powers are set out within the Insolvency Act 1986 (the act). While these powers are widely drawn, in practice the courts have interpreted these provisions narrowly and demonstrated an unwillingness to interfere with officeholder decisions. 

Whereas a creditor will generally have standing to challenge the decisions of officeholders, the creditor’s challenge must concern the decision’s impact on them in their capacity as a creditor. In Re Edengate Homes (Butley Hall) Ltd [2022] EWCA Civ 626, a creditor challenged a liquidator’s decision which prevented them from bidding for an assignment of a cause of action against them. The court rejected that challenge on the basis that the creditor’s application did not relate to their interest as creditor; rather the application concerned their interest as potential defendant of the claim (and was actually adverse to the interests of creditors as a whole).

The recent Supreme Court case of Brake v Chedington Court Estate Ltd [2023] UKSC 29 has further clarified the scope for potential challenges brought by bankrupts against their trustees in bankruptcy under section 303(1) of the act. The decision will also be of interest to liquidators, as the court indicated that the same analysis should apply to the issue of standing when challenging decisions of liquidators under section 168(5) of the act.

The facts

The application was made by two discharged bankrupts under section 303(1) of the act to challenge the decision of their former trustees in bankruptcy to sell their rights in relation to a property which had vested in the bankruptcy estate. The debtors alleged that the sale of the property interfered with their right to possession.

The Court of Appeal held that the test for standing was that the debtors had to have a substantial interest which had been affected by the conduct in question and a direct interest in the relief sought. It was therefore satisfied that the bankrupts did have standing to make the application.

The Supreme Court decision

The Supreme Court reversed the decision of the Court of Appeal. The court held that, although the drafting of section 303(1) (and also 168(5) in relation to liquidation) of the act was very broad in terms of who could challenge any act or decision of a trustee or liquidator, those terms should not be given a literal reading. The Supreme Court held that standing to challenge a trustee’s conduct was limited to:

  • Creditors applying in respect of conduct which was adverse to their interests as creditors (confirming the outcome in Edengate Homes above)
  • Bankrupts applying in respect of conduct by a trustee which was adverse to their interest in the estate, which required a real prospect of a surplus in the bankruptcy estate (otherwise the bankrupt had no such interest), and
  • Persons (creditors, bankrupts or others) whose rights or interests arose specifically from the bankruptcy itself.

The court also confirmed that the same approach to standing ought to apply to challenges to conduct in the context of a liquidation (albeit in the case of a liquidation the challenge could be brought by members of the corporate debtor rather than by the debtor itself). While there are significant differences in the language of sections 168(5) and 303(1), the court determined that made no difference to the scope of the two provisions as the general ability of “any person…aggrieved” to make an application under section 168(5) will encompass creditors and the members of the company.

The court also confirmed that neither provision is intended to confer the ability to attack an officeholder’s conduct on an outsider to the insolvency proceedings who is simply dissatisfied with an act or decision of the officeholder which has affected that outsider in its capacity as counterparty.

Lessons learned

The decision in Brake v Chedington Court Estate Ltd [2023] UKSC 29 will be welcomed by insolvency practitioners and provides useful guidance to confirm the limited scope to challenge officeholders’ decisions in the context of both personal bankruptcy and corporate insolvency. Theoretically any person either “dissatisfied” (in the case of bankruptcy) or “aggrieved” (in the case of corporate insolvency) can apply to challenge officeholder conduct – a potentially vast category of applicant. However, the court held that such persons will only have standing in respect of matters directly affecting their rights or interests and arising from powers conferred on trustees or liquidators which are peculiar to the bankruptcy or liquidation regime. In practice therefore, successful challenges by this category of applicant will be rare.

While the judgment did not directly address challenges in the context of administration (under paragraph 74 of Schedule B1) or voluntary arrangements (under section 7(3) and 263(3)), similar language is used across these provisions of the act. The ramifications from the findings in Brake v Chedington Court Estate Ltd will no doubt be felt in future challenges to officeholder conduct beyond the confines of bankruptcy or liquidation.

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