In this post, Tara McCarthy and James Warshaw, associates in the litigation team at CMS, preview the decision awaited from the Supreme Court in Brake and Anor v Chedington Court Estate Ltd.
The respondents in the Supreme Court are a married couple, Mr and Mrs Brake, and their son. Mr and Mrs Brake lived on a farm which they ran as a wedding and events venue in partnership with a third party. Mr and Mrs Brake contributed the farm as property of the partnership. The partnership later acquired legal title to the cottage which was transferred to the three partners on trust for the partnership. Initially, the cottage was used as accommodation for a housekeeper, followed by a personal assistant and his family, before being used by Mr and Mrs Brake and their son when the main house was let.
Differences led to the dissolution of the partnership in 2013. In 2015, Mr and Mrs Brake were declared bankrupt and, in 2017, the partnership went into liquidation. Mr and Mrs Brake’s interest in the cottage vested in their trustee in bankruptcy. The farm was eventually sold to The Chedington Court Estate Ltd (“Chedington”) and Mr and Mrs Brake’s trustee in bankruptcy acquired the rights to the cottage. Mr and Mrs Brake allege that the trustee in bankruptcy then entered into various transactions with Chedington through which they eventually acquired the rights to the cottage and evicted Mr and Mrs Brake. Mr and Mrs Brake also allege these actions denied them the opportunity to purchase the cottage themselves.
Mr and Mrs Brake afterward commenced eviction proceedings against Chedington – these proceedings have been heard separately. They also commenced insolvency proceedings against the liquidators of the partnership (the “Liquidation Application”) and against the trustee in Bankruptcy (the “Bankruptcy Application”). The purpose of this was (i) to unwind the disputed transactions between the liquidators and the trustee in bankruptcy and (ii) to establish that Mr and Mrs Brake’s pre-existing interests in the cottage had revested in them on the basis they were the sole or principal residents at the date of the bankruptcy. The High Court struck out the whole of the Liquidation Application. It is the latter (the Bankruptcy Application) with which the pending Supreme Court decision is concerned and on which this post will focus.
The strike out application
In January 2020, Chedington made an application to strike out several parts of the Bankruptcy Application on the basis that Mr and Mrs Brake lacked standing to bring it under the Insolvency Act 1986 (the “act”).
Mr and Mrs Brake had brought their claim under s 303(1) of the Act, under which the decisions of trustees in bankruptcy can be contested. They did so both as trustees of the Brake family settlement and as the bankrupts. Chedington argued that as trustees of the Brake family settlement, Mr and Mrs Brake had no legitimate interest in any of the relief sought. It was also argued that in their personal capacity, they had no legitimate interest in the relief sought in relation to the transactions concerning the cottages. On the other hand, Mr and Mrs Brake argued that a bankrupt who is also a bidder for a property is entitled to challenge the decision of the trustee in bankruptcy when an allegation is made that the process is unfair.
By an order dated 2 March 2020, the judge struck out substantial parts of the Bankruptcy Application on the basis that Mr and Mrs Brake had no standing to seek the relief claimed under s 303(1) of the Act, either as trustees of the Brake family settlements, or as bankrupts. As to the former, they were simply unsuccessful bidders for the cottages and outsiders to the bankruptcy. They therefore had no legitimate interest in the relief sought. As to the latter, a bankrupt can only challenge the decisions of a trustee where there is likely to be a surplus in the estate. It was accepted this was unlikely.
The Court of Appeals
After the majority of the Bankruptcy Application was struck out, Mr and Mrs Brake appealed. Firstly, they suggested that the judge was wrong to apply certain cases to define the boundaries within which a bankrupt can challenge the conduct of a trustee in bankruptcy under s 303(1) of the Act, and to hold that a bankrupt has no standing unless they can show there is likely a surplus in the estate. Both, they disagreed with the suggestion that, as trustees of the family settlement, they had no connection with the bankrupts and their interest in securing the family home.
Before examining the Court of Appeal’s decision, it is important to bear in mind that s 303(1) of the Act states as follows:
“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 orders it thinks fit”.
In their capacity as trustees
First, the judge considered Mr and Mrs Brake’s position in their capacity as trustees of the family settlement. Mr Davies QC for Mr and Mrs Brake submitted that they were invited to bid for the cottage and the process was unfair, unlawful and unconscionable. The judge concluded that, whilst it is clear that the court will give relief under either s 303(1) to rectify an unfair bidding process, this does not tell us whether an applicant who is a “they are bidders” has standing under s 303(1) to complain about the process. in Mahomed & Anor v Morris & Ors  EWCA Civ 46, the judge commented that it could not have been Parliament’s intention that any outsider to the liquidation who was dissatisfied with the liquidator’s decision could attack it under s 168(5) of the Act. Here, the judge said the same must apply to a trustee in bankruptcy. Consequently, in their capacity as trustees, Mr and Mrs Brake were “strangers to the bankruptcy”, had no direct interest in it and lacked standing to bring the Bankruptcy Application under s 303(1). As a result, the appeal was dismissed in their capacity as trustees.
In their capacity as former bankrupts
The judge then went on to consider Mr and Mrs Brake’s standing under s 303(1) in their capacity as former bankrupts. It was seen as”settled law” that a bankrupt must show more than simply being a bankrupt to question the trustee in bankruptcy. The bankrupt must show a substantial interest which has been affected by the conduct complained of and a direct interest in the relief sought. The potential existence of a surplus is one way of demonstrating this, but not the only one.
It was held that the first instance the judge was wrong to have concentrated solely on whether there was a surplus in this case. The Brakes had a legitimate and substantial interest in the relief sought to give them standing under s 303(1). Consequently, the appeal was allowed in Mr and Mrs Brake’s capacity as former bankrupts.
The Supreme Court gave Chedington permission to appeal this decision, and the appeal was heard on 1 November 2022. We await judgment, at which stage we will find out whether the decision of the Court of Appeal (that Mr and Mrs Brake had standing as former bankrupts in respect of the Bankruptcy Application) stands.
Chedington’s appeal centers on the ground that bankrupts cannot have standing to interfere in bankruptcies where the relief sought would have no impact on their position within such bankruptcies. The judgment should provide useful clarity when there will be standing to make an application for the purposes of s 303(1) in order to challenge the decision-making of a trustee in bankruptcy.