Are bankrupts interested in disclaimed property? (Frosdick v Fox and another)

Can a bankrupt give notice to their trustee in bankruptcy (trustee) under section 316 of the Insolvency Act 1986 (IA 1986) requiring the trustee to decide whether or not to disclaim property? We review the decision in Frosdick v Fox and another, in which the court had to consider this issue, among others, in connection with an application made by a bankrupt against his trustee.

Original news

Frosdick v Fox and another [2017] EWHC 1737 (Ch), [2017] All ER (D) 35 (Aug)

The Chancery Division struck out the claimant's claim, in which he challenged the first defendant trustee's disclaimer of rights of action against the claimant's former solicitors, following an application by the defendants. On the true construction of IA 1986, s 316, the action had no reasonable prospect of success, and the court would strike it out under CPR 3.4.

What are the practical implications of this case?

This case gives authority to the proposition that a bankrupt cannot give a notice under IA 1986, s 316 requiring a trustee to elect whether to disclaim or not in respect of any property which comprises the bankruptcy estate. That in itself does not appear to be a controversial conclusion, although it does raise a potential issue as to why a bankrupt cannot give a notice pursuant to IA 1986, s 316, but can (following previous authority) apply for a vesting order under IA 1986, s 320 in respect of property that has been disclaimed.

Accordingly, should a trustee receive any notice from the bankrupt purporting to require the trustee to make an election (whether or not IA 1986, s 316 is specifically mentioned), the trustee can disregard it, although they should probably explain to the bankrupt why their notice is inappropriate.

This case also restates previous authority that a cause of action can be onerous property for the purpose of disclaimer.

While it was not a point in issue in this case, where a trustee receives an offer or approach from the bankrupt (or any third party) to acquire an asset of the bankruptcy estate—in this case a cause of action—the trustee should of course consider that offer or approach. If they do not wish to take it any further, they should confirm that fact to the bankrupt or third party and ideally provide reasons.

What was the background to the case?

This case has a long history:

  • C, a firm of solicitors, had been instructed by the claimant in the present case, Mr Frosdick, in 2008 to pursue a claim for personal injury following his involvement in a road accident in 2007. That instruction had been on a conditional fee agreement (CFA) basis
  • at some point prior to June 2009, C terminated the CFA
  • in April 2011, C petitioned for Mr Frosdick’s bankruptcy on the basis of unpaid fees and a bankruptcy order was made the following month. The official receiver (OR) in due course became Mr Frosdick’s trustee
  • in August 2011, Mr Frosdick wrote a long letter to the OR (OR letter) asking them among other things either to litigate or assign back to him for £75,000 the cause of action against C. It was said that C had been negligent in not pursuing a claim for breach of contract worth up to €17,782,000 against a well-known bookmakers in respect of some gaming software that Mr Frosdick had developed. The losses were said to have been caused by the counterparty’s breach of contract, which arose by reason of the injuries sustained by Mr Frosdick in the road accident. There was no evidence that the OR answered the OR letter and certainly did not assign the cause of action back to him
  • in September 2011, Mr Fox (the first defendant) was appointed trustee of Mr Frosdick’s bankruptcy estate in place of the OR. In January 2012, Mr Frosdick wrote a detailed letter to Mr Fox (Fox letter), similar to the OR letter some months earlier. One of the things Mr Frosdick asked was that Mr Fox either litigate or reassign (for ‘substantial third party funds’) the cause of action against C. The cause of action was not reassigned
  • in May 2012, Mr Fox gave notice of disclaimer pursuant to IA 1986, s 316 of all rights of action vested in the bankruptcy estate against C

Over the ensuing years, Mr Frosdick issued or attempted to issue a significant number of applications and claims in various courts. Several unsuccessful attempts were made to have the bankruptcy annulled. Applications to ‘annul’ the disclaimer were also brought. Applications to bring a claim against Mr Fox for failing to pursue the negligence claim against C were commenced. Eventually an extended civil restraint order was made against Mr Frosdick. Several subsequent claims were refused permission to issue by reason of the restraint order. Mr Frosdick then commenced a series of actions in the Queen’s Bench Division against either Mr Fox or his firm, none of which appeared to have progressed beyond triage by the master.

In June 2016, Mr Frosdick brought a claim in the Chancery Division against the OR, on the basis that the OR was liable for his failure to bring the claim against C. The OR applied to strike the claim out pursuant to CPR 3.4(2). That application came before Mr Andrew Hochhauser QC (sitting as a Deputy Judge of the High Court), who granted the OR’s application and struck out the claim (Frosdick v Secretary of State for Business, Energy and Industrial Strategy and others [2016] EWHC 3008 (Ch)).

Mr Fox was not party to the proceedings before Mr Hochhauser QC. Accordingly, Mr Fox was unrepresented and no arguments were made on his behalf concerning his conduct of the bankruptcy estate or the circumstances of the disclaimer. During the course of his detailed reserved judgment, Mr Hochhauser QC nonetheless remarked (at para [35]) that:

I cannot see how the potential claim against [C] can constitute ‘onerous property’, but in any event in my judgment there is no complaint that can be made about the conduct of the OR.

Mr Frosdick placed heavy reliance on this comment when issuing proceedings in the Chancery Division against Mr Fox in January 2017. Permission was sought pursuant to IA 1986, s 304 for Mr Frosdick to bring a claim against Mr Fox, on the basis that Mr Fox should have concluded that the claim against C was a good one and he ought to have assigned it back to Mr Frosdick. Some time afterwards, Mr Frosdick applied to join the OR as a defendant.

Mr Fox applied to strike out the proceedings pursuant to CPR 3.4.

What were the legal issues that the court had to decide?

There were essentially three core issues before Mr Justice Birss.

The first issue

Firstly, in light of the comment of Mr Hochhauser QC in the earlier judgment to the effect that he was unable to see how the cause of action against C could constitute onerous property for the purposes of IA 1986, s 315—and Mr Frosdick’s reliance on that comment in the action against Mr Fox—Birss J was required to rule on the point. In answer to this point, Mr Fox submitted that the issue was well-settled on the authorities and that Mr Hochhauser QC had misdirected himself, having not heard any argument on the point.

The second issue

Secondly, and of some novelty, Birss J was required to consider the scope of the parties who may give a notice pursuant to IA 1986, s 316 requiring a trustee to elect whether to disclaim or not. That section provides that a notice of disclaimer shall not be given in respect of any property if:

  • a person interested in the property has applied in writing to the trustee or one of his predecessors as trustee requiring the trustee or their predecessor to decide whether they will disclaim or not, and
  • the period of 28 days beginning with the day on which that application was made has expired without a notice of disclaimer having been given in respect of that property

A trustee is deemed to have adopted any contract which by virtue of IA 1986, s 316 they are not entitled to disclaim.

Mr Frosdick contended that the OR letter in August 2011, and the Fox letter in January 2012, had each been a notice pursuant to IA 1986, s 316. He therefore contended that the cause of action against C had been adopted because 28 days had expired from the date of either letter without any response being received. This meant that it had not been open to Mr Fox to (purport to) disclaim the cause of action against C in May 2012.

In answer to this point, Mr Fox argued that Mr Frosdick was not ‘a person interested in the property’ by reason of all interest in the cause of action having vested in the estate upon Mr Frosdick’s bankruptcy under IA 1986, s 283. Accordingly, Mr Frosdick could not make a valid application for the purposes of IA 1986, s 316.

The third issue

Thirdly and finally—and depending on whether or not it had been open to Mr Fox to disclaim the causes of action in May 2012—a further issue arose concerning whether or not Mr Frosdick had any prospect of challenging Mr Fox’s exercise of his discretion to disclaim. Mr Fox contended that such a disclaimer had plainly been within the ambit of his discretion and the courts would not impugn that exercise of discretion.

What did the court decide and why?

The first issue

On the first issue, Birss J had no hesitation in finding (in accordance with several previous authorities) that a cause of action comes within the scope of onerous property for the purposes of the disclaimer provisions in IA 1986, ss 315–321. Birss J held (at para [38]) that:

A cause of action seem to me to be a good example of something which may give rise to a liability to pay money, since a claimant who brings a claim may incur their own legal costs in doing so and risks being ordered to pay their opponents costs if the claim fails.

The second issue

As to the issue whether Mr Frosdick was able to give a notice within the meaning of IA 1986, s 316, Birss J concluded that he was not such a person. This is believed to be the first time this question has been addressed in the case law. Birss J held (at paras [61]–[62]) that:

...the bankrupt himself cannot make a valid application under the section in relation to property which is within the bankrupt’s estate and has vested in the trustee… The “interest” referred to cannot be mere intellectual curiosity, it must be some sort of interest recognised in law…The effect of the automatic provisions in section 306 of the Act is to vest any interest that the bankrupt had in the property in the trustee.

It followed from this that neither the OR letter nor the Fox letter was effective to start the 28 day period running, which meant that the cause of action had not been adopted. That meant that it was, in principle, open to Mr Fox to disclaim it.

The third issue

As to the third point, which was whether Mr Fox’s decision could be impugned, Birss J held that no proper grounds had been shown for granting permission pursuant to IA 1986, s 304 to pursue the claim, bearing in mind the high hurdle that Mr Frosdick would have to get over.

Birrs J granted the application to strike out the claim as having no reasonable prospect of success.

To what extent is the judgment helpful in clarifying the law in this area?

There is now something of a tension in the case law concerning when a bankrupt is able to become involved in issues of disclaimer. Previous authorities (cited to Birss J in the instant case) have held that a bankrupt has standing to apply pursuant to IA 1986, s 320 for an order that property disclaimed by a trustee pursuant to IA 1986, s 315 be re-vested in the bankrupt. The relevant provision (IA 1986, s 320(2)(a)) says that an application may be made to the court by any person who claims an interest in the disclaimed property.

It has been held at first instance (see Khan-Ghauri v Dunbar Bank [2016] EWHC 3008 (Ch) and Young v Hamilton [2010] NICh 11, [2010] BPIR 1468) that a bankrupt comes within the scope of a person who claims an interest in the disclaimed property.

Before Birss J, Mr Fox submitted that the difference in the statutory language between IA 1986, s 316 (‘a person interested in the property’) and IA 1986, s 320 (‘any person who claims an interest in the disclaimed property’) must have been deliberate and that the effect of these provisions was that a bankrupt could apply under IA 1986, s 320 but not under IA 1986, s 316. Birss J noted at para [63] of his judgment that IA 1986, s 316 used narrower language than IA 1986, s 320, but took care not to make any decision about the scope of IA 1986, s 320. However, it is not immediately apparent how, if a bankrupt is unable to apply under IA 1986, s 316 on the basis that they are not ‘a person interested in the property’, they could properly be regarded as a person who ‘claims an interest in the property’ to enable them to apply under IA 1986, s 320—it could be said that a person can only properly ‘claim’ something if they have some legitimate basis for making that claim. If a bankrupt has no interest for the purpose of IA 1986, s 316, then it raises the question on what basis can there be for holding that a bankrupt is nonetheless entitled to ‘claim’ an interest for the purpose of IA 1986, s 320.

Conversely, an argument could be made that a bankrupt does have an interest where they apply to annul, or where there is or is likely to be a surplus after the estate has been administered. However, whether such an interest could be said to extend to specific items of property comprised in the bankruptcy estate that are capable of being disclaimed, or should be confined to an interest only in (say) the surplus or in the amount they need to find to achieve annulment or in the due administration of the estate as a whole, is less certain.

Either way, it is perhaps difficult to justify a difference in the treatment of bankrupts for the purposes of IA 1986, ss 316 and 320. It may, therefore, be difficult to reconcile Frosdick v Fox on the scope of IA 1986, s 316 with the decisions on the scope of IA 1986, s 320 referred to above. The area would probably benefit from a trip to the Court of Appeal.

Case details

  • Court: High Court, Chancery Division
  • Judge: Mr Justice Birss
  • Date of judgment: 11 July 2017

Further Reading

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The process of disclaimer by a liquidator or trustee in bankruptcy under sections 178 or 315 of the Insolvency Act 1986

The effect of disclaimer by a liquidator or trustee in bankruptcy on property and third parties

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