Office-holders must make their own decisions—Parker v Nicholson

Office-holders must make their own decisions—Parker v Nicholson

Christopher Burt, solicitor at Moon Beever, considers the recent High Court decision in Parker v Nicholson and others clarifying an office-holder’s right to delegate decision making.

Original news

Parker v Nicholson and others [2015] EWHC 3881 (Ch), [2015] All ER (D) 278 (Nov)

The Bankruptcy High Court dismissed an application for directions made by the applicant trustee, P, as to whether to admit a proof of debt filed by the respondent liquidators and whether a meeting of creditors should be convened at the liquidators' request. P's role was to make hard decisions such as the one in the present case. Such applications were to be discouraged.

What issues did this case raise?

Insolvency practitioners are routinely required to make difficult decisions in their insolvent estates. One of the perennial challenges is the adjudication of creditor claims when hotly contested by the underlying insolvent party and his/her/its creditors. Office-holders find themselves in an uncomfortable position and there is naturally some attraction in delegating contentious adjudications to third parties, such as the court. The Insolvency Act 1986 (IA 1986) provides that office-holders may apply to court for directions on matters arising in their estates. The key question in this case was to what extent can an office-holder refuse to make a decision—in particular adjudicating on a proof of debt—but instead to refer the matter to the court?

What were the key facts of this case?

Mr Parker was appointed trustee in bankruptcy of Michael Paul Chinn with effect from 3 December 2014. The trustee proceeded to investigate the affairs of the bankrupt, instruct solicitors and begin asset realisation work. However he did not adjudicate—not even for voting purposes—on the proofs of debt that had been filed with him. The most substantial of these proofs was from the liquidators of one of the bankrupt’s former companies in the sum of £4.4m.

Correspondence commenced and the joint liquidators ultimately demanded that:

  • their proof of debt be admitted at least for voting purposes
  • a meeting of creditors be convened, and
  • a resolution be put before the meeting for the trustee’s replacement

Instead of convening a meeting and adjudicating on the proof, in April 2015 the trustee issued an application to court for declarations as to whether the proofs of debt should be admitted and a meeting convened. In his supporting evidence, the trustee conceded that in delegating his decision-making he was seeking the protection of the court (fearing on the one hand a complaint from the bankrupt and on the other, an application by the liquidators).

What was the court asked to consider?

The trustee’s application was effectively made under IA 1986, s 303(2) which provides that:

The trustee of a bankrupt’s estate may apply to the court for directions in relation to any particular matter arising under the bankruptcy.

Similar powers are provided to liquidators under IA 1986, s 112(1):

The liquidator or any contributory or creditor may apply to the court to determine any question arising in the winding up of a company...

Administrators also have corresponding powers under IA 1986, Sch B1, para 63:

The administrator of a company may apply to the court for directions in connection with his functions.

As to the application of IA 1986, s 303 in the extant bankruptcy application, there was little available case law but for two analogous decisions, one in a liquidation and one in an administration.

In the liquidation case of Re Stetzel Thomson & Co Ltd (1988) 4 BCC 74, the court held that it would be inappropriate to give directions (under IA 1986, s 112) where an alternative, more appropriate course, was available. Harman J concluded that:

In my view, the only possible answer to this matter is to say that the liquidators must take their own view, administer the fund as they think fit, and if adverse claims are brought against them they will have to resist those adverse claims as best they can.

There was a similar outcome in the later administration case of Re T & D Industries plc (in administration); Re T & D Automotive Ltd (in administration) [2000] 1 All ER 333, [2000] 1 BCLC 471 in which Neuberger J held:

My decision tends to emphasise the fact that a person appointed to act as an administrator may be called upon to make important and urgent decisions. He has a responsible and potentially demanding role. Commercial and administrative decisions are for him, and the court is not there to act as a sort of bomb shelter for him.

What did the court decide?

In November 2015, the trustee’s application came before Mrs Registrar Barber in the bankruptcy court. The registrar gave an extempore judgment helpfully clarifying the law on an office-holder’s ability to seek the court’s assistance and protection when tasked with difficult decisions. Picking up on Neuberger J’s bomb shelter analogy, the registrar observed:

...the trustee has expressly acknowledged, in his second witness statement, that he is effectively treating the court as a bomb shelter. His very motivation, in coming to court, is to avoid criticism from either one of two parties in disagreement. His role, however, is to make hard decisions such as this.

In the absence of exceptional circumstances (such as in an area of developing jurisprudence) office-holders should make their own decisions, no matter how difficult:

Ordinarily, however, subject to exceptional circumstances or areas which require a definitive ruling, such as those that I have mentioned, it is for the office holder to get on and make a decision on the proof. What is not acceptable is for an office holder to invite the court, outside of the established appeal process which is clearly set out in the Insolvency Rules 1986, to supplant the office holder’s role entirely. It is, as I have said, for the office holder to adjudicate on the claim and for those who disagree with his decision then to choose whether or not to invoke the appeals process, a process in which, as indicated, the office holder is ordinarily protected on costs under the Insolvency Rules (see rule 6.94(5): see too rule 6.105).

As such, it was wholly misconceived to make an application for directions when an alternative mechanism for resolution was available, in circumstances where the trustee was attempting to delegate his decision-making to the court and thereby obtain the protection thereof: seems to me that applications such as that before me today should be strongly discouraged. Whilst I can quite see that there may be exceptional situations in which some discrete guidance is required from the court on a given point relating to a proof of debt (such as whether the debt should be treated as liquidated or unliquidated for example), for an office holder to seek the wholesale abnegation of his responsibility to rule on that proof is a matter which the court should rarely entertain. The ruling now, by the court, on whether and if so in what sum the liquidators’ proof should be admitted for voting purposes, would occupy what can only be described as an incongruous position within the framework of this bankruptcy.

The application was duly dismissed and permission to appeal was refused. Costs were awarded in the liquidators’ favour.

What is the significance of this decision for insolvency lawyers?

This is an important decision which reconfirms the law on office-holder decision-making. In all but the most exceptional cases, office-holders must proceed to make decisions (such as in relation to the adjudication of proofs) and not attempt to abdicate responsibility. To do so causes creditors additional expense both directly (in taking a position on an unnecessary court application) and indirectly (the office-holder’s estate bearing their costs in bringing the same). Office-holders run the very real risk of a personal costs liability if they are held to have behaved improperly.

John Briggs was instructed by Chris Branson and Oliver Fitzpatrick of Boyes Turner LLP for the trustee.

Daniel Lewis was instructed by Frances Coulson & Christopher Burt of Moon Beever for the liquidators.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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Trustee in bankruptcy—roles, powers, functions and duties

Creditor's appeal against rejection of proof of debt

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First published on LexisPSL Restructuring and Insolvency

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About the author:

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.