Bulletins | August 3, 2023

Patley Wood Farm LLP v Kristina Kicks

The application before HHJ Paul Matthews, sitting as Judge of the High Court, in Patley Wood Farm LLP & Ors v Kristina Kicks & Anor [2022] EWHC 2973 (Ch) was essentially a challenge to the decision of trustees in bankruptcy not to intervene in an appeal in possession proceedings between the bankrupts and a Chedington, a creditor, following the purported sale of the bankrupts’ interest in a property known as West Axnoller Cottage. The trustees had taken the view that it was not in the interests of creditors to join in proceedings where there was unlikely to be a financial benefit to the bankruptcy estates: they considered it would not be cost effective to get involved because there was no value in the cottage because there was a charging order over the bankrupts’ interest in it; getting involved in the proceedings would, in their view, lead to unnecessary costs being incurred and expose the bankruptcy estates to the risk of adverse costs.

To the surprise of many, HHJ Matthews made an order under section 303(1) Insolvency Act 1986 directing the trustees to make an application to join the claim, file and serve written submissions and/or a witness statement in opposition to one ground of the appeal and in support of a possession order for the cottage in their favour, and to attend and make submissions at any hearing of those matters. The trustees appealed against that order with permission of Newey LJ.

Giving the judgment of the Court of Appeal, (Patley Wood Farm LLP & Ors v Kicks & Anor [2023] EWCA Civ 901), Arnold LJ set out the law by reference to s 303(1) and established authority, Re Edennote Ltd, in which Nourse LJ said that, fraud and bad faith apart, the court would only interfere with the act of an office-holder “if he has done something so utterly unreasonable and absurd that no reasonable man would have done it,” and Bramston v Haut, in which Kitchin LJ cited Nourse LJ’s statement and approved the test set out by Mr Registrar Baister in Osborne v Cole:

“that it can only be right for the court to interfere with the decision the official receiver has taken if it can be shown he has acted in bad faith or so perversely that no trustee properly advised or properly instructing himself could so have acted, alternatively if he has acted fraudulently or in a manner so unreasonable and absurd that no reasonable person would have acted that way.”

Arnold LJ accepted that HHJ Matthews’s decision had been an evaluative one. Given that it was not suggested that the judge had made any error of law, the appeal court could only intervene if it found a flaw in the judge’s reasoning, such as a gap in his logic, a lack of consistency or a failure to take account of some material factor that undermined the cogency of his conclusion (Re Sprintroom Ltd). Arnold LJ identified four flaws.

First, the judge below had failed to give proper weight to the fact that trustees were experienced professionals who had a statutory discretion to exercise. Whilst they owed duties to creditors, “It is not the Trustees’ duty to act in the interests of the creditors at all costs.”

Secondly, the judge had disregarded the key reason given by the trustees for not applying to join the appeal, namely that it was unlikely that it would result in any benefit to the bankruptcy estates, and hence to the creditors. There was no prospect of a dividend. He said:

“In some cases it might, I suppose, be argued that it would be of some benefit to the bankruptcy estate to reduce the size of the deficit even if that did not result in any payment to creditors. In the present case, however, it seems clear that the only possible benefit would be to increase the sums available for payment of the Trustees’ own fees. The Trustees are at least entitled to take the view that this is not a course of action that they wish to pursue.”

Thirdly, the judge had said that it was difficult to see the downside to the trustees in making an application for joinder. Arnold LJ thought, “With all due respect to the judge, the downsides were obvious and have been confirmed by subsequent events. The Trustees have been forced to become embroiled in protracted, complex, time-consuming and hostile litigation. […] [T]he Trustees’ concern about their exposure to costs has been amply vindicated by what has happened subsequently.”

Fourthly, the judge had dismissed the trustees’ concerns as to their independence as “absurd.” Whilst recognising that the case under consideration could not be equated with cases such as Re Ng [1997] BCC 507 and Trustee in Bankruptcy of Bukhari v Bukhari [1999] BPIR 157, Arnold LJ nevertheless was of the view that the trustees were entitled to be concerned about their independence being compromised. “This,” he said, “is not a straightforward case of third party funding. The reality of the situation […] is that Chedington, which is not a creditor, has not merely been funding the Trustees’ application, but also dictating to the Trustees what submissions they can and cannot make to the court regardless of the legal advice the Trustees have received.”

In the light of those matters, Arnold LJ found HHJ Matthews to have been wrong in deciding that the trustees’ decision not to apply to join the appeal had been perverse.

The judgment of the Court of Appeal will be widely welcomed as sound common sense, firmly in line with the high hurdle rightly set out in the case law. Office-holders cannot operate looking over their shoulder. Nourse LJ’s description in Edennote of the criterion for interference with an office-holder’s decision as “a formidable test,” whilst noting that it left “a potentially large category of cases where the liquidator’s conduct may be open to valid criticism but where that conduct cannot be so characterised” has worked well for many years and should not lightly be eroded.