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What are the challenges when bringing a claim under section 304 of the Insolvency Act 1986 (IA 1986)? Giselle McGowan, barrister at 9 Stone Buildings, considers the position following the decision in Borodizicz v Horton.
Borodzicz v Horton  Lexis Citation 286,  All ER (D) 03 (Dec)
The Bankruptcy High Court granted the applicant discharged bankrupt permission to bring an action against the respondent, the released joint trustee in bankruptcy, under IA 1986, s 304 for an order that he repay, restore or account for money or pay a sum by way of compensation in respect of misfeasance or breach of fiduciary duty in carrying out his functions as trustee. There was evidence to suggest that the applicant had a reasonably meritorious cause of action against the respondent on the basis of his having incurred and paid legal fees in excess of what he had had authority to incur.
The respondent was the applicant’s former trustee in bankruptcy. The applicant applied for permission to bring an application pursuant to IA 1986, s 304 that the respondent had misapplied, retained or become accountable for property in the bankruptcy estate and/or that the estate had suffered a loss in consequence of misfeasance and/or breach of duty by the respondent. The applicant’s complaints related largely to the level of the respondent’s fees, the sums paid to the respondent’s solicitors and sums paid to the sole creditor in respect of costs claimed. Permission was required because the applicant was the bankrupt, the respondent had been released and the applicant was subject to a limited civil restraint order.
Whether the applicant had a reasonably meritorious cause of action that the respondent had misapplied, retained or become accountable for property in the bankruptcy estate and/or that the estate had suffered a loss in consequence of misfeasance and/or breach of duty by the respondent in his management of the estate in:
Further whether such an application was reasonably likely to result in a benefit to the estate.
The applicant claimed that, in exercising his discretion to manage the estate, the respondent had breached his duty of care and skill and become accountable for the sums paid. The respondent was expected to exercise proper commercial judgement and not to act regardless of expense. The applicant maintained that there was reasonable merit to an argument that, in acting as he had done, he had not exercised such commercial judgment and had not acted as a reasonably prudent man would have done as regards his own affairs.
The Chief Registrar refused permission to bring an application on all complaints with the exception of the sanction point. He found that:
The Chief Registrar’s conclusions were reached taking into account that the purpose underpinning a trustee’s release was to wipe the slate clean so far as the trustee was concerned so that he could pay no thought to his previous conduct as trustee. While this was not absolute, none of the above justified a departure from that policy in this case.
However, as regards the sanction point, the effect of sanction was to put a cap on what the respondent was entitled to spend on the possession and sale application. It was not open to the respondent to ignore it and it was his duty to remain within the cap. From the evidence, the Chief Registrar drew the inference that this was ignored or overlooked. This issue went to the respondent’s authority to incur fees beyond the limit of his sanction. There was evidence to suggest a reasonably meritorious case that the respondent had incurred and paid legal fees in excess of which he had been entitled to incur. Further, there was evidence that such an application may benefit the estate. Such a point was sufficiently important to be capable of being litigated notwithstanding the strong presumption which release gave rise to.
Yes. The Chief Registrar considered that release gave rise to a strong presumption against allowing applications against trustees who had obtained their release. The purpose underpinning a trustee’s release was to wipe the slate clean so far as the trustee was concerned so that he could pay no thought to his previous conduct as trustee (albeit it was not an absolute bar) and therefore there must be sufficient evidence to justify a departure from that policy. This was a factor the Chief Registrar took into account in refusing permission in respect of the majority of the issues raised.
The additional difficulty in bringing an application against a trustee post-release given the presumption against allowing an application post-release as discussed.
That where sanction has been granted to a trustee by the Secretary of State to incur fees only in a certain sum, it is important for a trustee to ensure that his costs remain within that sum and to keep records demonstrating this.
Where permission is sought pursuant to IA 1986, s 304 to challenge a decision of a trustee which falls within the exercise of his discretion, the importance of (i) framing the issues as narrowly as possible to identify specific complaints rather than making general criticisms and (ii) obtaining sufficient evidence upon which a trustee’s decision can be impugned at the permission stage of a s 304 application.
Interviewed by Diana Bentley.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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First published on LexisPSL Restructuring and Insolvency
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Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.
Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.
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