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18-08-2018

The position of a trustee in bankruptcy can be a difficult one. Who does the trustee represent?

We know that the duties are to get in, realise and distribute bankruptcy estate assets. As part of this process, a trustee will need to adjudicate on claims and to realise so much of the estate as is required without unduly lengthening the administration. We know that a trustee has no responsibility to a creditor who chooses not to prove in the bankruptcy with a resulting surplus perhaps being repaid to a bankrupt provided the proper advertisement regime is followed.

The role of the trustee and the inter-relationship with the realisation of assets and the obligation to distribute to creditors can cause confusion and lead some to believe that in all circumstances the trustee is a general representative of the creditors.

That is not the case and the High Court in Sands v Layne has made it quite clear that a trustee’s duties and powers arise from the appointment as trustee. Once that appointment has ended through the order being set aside or rescinded, the trustee no longer has any duties or powers in relation to an estate that no longer exists.

In Layne, the bankruptcy petition was contested on the grounds that the petitioning creditor had unreasonably refused a compromise (section 271(3) Insolvency Act 1986). The order was made and ultimately a trustee was appointed.

An appeal was made against the granting of the order with additional points that the bankrupt was solvent and could offer security. The appeal was settled by consent with security being granted and the bankruptcy order rescinded.

The trustee sought a copy of the application and evidence in support and one year after the rescission applied for a review under section 375 Insolvency Act 1986.

The court discussed whether it was possible to review the decision of an appellate court under the section 375. Interestingly, the court’s view on this wavered and was uncertain. The ultimate conclusion was that section 375 could not extend to a review of an appellate decision but was only available to review a first instance decision. However, as the court wavered on this point, it went on to consider the position if it considered that the appellate decision could be reviewed.

The court rightly considered the basis of the authority stemming from the order and the statutory provisions. Once there was no order, there was no authority for the trustee to act.

The court clarified that the position on the appeal against the bankruptcy order was to consider if that order should have been made. Under section 271(3), if the court had concluded that it ought not to have been made because security was unreasonably refused, the bankruptcy order should be set aside. What was to be considered at this time was the relationship and the legal position between the petitioning creditor and the debtor. Any other creditors would have been entitled either to take over the petition in substitution or to issue a fresh petition. On that basis, any granting of security could have been challenged as a security if the timing of the issue of the second petition allowed.

The trustee’s case was that there were unsecured creditors who had not been brought to the attention of the court on the appeal and their interests were prejudiced.

That may have been so but the court held that the decision on the original granting of the bankruptcy order could deal solely with that issue. Any creditors so prejudiced could seek their own relief.

The trustee’s application was dismissed.

Some thoughts

The case is a useful illustration of the role of the trustee which is often misunderstood. It is not to be the general representative of the creditors but to administer an estate. If there is no estate, the creditors need to look after themselves. Indeed, any creditor could have issued a petition when the order, in this case, was rescinded and sought to invoke the preference regime. Any creditor could have applied to take over the carriage of the petition in substitution and so seek to invoke section 284 to render any giving of security void. It has been clear since the decision in Robert Petroleum v Kenny [1983] that there is nothing wrong with one creditor seeking to put itself in a better position than other creditors, eg by seeking a charging order. If other creditors wish to seek to impose a collective insolvency regime, it is possible to issue a petition. Indeed in Robert Petroleum, the issue of a petition was sufficient reason to refuse to make an interim order final. However, in the absence of any formal insolvency regime being engaged, creditors are perfectly entitled to think only of themselves.

With creditors taking no action themselves, it is hard to see what standing the trustee had to issue the application to challenge once the order had been made. The parties with the legal standing to make that application would have been the creditors themselves.

It is tempting to suggest that the trustee should have applied to be part of the original application for rescission and the appeal so that the court was advised of the full circumstances of the creditors’ claims. However, on the reasoning given by the court that what mattered was the issue between the petitioning creditor and the debtor to invoke section 271(3), it must be uncertain as to whether the trustee’s involvement would have made any difference to the outcome in the absence of any individual creditor being joined. The trustee had no part to play in the issue to be decided.

It is submitted that Trustees need to consider the ambit of their role as set out in the Insolvency Act and the Rules regarding the administration of estates and bear in mind that they are not the general representatives of the creditors for all purposes and, at times, the creditors are expected to fend for themselves.

If you wish to discuss this issue please contact Graham McPhie (gmcphie@moonbeever.com); or Frances Coulson (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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