No jurisdiction for bankruptcy court to stay possession claim (Re Roderick John Lynch)

What are the practical implications of this case?

This case is an important illustration of the principle that the bankrupt’s property vests in the trustee in bankruptcy under IA 1986, s 306 subject to the proprietary interests of third parties, including those with charges over real property.

The court held that the enforcement of third-party proprietary interests are not proceedings within the bankruptcy. The fact that a dispute arises as to the validity of a lender’s security interest will not therefore render that dispute an issue arising in the bankruptcy itself. Therefore, it will not be open to judges (in this case an Insolvency and Companies Court Judge (ICCJ)) to interfere with the jurisdiction of the county court to determine possession proceedings.

Where a lender seeks to enforce its security after the making of a bankruptcy order, it should name the trustee in bankruptcy as a party to the proceedings. It is up to the trustee (with or without the benefit of directions from the bankruptcy court) to decide what role they wish to play.

Where the bankrupt is in possession, the lender should also name the bankrupt as a defendant. This will ensure that the bankrupt is personally bound to comply in with any order that the court may make.

What was the background?

Shortly after a bankruptcy order was made against Mr Roderick Lynch (the bankrupt), proceedings were commenced in the county court by a lender, Inspiration Finance Ltd (Inspiration) naming the bankrupt only as defendant. His Honur Judge Gerald, struck out the bankrupt’s defence and counterclaim on the grounds that his interest had passed to the trustee, Mr Alex Cadwallader (the trustee). He adjourned the claim to allow the trustee to take advice and state his position. Having done so, the trustee confirmed he did not intend to oppose Inspiration’s claim.

The bankrupt sought to challenge the trustee’s decision and direct him to adopt his defence and counterclaim by application to the bankruptcy court pursuant IA 1986, s 303. At a hearing of that application to which Inspiration was not party, ICCJ Barber made an order (the first order):

• transferring to the High Court and then staying the possession claim that was taking place in the county court  

• directing the trustee to issue an insolvency application naming Inspiration and the bankrupt as respondents to determine the validity of Inspiration’s charge as an issue in the bankruptcy

Inspiration responded by issuing an inter-partes insolvency application for an order setting aside the first order. ICCJ Barber rejected that application, upholding the first order save for a variation in the directions on the trustee’s application (the second order).

Inspiration appealed both the first and the second orders. Inspiration argued that ICCJ Barber had erred in law, alternatively had wrongly exercised her discretion, in making those orders. At the time of granting permission to appeal, the appeal court extended time to appeal against the first order.

What did the court decide?

Mr Justice Marcus Smith held that ICCJ Barber failed to properly address the merits of the bankrupt’s IA 1986, s 303 application. She had wrongly concluded that there would be no proper examination of the validity of Inspiration’s security. As a result, she had started from the position of putting the metaphorical ‘cart’ before the ‘horse’.

More importantly, Marcus Smith J held that neither IA 1986, ss 303, 363, 285 conferred jurisdiction on ICCJ Barber to stay Inspiration’s possession claim and determine the validity of its charge as an issue in the bankruptcy. That was the consequence of three interlocking principles:

• Heath v Tang [1993] 1 WLR 1421, is authority for the proposition that once vested in the trustee in bankruptcy, a bankrupt has no interest or standing to prosecute or defend claims regarding that property  

• Revenue and Customs Commissioners v Ariel [2016] EWHC 1674 (Ch) is authority for the proposition that IA 1986, ss 303 and 363 can only be used to determine matters within the bankruptcy, not to determine the rights of third parties acquired independently  

• Lloyd v. David Lloyd & Co (1877) 6 Ch 339, is authority for the proposition that a charge over property continues to encumber the estate and there is nothing in IA 1986, s 285 to prevent the holder of such a charge from enforcing it

Accordingly, the course taken by ICCJ Barber was not, in law, open to her.

In the light of his conclusion on the first ground of appeal, it was unnecessary for Marcus Smith J to consider Inspiration’s second ground of appeal in detail. However, the judge said that it was difficult to see how ICCJ Barber could have properly exercised any discretion she may have had. The making of an order in a matter which Inspiration had an interest without it being before the court was addressed by its subsequent application. However, the failure to properly dispose of the IA 1986, s 303 application was serious and if ICCJ Barber was going to make an order of this kind, it was incumbent on her to articulate why the IA 1986, s 363 application should prevail and she had not adequately done so.

Case details

• Court: High Court, Chancery Division  

• Judge: Marcus Smith J  

• Date of judgment: 17 January 2020

Christopher Boardman is a barrister at Radcliffe Chambers, and a member of LexisPSL’s Case Analysis Expert Panels. If you have any questions about membership of these panels, please contact caseanalysis@lexisnexis.co.uk.

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