Limited standing to attack decisions of insolvency officeholders (Re Stay in Style)

Limited standing to attack decisions of insolvency officeholders (Re Stay in Style)

In two related judgments, the High Court has affirmed that standing to attack the decisions of liquidators and trustees in bankruptcy is largely limited to creditors, contributories, and bankrupts where there is likely to be a surplus in the estate. The court struck out challenges brought by former bankrupts who had bid for property for lack of standing. In so doing, it rejected a wide range of arguments as to how a legitimate interest (and standing to challenge) could arise. The decisions serve as a useful reminder that the requirements for standing are construed narrowly. Practitioners may find it interesting that the court expressly rejected an argument based on natural justice and reiterated that those aggrieved by faulty bidding processes must rely on existing common law remedies. Written by Judy Fu, barrister at 3 Verulam Buildings.

Re Stay in Style (in liquidation) and others [2020] EWHC 537 (Ch)

Re Stay in Style (in liquidation) and others [2020] EWHC 538 (Ch)

What are the practical implications of these judgments?

It is well-established that the courts are generally unwilling to interfere with the administrative and commercial decisions taken by insolvency officeholders, save in cases of fraud or bad faith.

It is also clear that only those with a direct interest in the insolvency process has standing to apply to the court to interfere with the decisions of officeholders.

These judgments provide a useful illustration of those principles: practitioners should bear in mind that unless the applicant is a creditor or contributory, or (in the case of bankrupts) there is likely to be a surplus in the bankrupt estate, applicants are likely to face difficulties in establishing standing to bring a challenge.

These judgments also illustrate the difficulties which can arise where an applicant takes on multiple capacities in an insolvency process.

Here, the applicants were variously former bankrupts, trustees of a family settlement which had bid on the property in issue (which had been sold by the trustee in bankruptcy and which transaction the applicants sought to attack), and former owners and occupiers of the property from which they had been evicted.

It was not sufficient simply to assert that the applicants were ‘persons aggrieved’ under section 168 of the Insolvency Act 1986 in a generalised way.

The judge was careful to distinguish between the capacity in which the applicants bid on the property, and (having found they did so in their capacity as trustees of the family trust) found the applicants to be outsiders with no standing.

Their position as former occupiers or beneficiaries of the family trust did not affect that analysis.

What was the background?

The judgments are part of a wider set of proceedings concerning a property known as West Axnoller Cottage and the liquidation of a partnership trading as ‘Stay in Style’.

The cottage was occupied by the Brakes family, and vested in the Brakes and their former co-investor in Stay in Style for the benefit of that partnership.

The partnership went into liquidation and the Brakes became bankrupt.

The Brakes’ family trust bid on the cottage, but the bid was rejected, and the partnership’s liquidators sold the cottage to the Brakes’ trustee in bankruptcy, who then sold the property on to the Chedington Court Estate (Chedington).

The Brakes (both as trustees of the Brakes family settlement and as bankrupts) applied to attack the decision of the trustee in bankruptcy and the partnership’s liquidators, with the ultimate relief being an order that the liquidators accept the family’s own bid for the cottage. In [2020] EWHC 537 (Ch), Chedington applied to strike out the bankruptcy application, and in [2020] EWHC 538 (Ch), Chedington applied to strike out the liquidation application—both applications were made on the basis that the Brakes had no standing to attack the transactions.

What did the court decide?

The court affirmed the Court of Appeal’s decisions in Re Edennote Limited [1996] 2 BCLC 389 and Mahomed v Morris [2000] Lexis Citation 2584, providing that persons who were not creditors or contributories—but are denied an opportunity to acquire property in liquidation—have no standing to complain.

The court accepted that that position applied both in bankruptcy and liquidation. The court also affirmed the rule in Re A Debtor [1949] Ch 276 and Engel v Peri [2002] EWHC 799 (Ch), providing that a bankrupt would only have standing to challenge where there was likely to be a surplus in the bankrupt estate, or if it had some other substantial interest which had been adversely affected (such as an interest on the fees and charges made by the trustee).

In the bankruptcy application the Brakes relied on the decision in Faryab v Smith [2000] Lexis Citation 1593 for the proposition that a bankrupt need not always demonstrate there was likely to be a surplus in bankruptcy. 

That was rejected.

The court noted that decision in Faryab was ‘compromised’ in this context because the question of standing was not raised or dealt with, and the Court of Appeal there was not referred to its own decision in Mahomed v Morris.

Interestingly, the Brakes also sought to rely on their rights under Article 8 of the European Convention of Human Rights, but the court found these to be inappropriate to the question of standing (as an unlawful eviction cannot confer standing to someone who is otherwise an outsider).

The Brakes further invoked natural justice in circumstances where the bidding process was allegedly faulty. The court stated that where an officeholder has behaved unfairly, the bidder’s recourse was to common law remedies. No additional protections were available to bidders where an offeror simply happened to be an insolvency official.

Both applications were struck out for lack of standing.

Case details

  • Court: High Court, Chancery Division
  • Judge: His Honour Judge Paul Matthews (sitting as a High Court judge)
  • Dates of judgment: 2 March 2020 and 3 March 2020

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About the author:

Zahra started working as a paralegal at LexisNexis in the Lexis®PSL Banking & Finance and Restructuring & Insolvency teams in April 2019 and moved to the Corporate team in June 2020, where she currently works as a Market Tracker Analyst. Zahra graduated with 2.1 honours in BA French and Spanish and completed the GDL at BPP University. She has undertaken voluntary work for law firms in London, Argentina and Colombia.