Brake & Anor v The Chedington Court Estate Ltd [2023] UKSC 29 (10 August 2023)
Citation: Brake & Anor v The Chedington Court Estate Ltd [2023] UKSC 29 (10 August 2023)
Rule of thumb: Stare-decisis: If a person is made bankrupt, and they think the Accountant in Bankruptcy/ Liquidator has undersold their assets, do they have a right to challenge this? Only in some circumstances. If their assets sold at the absolute maximum would not settle their debts, then, ‘no’, they do not have standing to challenge this; if the assets sold at the absolute maximum could leave a surplus in money, then, ‘yes’ they do have standing.
Background facts: The basic facts of this case were that Mr & Mrs Brake sought to run a hotel & events business from their farm-home – they would live in the farm-home hotel or occasionally the cottage next to the farm-conversion if the hotel was particularly busy. They obtained investment from the Chedington Court Estate (Chedington Court bought the initial investment company who made the investment) to make the conversion of their farm-home into the hotel & events business a reality. The Brakes did not set up a company to do this and ran it as a partnership with unlimited liability.
The Brakes ran into a legal dispute with the investor in relation to the duties of how they were to run the property. Mr & Mrs Brake lost this legal dispute. The Chedington Court Estate made Mr & Mrs Brake bankrupt to get the money that they were owed – accountants in bankruptcy were appointed to sell all Mr & Mrs Brake’s assets to repay what they owed.
Parties argued: Mr & Mrs Brake were not happy with how the accountant in bankruptcy sold their assets – they sought to argue that the accountant in bankruptcy had no right to sell the cottage as this was a family home.
The accountant in bankruptcy told Mr & Mrs Brake that they had no legal standing to challenge how they were doing their job - firstly, the accountant in bankruptcy denied this was the family home as the Brakes only lived in this occasionally and it was a second home with their family home being the hotel, and, secondly, the accountant further argued that there was no realistic chance of there being a surplus once their estate was sold. So the accountant in bankruptcy argued that there was no standing for the Brakes to have the dispute; Mr & Mrs Blake sought to sue the administrator for breach of duties to protect their cottage.
Court held: The Court rejected the arguments of Mr & Mrs Brake and upheld the arguments of the accountant in bankruptcy – the person running a business organisation have no standing to challenge legally whether an accountant in bankruptcy has performed their duties properly in the circumstances of this case – the cottage was not the Brakes’ family home, and, there was no chance of a surplus, so there was no standing to challenge the accountant in bankruptcy.
Whether an accountant in bankruptcy has complied with their legal duties in selling the assets can be challenged by 3 categories of people (1) the creditors, (2) a bankrupt person if it is possible that there could be a surplus, and (3) a range of other specific statutory situations, such as family home etc, which did not apply in this case. The Brakes did not meet any of the 3 of these categories in order to have legal standing. The Court affirmed that there is a major risk incurred by people who run a partnership business from their family home – they can literally lose absolutely everything material they have if the partnership fails.
Ratio-decidendi:
1. ‘This appeal concerns the standing of a bankrupt to challenge the acts, omissions or decisions of the trustee of the bankrupt’s estate under section 303(1) of the Insolvency Act 1986. More particularly, it concerns the standing of two bankrupts to challenge steps taken by their trustee to facilitate their eviction from a property which was in their possession (but was not occupied by them)’…. 3. Section 303(1) of the Insolvency Act 1986 (“IA 1986”) provides: “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 order as it thinks fit.” … 5. Similar provisions entitling creditors and others to challenge liquidators in a compulsory winding-up have applied since the enactment of section 24 of the Companies (Winding-Up) Act 1890 (53 & 54 Vict, c 63). The current provision is section 168(5) of the IA 1986 which provides: “If any person is aggrieved by an act or decision of the liquidator, that person may apply to the court; and the court may confirm, reverse or modify the act or decision complained of, and make such order in the case as it thinks just.” … 8. Neither section is intended to provide a means of redress to a party with no connection to the bankruptcy or liquidation. I agree with the observation of Peter Gibson LJ in Mahomed v Morris [2000] EWCA Civ 46, [2000] 2 BCLC 536 at para 26: “It could not have been the intention of Parliament that any outsider to the liquidation, dissatisfied with some act or decision of the liquidator, could attack that act or decision by the special procedure of section168(5)”…..
36. ‘Between February 2010 and June 2013, Mr and Mrs Brake (“the Brakes”) and Patley Wood Farm LLP (“PWF”), an investment vehicle for Lorraine Brehme (“Mrs Brehme”), were in partnership carrying on an accommodation and events business under the name “Stay in Style” (the “Partnership”). Disputes arose between the partners which were referred to arbitration, which concluded with a final award in favour of PWF, a costs order against the Brakes and the dissolution of the Partnership. 37. The Partnership’s property included West Axnoller Farm (the “Farm”), which Mrs Brake had purchased in 2004 and had introduced into the Partnership in 2010. The Farm includes West Axnoller House (the “House”). The adjacent West Axnoller Cottage (the “Cottage”) had been purchased with Partnership funds from a third party. It was registered in the names of the Brakes and Mrs Brehme and held as Partnership property. Mrs Brake further owned, in her personal capacity, two small parcels of land surrounding the Cottage (the “Adjacent Land”). 38. The Brakes lived in the House and used the Cottage when the House was let to paying guests….’
99. ‘The principles underlying the standing of applicants under section 303(1), and section 168(5), of the IA 1986 can be summarised as follows. Creditors have standing where their application concerns their interests as creditors, because the bankrupt’s estate or the assets of the company in liquidation are administered under the terms of the statutory trust for their benefit as creditors. Likewise, where there is or there is likely to be a surplus, the bankrupt or contributories are also persons for whose benefit the estate or assets are being administered and they have standing in respect of their interests in the surplus. Beyond that, there is a limited class of cases where creditors, the bankrupt, contributories or others will have standing, but only in respect of matters directly affecting their rights or interests and arising from powers conferred on trustees or liquidators which are peculiar to the statutory bankruptcy or liquidation regime. Engel v Peri and In re Hans Place Ltd provide good examples of cases within this category. 100. The Brakes do not fall within any of these categories and therefore do not have standing to make the bankruptcy application insofar as it deals with the Trustee’s dealings with the Cottage in December 2018 and January 2019…’
Lord Richards
Warning: This is not professional legal advice. This is not professional legal education advice. Please obtain professional guidance before embarking on any legal course of action. This is just an interpretation of a Judgment by persons of legal insight & varying levels of legal specialism, experience & expertise. Please read the Judgment yourself and form your own interpretation of it with professional assistance.