It is very much the nature of the job that appointed Office Holders are required to make difficult and challenging decisions on each and every case they take. On some occasions those decisions are well received – on others, not so well. Creditors affected by those decisions can take comfort that the Office Holder is experienced in making those difficult decisions, is an Officer of the Court, has their own licence to protect and, fundamentally, has a duty to treat all creditors fairly. But what happens when an Office Holder knows that whichever decision he makes, he is likely to receive a claim challenging that decision from one or more creditors? Can the Office Holder ask the Courts to make a decision for them?
This point was discussed in detail in Parker v Nicholson. This case was brought by Mr Parker who was appointed trustee in bankruptcy (the “Trustee”) of a Mr Chinn with effect from 3 December 2014. Amongst the creditor claims in the bankruptcy estate was a c£4.4m claim from the liquidators (the “Liquidators”) of Staffsmart UK Limited (“Staffsmart”), a company of which Mr Chinn was formerly a director. Mr Chinn had accepted an 8 year disqualification undertaking in relation to his conduct as a director of Staffsmart and the Liquidators sought to submit a proof of debt for, inter alia, overdrawn loan accounts, preferences, misfeasance and wrongful or fraudulent trading claims. Their claim actually totalled in excess of £8m but had been limited to the shortfall to Staffsmart’s creditors. Despite accepting the disqualification undertaking Mr Chinn strongly disputed the validity of the Liquidator’s claims. The Liquidators on the other hand adduced a significant level of evidence in support of their claim.
The Trustee therefore needed to decide whether to admit the proof or not. Knowing that whatever decision he made he was likely to face a challenge from either Mr Chinn or the Liquidators, he decided to short circuit the need for a challenge and ask the Court to make the primary decision. Accordingly in April 2015, he sought directions from the Court pursuant to section 303 of the Insolvency Act 1986 as to
- whether the proof of debt filed by the Liquidators should be admitted for voting purposes; and
- whether a meeting of creditors should be convened at the request of the Liquidators (the purpose of which was to remove the Trustee as trustee in bankruptcy and to appoint two other insolvency practitioners to replace him).
The Court is not normally involved at this stage because an Office Holder usually makes a decision on admissions of proofs of debt himself and allows an aggrieved party to bring an action to challenge that decision through the Courts if they feel strongly enough about it. However, the Trustee argued that his circumstances were different – this was not a commercial or administrative decision (so as to distinguish this case from Re T&D Industries plc ) and, as it was clear that a dispute would arise whatever the Trustee’s decision, it was appropriate for the Court to assist as the Court is experienced in the adjudication process.
The Court wholly disagreed. The Insolvency Rules clearly provide the power for an Office Holder to decide on admissibility on a proof of debt. Further, there is an established appeal process which can be invoked by a dissatisfied party should they wish to do so. If they do so the onus falls on the applicant to satisfy the Court that the Office Holder’s decision was flawed. Accordingly, the comments of Neuberger J, as he was then, in T&D Industries, that “the Court is not there to act as a bomb shelter” [for Office Holders] remains valid and the Courts should not be called upon to assist merely because the Office Holder has a tough decision to make.
Therefore Office Holders must bear in mind that the Courts do not take such applications lightly. If an Office Holder makes an unnecessary application for directions for matters clearly already within their powers, they may well be penalised on costs. In this case, the Court ordered the Trustee to pay the Liquidators’ costs of and occasioned by the application and the Liquidators were even granted liberty to apply for a personal costs order against the Trustee.
The message is clear. Office Holders should have faith in their powers and use their judgement when necessary. The Insolvency Rules provide mechanisms for aggrieved parties to make an application to challenge decisions if they believe it necessary to do so, but the burden of proof lies with those aggrieved parties – as does the risk on costs.