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26-05-2017

Oraki v Bramston - the Court of Appeal decision. The High Court in Oraki v Bramston concluded that a trustee in bankruptcy had no general common law duty to the bankrupt outside of the requirements of the Insolvency Act 1986.

However, common humanity dictated that a trustee could be expected not to ride roughshod over a bankrupt particularly where it was apparent that the bankruptcy order could be annulled on grounds that it ought not to have been made or there was a surplus likely to be returned to the bankrupt.

In Oraki, the bankrupts had ultimately succeeded in annulling the bankruptcy orders and the issue was the conduct of the trustees. In particular, on appeal, there were assertions that the trustees had deliberately lengthened the bankruptcy process and been obstructive as regards the annulments.

The decision was very fact specific with the court concluding that the trustees had taken proper steps to comply with their duties to get in and realise bankruptcy estate assets and the process had been lengthened because of the time allowed at the bankrupts' requests to enable them to pursue an annulment. There had been annulment applications which were not successful before the ultimate order was made.

The points that can be taken away for general application are:

  1. On an application for an annulment on the grounds that the order ought not to have been made, the proper stance for the trustee to take is one of neutrality;
  2. Even though the stance is one of neutrality, the trustee's position as an office of the court means that he should ensure that any factor that might be relevant to the court making its decision should be brought to its attention.
  3. On an application for permission to enforce a possession order in the High Court, as an ex parte application there is a duty of full and frank disclosure and so matters must be brought to the attention of the court which are relevant to its decision, such as an application to annul being issued.
  4. The Court of Appeal disagreed with the High Court in suggesting that the Insolvency Act provisions mean that a trustee has no general duty of care to the bankrupt. Rather unhelpfully the Court did not consider that it needed to explore the scope of that duty having concluded already that the facts asserted by the appellant concerning the conduct of the trustees did not give rise to grounds of appeal.

This leaves us with the position that the court has confirmed that a trustee in bankruptcy has a duty of care to the bankrupt but has not defined the extent of that duty. It is submitted that this should give us no real problems if trustees continue to follow good practice.

There is a duty to get in and realise bankruptcy estate assets and the High Court test of not riding roughshod over the bankrupt is not a million miles away from imposing a duty of care towards the bankrupt. We would suggest that duty is to exercise the Insolvency Act requirements to administer the estate in a way which is not unduly unfair to the bankrupt in circumstances where there is likely to be a surplus and/or it is clear to some extent that the order ought not to have been made and the bankrupt is given the opportunity to challenge.

There is, therefore, little real change from the position following the High Court decision other than those who have been made bankrupt can now point to some authority for a trustee having some duty towards that bankrupt and can raise an argument that the duty arises in all situations. It should also be born in mind that, for any cause of action to exist, a bankrupt would need to show the existence of a duty of care, a breach of that duty and that losses have been caused by that breach. The Court of Appeal agreed with the High Court that mental distress was not in itself a recoverable loss. Provided a trustee administers the estate fairly, we would not anticipate this decision should cause any problems for practitioners.

Graham McPhie

For further information on this matter please contact Graham McPhie at gmcphie@moonbeever.com  or Frances Coulson at fcoulson@moonbeever.com.

This is intended for general information only and should not be considered as giving advice in relation to any individual case nor be taken as applying to any particular case. No liability is accepted for any such use of the information contained.

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