Bankruptcy Hearing – Dismissal on Anticipated Improper Trustee behaviour

Author: Simon Hill
In: Article Published: Saturday 04 November 2017


Where a bankruptcy petition is properly founded upon a debt, and the proper procedure for bring the petition has been completed, the debtor/respondent to the petition will have only a selection of grounds upon which he/she can resist the Bankruptcy Court adjudicating the debtor as bankrupt. 

This article will consider one short ground that has been argued as a basis for resisting the making of a bankruptcy order - namely that any Trustee in Bankruptcy to be appointed following the bankruptcy order, might act improperly when in office. Readers should note that: (1) this article is part of a series of free-standing articles available on bankruptcy hearings; (2) the governing Insolvency Rules changed on 6th April 2017. Prior to that date, the Insolvency Rules 1986 ('1986 Rules') applied, since then, the Insolvency Rules 2016 (SI 2016/1024) have appled ('2016 Rules');  readers will need to bear this in mind when considering older authorities.  

Re Micklethwait [2003] BPIR 101
This ground was put forward in the case of Re Micklethwait [2003] BPIR 101, before Peter Smith J. That case involved the Court hearing together 3 petitions presented by Lloyds, against 3 former names, the respective petitions based on 3 separate judgment debts granted in favour of the petitioning creditor Lloyds.

Judgment debtors claims
Of relevance was that the judgment debtors contended that they held ‘…various claims which if established will enable the debtors to have funds in excess of the liability to Lloyd's…’ (paragraph 7). However, all claims were against parties other than Lloyd’s (save for one very doubtful claim against Lloyd's), The major set of claims, said to be held by the judgment debtors, consisted of a complaint to the European Commission, against the British Government, for compensation, for allowing Lloyd’s to run the underwriting business in the way it did – a set of claims that the judgment debtors contended was ‘effectively against Lloyds’ (paragraph 18); but which in reality were not, and in any event were speculative, without limit in time (proceedings were progressing very slowly) and without funding.

Discretion under section 266(3) of the Insolvency Act 1986
The judgment debtors argument centred around the Bankruptcy Court discretion under s.266(3) of the Insolvency Act 1986, with the judgment debtors arguing for the petitions to be adjourned/dismissed. That section provides:

The Court has a general power if it appears to it appropriate to do so, on the grounds that there has been a contravention of the rules or for any other reason, to dismiss a bankruptcy petition or stay proceedings on such a petition, and where it stays proceedings on a petition, it may do so on such terms and conditions as it thinks fit.

As Arden J in Westminster City Council v Parkin [2001] BPIR 1156 stated at 1157B, this ‘…gives the court an unusual but general power where there has been a contravention of the Rules or ‘for any reason’ to dismiss a petition or to stay proceedings on a petition.

As Peter Smith J said early in his judgment in Re Micklethwait, at paragraph 6, ‘The power set out in the section is quite unfettered…’, and at paragraph 9 said ‘…the power can be exercised if the making of a bankruptcy order might cause an injustice.

The judgment debtors contended that improper Trustee in Bankruptcy behaviour, unrealised but merely feared, could found grounds for a dismissal. The way it was formulated by the judgment debtors, was summarised by Peter Smith J in Re Micklethwait, at paragraph 7 and 8:

The argument goes like this; in the case of each debtor the major or sole creditor is only Lloyd's. If the debtor is made bankrupt it is then suggested that Lloyd's will obtain the appointment of a pliant Trustee in Bankruptcy. Certainly if Lloyd's is the sole or major debtor it will as regards any unsecured debt of course be able to vote in the appointment.

The second stage of [counsel for the judgment debtors’] submission however, involves the Trustee in Bankruptcy then exercising his powers as Trustee to abandon in effect, any claim that the bankrupt might have had to seek compensation for Lloyd's…

At paragraph 33, he elaborated:

In effect [counsel for the judgment debtors] is saying that the trustee will be a puppet of the appointer, namely Lloyd’s, and as a Trustee will sign away any claims that the estate has in favour of Lloyd’s. It assumes that a Trustee in Bankruptcy will act in breach of his duties.

Another way of putting this, is that a pliant Trustee in Bankruptcy is likely to be appointed by the petitioning creditor Lloyd’s, and that the Court ought to assume that such a Trustee in Bankruptcy will then act improperly and abandon the set of claims the judgment debtors had asserted against the British Government in relation to Lloyd’s.

As a point of principle, Peter Smith J said, at paragraph 35 of Re Micklethwait:

It is fanciful to suggest that I should not make a bankruptcy order, because a Trustee in Bankruptcy might act in such an improper way in the future.

He reasoned that office holders are just not that pliable or easily persuadable, contrary to what was feared, and perhaps contrary to the hope/expectation of substantial creditors. Peter Smith J said, paragraph 34:

For my part in my experience of trustees and liquidators, some creditors find that their expectations that the office holders will act as the creditors wish them to do is often dashed, and that they often develop a measure of independence, which sometimes leads creditors to wish they had never appointed insolvency practitioners in the first place.

He was, in effect, holding that the risk was not sufficiently great to justify, or warrant, a refusal to make a bankruptcy order. 

In any event, on the facts of Re Micklethwait, Peter Smith J said, at paragraph 33, in respect to the judgment debtors’ fear that any Trustee in Bankruptcy will abandon their claims:

I cannot see that happening, nor more significantly can I see the names letting it happen. They, even if they are bankrupt, are interested in the estate, because they are entitled to the surplus after payment of the debts. If the position is that they have a claim worth millions they will have, on their analysis, a substantial surplus. If the Trustee in Bankruptcy were act (sic) that way without proper reason, I cannot see them not having him removed, or seeking to challenge the transaction.

He did however emphasize, that ‘All of this however is speculation, in my judgment.’ And that the point was that it was ‘…fanciful to suggest that I should not make a bankruptcy order, because a Trustee in Bankruptcy might act in such an improper way in the future.

On the facts in Re Micklethwait, after all the other grounds for resisting the respective bankruptcy petitions were held to be untenable, the Court made bankruptcy orders against all 3 judgment debtors.

The judgment in Re Micklethwait makes clear that a general fear that a Trustee in Bankruptcy will act improperly upon appointment and vesting, is not a ground for dismissing the bankruptcy petition/refusing to make the bankruptcy order.