Liability of trustees and the discretion to manage the estate—Borodzicz v Horton

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.

Original news

Borodzicz v Horton [2015] Lexis Citation 286, [2015] 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.

What was the background to the case briefly?

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.

What were the issues that the Chief Registrar had to decide?

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:

  • accepting the petitioner’s claims pursuant to costs orders and in respect of petition costs in full rather than attempting to reach a lower settlement or requiring detailed assessment of the same and possibly paying VAT which the petitioner was not entitled to recover
  • paying sums to his solicitors which the applicant claimed were disproportionate to the work required
  • possibly incurring legal costs in respect of his application for possession and sale of the applicant’s home in excess of the sum which he had been given authority to incur pursuant to sanction from the Secretary of State (the sanction point)
  • paying costs for the conveyance of the applicant’s home which she claimed were disproportionate
  • claiming remuneration in the level claimed which the applicant claimed was not justified by the work required or done

Further whether such an application was reasonably likely to result in a benefit to the estate.

Why did these issues arise in this case?

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.

What are the pertinent legal points that came out of the issues in this case? What did Mr Chief Registrar Baister decide and why?

The Chief Registrar refused permission to bring an application on all complaints with the exception of the sanction point. He found that:

  • the respondent’s treatment of the petitioner’s claims was a matter for his discretion—he had a choice whether to contest costs and took a view. There was insufficient evidence on the basis of which this commercial decision could be impugned
  • the decision to pay his solicitor’s fees was a commercial one for the respondent to make—while there was evidence his solicitors did not cast a critical eye to whether time spent was well spent and properly chargeable, there was evidence of a fee reduction which implied some thought was given to the level of the charges. The Chief Registrar was satisfied that the decision to pay was within the respondent’s discretion and there was insufficient material to justify the prosecution of an application to challenge this
  • on the material available it was impossible to conclude that the conveyancing charges were not a proper charge for the work undertaken
  • while there were aspects of the respondent’s remuneration that were susceptible to criticism, the applicant’s case was too broadly framed to be satisfied that an attack on the remuneration would succeed to any appreciable extent

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.

Did the fact that Mr Horton had been released as the trustee affect the case, and if so, how?

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.

What should practitioners acting for either side take away from this judgment?

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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