John Szepietowski Reviews Leopard v Robinson 2020 EWHC 2928 (Ch) – The Trading of a Business by a Trustee in Bankruptcy
On 14 October 2014, the Respondent, who operated a cleaning business, was made bankrupt following a petition issued by HMRC. The Respondent had run the business for over twenty years and in order to continue trading, the Official Receiver urgently appointed a Trustee on 20 October 2014 (The Applicant). Following this appointment, an application was granted to continue trade on 24 October 2014. The Respondent continued to run the cleaning business under the Applicant’s supervision.
An automatic discharge normally occurs twelve months after a Trustee is appointed, however, the Applicant continued in his position until 2017. At this point in time, the Applicant felt it necessary to issue an application for possession and sale of the Respondent’s family home. Meanwhile, the Applicant urged the Respondent to purchase the business in order to relieve the Applicant of his involvement. These exchanges led to a dispute between the parties and subsequent legal proceedings.
The Respondent’s position is that he has been operating the business for his own benefit and not on behalf of the bankruptcy estate and thus is entitled to the trading income that accumulated over the preceding three years. The Respondent was adamant that he would not buy the business back because, in his view, he continued to own it.
Further complications arose when the Respondent opened a similar company. The Applicant viewed this as a cunning attempt to entice customers, however, the new company was unable to trade. This matter was resolved by the Respondent providing undertakings; including cooperating with the Applicant to maintain the cleaning business and not operating a competing business.
The Applicant withdrew from the business with effect from 31 July 2019.
The judge considered a number of issues in this case, the focal problems being:
- The determination of which business assets vested in the Respondent and which vested in the Applicant;
- Whether the Applicant or the Respondent traded the business from the date of the Applicant’s appointment;
- Whether the Applicant acted outside his powers as a Trustee;
- Whether the Applicant acted in breach of the rule in ex parte James?
As the Respondent was a sole trader, all the property belong to or vested in the bankrupt business at the time of bankruptcy forms part of the bankruptcy estate. However, following Section 283(2)(a) Insolvency Act 1986, tools and equipment which are necessary to the bankrupt (Respondent) for use personally by him in his employment or business are classified as ‘exempt property’. The court concluded that only a transit van could be classed as exempt estate and therefore the majority of the assets vested in the Applicant.
The Court concluded that the Applicant was trading the business given his extensive involvement in the business and the Respondent’s lack of suggestion to the opposite prior to 2017.
The Court examined Paragraph 1 or Schedule 5 of the Insolvency Act 1986 which gave the Applicant the
“power to carry on the business of the bankrupt so far as may be necessary for winding it up beneficially and so far as the trustee is able to do so without contravening any requirement imposed or under any enactment”.
The Court concluded that the phrase “winding it up beneficially” referred to the business and not the estate in favour of the creditors as a whole. The Court stressed that this power was not to continue indefinitely and was not to be used in place of a trading Individual Voluntary Arrangement or sale of the business’ goodwill.
The rule in Re Condon, ex parte James is that an officer of the court should act in a lawful way that society and right-thinking people would agree with. This was considered in the context that an Income Payments Order or Agreement could have been put in place within the first year of the Applicant being appointed. This IPO or IPA would last a maximum of three years, however, the Respondent had been accounting to the Applicant for a five-year period. The Court concluded that a right-thinking person would deem it wrong for the trading income of the business between 10 October 2017 and 31 July 2019 as an asset of the bankruptcy estate and therefore awarded this period of trading income to the Respondent. However, the Court allowed for reductions from the income to be made in favour of the Applicant. These were: the Applicant’s accountancy fees; the Applicant’s reasonable and proper time costs; and the Respondent must account to the Applicant for a sum representing the value of the assets of the business.
Please contact John Szepietowski firstname.lastname@example.org at Audley Chaucer for details on this matter or any other legal topic www.audleychaucer.com