Helping to restore office holder discretion in ‘the Battle of the Brakes’

Can the courts force trustees in bankruptcy to join as a party in legal proceedings? No, according to the Court of Appeal in a highly welcome return to normality and common sense for the insolvency profession.

Often referred to as a modern-day Jarndyce v Jarndyce (the fictional and seemingly endless probate dispute of Dickens’ classic Bleak House), the ‘Battle of the Brakes’ is a veritable legal saga that has produced no fewer than 44 reported decisions since proceedings first started nearly a decade ago.

A recent chapter in this protracted legal battle (known officially as Patley Wood Farm LLP v Kicks) has provided welcome confirmation for members of the insolvency profession concerning whether the courts can force them to join proceedings in the interests of creditors and, by extension, whether insolvency practitioners are required to work for free.

How did the Battle of the Brakes begin?

It is hard to imagine West Axnoller Farm, a secluded, idyllic countryside retreat set in the hills of Dorset, as the primary battleground for such a complex, hostile legal battle.

In May 2015, however, a dispute between business partners – couple Nihal and Andrew Brake and Patley Wood Farm LLP – and a subsequent failure to pay costs, left the Brakes declared bankrupt and kickstarted insolvency proceedings. Crucially, this would also raise substantive arguments over who owned a cottage (the ‘Cottage’) on the farm which was adjacent to a house (the ‘House’) on the estate, which was previously the Brakes’ home as well as a business enterprise. The Brakes would stay in the Cottage when the House was being used for events.

The House was eventually bought by The Chedington Court Estate Ltd (‘Chedington’), a provider of luxury experiences and sustainable projects owned and controlled by Dr Geoffrey Guy. The former trustee in bankruptcy also entered a conditional contract to sell the Cottage to Chedington.

In November 2018, relations between the Brakes and Dr Guy broke down. The Brakes alleged that Chedington had unlawfully evicted them from the Cottage and issued proceedings.

Why did the trustees in bankruptcy become more involved?

It is into this arena that the trustees in bankruptcy (TIBs), Kristina Kicks and Blair Nimmo, were invited in November 2022 to step in.

The Brakes successfully challenged their unlawful eviction. This left the Court of Appeal to decide who owned the Cottage that was occasionally used by the Brakes, and whether they had any claim to remain there.

Chedington wished to prevent the Brakes from retaking possession of the Cottage, and so it asked the TIBs to join the Court of Appeal proceedings, post-judgment, to seek a possession order in their own right.

In exchange, Chedington would offer adverse costs indemnity and meet the TIBs’ reasonable expenses. Once possession of the Cottage was reclaimed, Chedington would also pay £3,000 per calendar month as a licence.

Given the level of costs and expenses already incurred, the TIBs decided that the financial benefits to the estates’ creditors would do little to outweigh the disadvantages of becoming embroiled in protracted, time-consuming, and hostile litigation.

Chedington’s funding proposition was also troubling. For the TIBs, it essentially allowed Chedington to ‘call the shots’, both in terms of legal advice and the position adopted by the TIBs during the proceedings. And so, after taking legal advice, the TIBs declined.

How did Chedington challenge the trustees’ decision?

Chedington and a creditor made an application before the High Court under section 303 of the Insolvency Act 1986, which provides powers to the court to give directions to, and control, a trustee in bankruptcy in certain situations.

This provision usually comes with a high bar. A court may only interfere if shown that an office holder has acted in bad faith, or that they have acted so perversely that no office holder, when properly advised or properly instructing themselves, could have acted in such a manner.

In a decision that surprised, and concerned, many insolvency professionals, the High Court allowed the section 303 application, with the first instance judge dismissing the TIBs’ concerns as “simply absurd”. It then directed the TIBs to apply to the Court of Appeal to be joined and to seek a possession order. The TIBs were even prohibited from raising concerns as to their legal entitlement to be joined as a party to proceedings. Naturally, the TIBs took their case to the Court of Appeal.

What was the Court of Appeal’s decision?

In what has been remarked as a “welcome return to common sense”, the Court of Appeal unanimously overturned the High Court’s decision.

According to Lord Justice Arnold, the first instance judge had failed to recognise the full extent of the TIBs’ statutory discretion as to how a bankruptcy would be managed. TIBs were not, according to the Court of Appeal, required to act in the interests of creditors at all costs.

The Court also agreed that there was no real prospect of the creditors benefitting from the TIBs’ involvement in the proceedings. The £3,000 per month licence fee offered by Chedington was indeed a mere “drop in the ocean” when compared to the deficit faced by the estates.

Overall, the Court of Appeal ruled that the first instance judge had simply been wrong in failing to see any downsides – downsides that had, in fact, been confirmed by Chedington’s attempts to direct the TIBs’ position and dictate the submissions they made to court.

Why is the Patley Wood Farm LLP v Kicks decision significant for insolvency practitioners?

Should the High Court’s initial decision not have been challenged, this would have set an alarming precedent – one in which an office holder’s powers could be hired out to the highest bidder, and where court interference could become increasingly common in bankruptcies and insolvencies, provided there was some form of financial benefit.

Instead, we now see a welcome return to normality and common sense. No office holder can be expected to carry out their role effectively while fearful of challenge and interference by the court, nor should they be required to work for free and take unreasonable risks as part of their duty to act in the interests of creditors.

The case has provided insolvency practitioners with reassurance that the court can, and will, recognise and maintain office holder discretion in the administration of insolvent estates.

This is a welcome result for the insolvency profession, and one in which we are proud to have played a part.