What is the trustee’s duty to the bankrupt? (Oraki v Bramston)

Does a trustee have a common law duty of care to the bankrupt? John Briggs, barrister at South Square, clarifies the legal position following the decision in Oraki and another v Bramston and another.

Original news

Oraki and another v Bramston and another [2015] EWHC 2046 (Ch), [2015] All ER (D) 175 (Jul)

The claimant former bankrupts brought a claim alleging that the defendant trustees had failed to do their job properly and that they had mismanaged their estates, thereby causing them loss and damage. The Chancery Division, in dismissing the claim, held that a surplus in the bankrupt’s estate did not give rise to a duty in the tort of negligence on the trustee’s part to the bankrupt. A trustee did not owe a bankrupt a duty at common law outside of section 304 of the Insolvency Act 1986 (IA 1986) and, further, it was not part of the trustee’s role to review the legitimacy of a judgment affecting a bankrupt, which directly or indirectly had been subject to appeals which had been rejected.

What was the background to the hearing?

Dr Oraki and her husband (the Orakis) had been made bankrupt in 2005/06. Many years later, in January 2013, their bankruptcies were annulled pursuant to IA 1986, s 282(1)(a) due to serious irregularities in relation to the judgment and the debt on which they had been made bankrupt.

The judgment in favour of the solicitors whom the Orakis had instructed was for damages to be assessed in what was an action for debt. There was no itemised bill and no power under the Civil Procedure Rules 1998, SI 1998/3132, r 24 to order a payment on account.

The Orakis claimed that the first and second trustees in bankruptcy (the trustee) had failed expeditiously to bring their bankruptcies to an end and had mismanaged their properties causing them and their estates loss. In other words, the trustee had done a bad job.

What were the legal issues that the judge had to decide in this application?

The principal legal issue was whether the trustee had not only statutory duties under IA 1986—the principal remedies are set out in IA 1986, s 303 (general control of trustee by the court) and IA 1986, s 304 (liability of trustee)—but a common law duty of care to the bankrupts.

This issue arose since it was said that the estates were very solvent due to the properties owned and the mismanagement would adversely affect the interests of the Orakis (although not their creditors to whom they owed little or nothing as their debts were disputed).

Other particular issues which the court addressed were:

  • whether an order for damages for mental distress can be made in circumstances where a bankruptcy has been unnecessarily prolonged
  • the effect of release on a trustee’s liability for loss

What were the main legal arguments put forward?

The main arguments put forward were that the trustee had a duty to:

  • assist the Orakis in bringing their bankruptcies to an end
  • pursue any debts owed to the Orakis
  • maintain properties under their control and maximise income

The Orakis argued that this failure caused them loss and substantial mental distress for which they should be compensated.

What did the judge decide, and why?

The judge decided that, while in some circumstances it might be open to a trustee to treat the judgment as invalid for the purposes of the bankruptcy due to a miscarriage of justice (eg Re Menastar Finance Ltd [2002] EWHC 2610 (Ch), [2002] All ER (D) 26 (Nov)), there were definitive judgments to the effect that the bankruptcy orders were properly made and it was not part of the trustee’s role to review the legitimacy of the judgment.

As to the legal argument of bringing an end to the bankruptcy expeditiously, the judge found that the trustee had no readily available cash assets sufficient to discharge the bankruptcy debts and costs and that the position regarding the debts and assets was unclear. The judge also found that while the trustee sought to realise assets, it was the Orakis who opposed such action and did not want the bankruptcies to be dealt with expeditiously except on their terms.

The trustee could not be faulted for failing to pursue debts or take proceedings to pursue rights of action and the Orakis failed to prove loss in relation to claims such as tenants’ actions, re-mortgaging of properties or mental distress.

Moreover, personal loss to the Orakis, as opposed to loss to their estates recoverable under IA 1986, s 304, was discharged by the trustee’s release pursuant to IA 1986, s 299(5).

To what extent is the judgment helpful in clarifying the law in this area?

The judgment is helpful in clarifying the law in relation to the trustee’s duty to the bankrupt. Such a duty is statutory only. The judge rejected the argument that there is any common law duty of care.

The judgment is also helpful in confirming that the trustee is empowered to use their discretion in administering the estate and the court will be loath to interfere unless their actions are wholly unreasonable.

Regarding loss under the mental distress claim, the judge considered that there could be no such claim on the facts of this case and, in any event, a claim for £690,000 was too much for non-pecuniary loss (Demarco v Perkins [2006] EWCA Civ 188, [2006] All ER (D) 150 (Jan)).

What practical lessons can those advising take away from the case?

Practical lessons which trustees can take from this case are:

  • to ensure that good legal advice is obtained at all stages where necessary to back up the trustee’s own appraisal of the difficulties they are facing in administering the estate—in a claim for professional negligence the court is likely to scrutinise the justification for the trustee’s actions and strategy
  • that it is important to apply for release as soon as is practicable following resignation, removal or cessation of office—the effect of discharge from all potential liability other than loss to the estate itself is confirmed by this court decision in Oraki

John Briggs acted for the defendant trustees in bankruptcy in this case.

Interviewed by Stephanie Boyer.

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

Further Reading

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Roles, powers, functions and duties of the trustee in bankruptcy

What steps are available if it transpires that the bankruptcy order should not have been made and what are the usual grounds for the court annulling the bankruptcy order?

What effect does an insolvency process have on ongoing litigation/arbitration proceedings?

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First published on LexisPSL Restructuring and Insolvency

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