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23-07-2015

In the decision of Oraki v Bramston and others, Mrs Justice Proudman had to consider the issue of the duties a trustee owes to a bankrupt individual in a situation where the bankruptcy order was set aside on the grounds that it ought not to have been made and, it is said, was effectively solvent with surplus assets.

Dr and Mr Oraki were made bankrupt by their former solicitors. As the judge pointed out, they found themselves in a “Kafkaesque situation. Dr Oraki has always stoutly maintained, and so it has proved, that they were wrongly made bankrupt but no-one in authority would listen to them when they said so. Appeal after appeal and application after application were dismissed.”

The solicitor who had applied and obtained the bankruptcy order was subsequently struck off for findings which included dishonest misrepresentations as to his professional status, academic qualifications and experience whereby he gained admission as a solicitor. He had been convicted of fraud in California.

At the annulment hearing, an order was made for costs to be paid by the former bankrupts. These included the costs of the trustee in bankruptcy. There had been two further trustees in replacement of Mr. Bramston but that factor is not in itself of any relevance.

The factual basis of the conduct of the bankrupts and the steps taken by the trustee makes lengthy reading but suffice it to say that there was a degree of impasse with the bankrupts making many allegations against the trustee and all the professionals involved and the trustee considering that the administration of the estate was hindered by the non-cooperation of the individuals concerned.

The court had to consider whether the trustee in bankruptcy should have been aware that the bankruptcy orders ought not to have been made. It was concluded that there might be circumstances in which a trustee ought to look behind the making of the order but, with the successive appeals that had taken place and the bankruptcy order being upheld, there was nothing in this case to alert a trustee to the possibility of any irregularity with the bankruptcy order.

It was also asserted that the trustee owes a general common law duty of care to the bankrupts. This was rejected by the judge who considered that there was no reason to look beyond the statutory duties of a trustee. Even though this was a surplus case and there may be different considerations, this was already dealt with by the bankrupt’s entitlement to any surplus. As the judge said, “Common humanity dictates - and all the courts in this country always have common humanity firmly in mind as an ingredient of justice in the overriding objective - that the trustee should not ride roughshod over someone who either should obviously not have been made bankrupt in the first place or who it can be seen has assets greater than liabilities”.

There were also allegations that the trustee had not pursued claims which had vested in him to the extent that those were statute barred. This assertion was rejected by the judge as the trustee had no funds to pursue the litigation, he had insufficient information that the claims were good, the bankrupts were adamant that they wanted to annul and no reasonably skilled and competent practitioner would have pursued those claims.

The judge held that a trustee could not be criticised unless it could be shown that he had taken or had failed to take some action that a reasonably competent office holder would have taken or not taken in carrying out his functions in the exercise of his discretion. The duty of skill and care in exercising his managerial discretion had to be judged against the standard of the reasonably skilled and careful insolvency practitioner. A trustee, who had a discretion in the management of the bankrupt's estate, pursuant to s 305(2) of the Act, could not be made liable because his perception of the circumstances was wrong, unless it was an error which an ordinarily-skilled insolvency practitioner would not have made. 

What do we take from this decision?

On the one hand it is useful that the court held there was no obligation to look behind the judgment which had lead to the bankruptcy order even if ultimately annulment was obtained. However, it was also emphasised again that a trustee may well have circumstances in which there are sufficient reasons to be suspicious. Indeed there was prior authority in the decision of Ella v Ella in which a trustee was criticised for continuing to administer the estate in circumstances where the bankruptcy order might have been viewed with suspicion and the trustees should have considered they were dealing with the sort of case where the making of the bankruptcy order was highly likely to be an abuse of process. The court would not order that the trustee’s costs be a charge on the estate.

In Oraki, it was fortunate that there had been many appeals which upheld the order. In general, it can be said that it is still the case that a trustee has no general obligation to look behind the making of the bankruptcy order but that is not absolute and consideration should be given as to whether there is any legitimacy to the complaints that might be made by any bankrupt.

It is useful that the court rejected any general duty of care beyond the statutory duty in the Act but this might prove to be academic and the simple fact is that the trustee as an office holder had duties which would very much equate to those founded in negligence and it would be unwise to suggest that this case lessens those duties at all.

On the facts of the case, the impossibility to litigate was considered as within the actions of the competent professional. In terms of any actions for a trustee to take there is always an evidential burden of proof to be overcome. Normally, the trustee is an outside third party to the potential claim to be litigated although, by dint of the Insolvency Act 1986, that claim vests in the trustee. More often than not, the likely witness in support of the case will be the person who is bankrupt. In any potential claim, it is essential for any trustee to assess the evidence needed to support that case and the strength of it, whether the bankrupt will be a reliable and credible witness, how the claim will be funded, how adverse costs will be met and to conduct a costs/benefit/risk analysis before launching into any proceedings.

The decision in Oraki, it is submitted gives some comfort that in those circumstances, a trustee will not be held liable if a cause of action becomes statute barred because the trustee was not in a position to litigate on the same.

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 here.

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