Restructuring & Group Legal Alert

Block transfers of IP appointments – recent Court of Appeal decision The Court of Appeal1 has confirmed that the Court has the ability to appoint a new , or a new in a compulsory , following the removal of the previous office holder, under its power to give directions in relation to any particular matter arising under a bankruptcy or winding up (ss303(2) and 168(3) ).

Background to the appeal

An insolvency practitioner (the “Office Holder”) who was planning to retire from practice sought and obtained a “block transfer order” (the “Transfer Order”) in respect of his appointments as trustee in bankruptcy, liquidator and supervisor (which appointments were not likely to be concluded by the time of his retirement) removing him from office and appointing another insolvency practitioner in his place (the “New Office Holder”).

An individual for whom the Office Holder was trustee in bankruptcy sought to set aside the Transfer Order so far as it concerned her bankruptcy (the “Discharged Bankrupt”).

1 Donaldson v O’Sullivan and another [2008] EWCA Civ 879

4 July 2008 Under the terms of the Transfer Order of the various insolvent estates had 28 days in which to apply to the Court for reconsideration of the removal of the Office Holder and of the appointment of the New Office Holder, any such application to be made on reasonable grounds. The Discharged Bankrupt was not a and so could not rely on this term of the Transfer Order. However, she was plainly affected by the Transfer Order and, since her contention was that there was no power to appoint a new trustee (rather than that a power was wrongly exercised), she was entitled to raise the point that the New Office Holder was not her trustee in bankruptcy, having been invalidly appointed.

The High Court dismissed her application2 but granted permission to appeal.

Block transfers

The practice of block transfers of insolvency practitioner appointments by way of Court order has developed from a series of decisions in the Chancery Division and is now governed by the procedure set out in paragraph 1.6 of the CPR Practice Direction on Insolvency Proceedings.

The decision

The Court of Appeal dismissed the Discharged Bankrupt’s appeal. It held that Harman J in Re Parkdawn Limited had been correct to conclude that s303(2) Insolvency Act 1986 (“IA”) confers power on the Court to appoint a new trustee in bankruptcy, which power it can exercise so as to replace a trustee removed under s298 IA.3

s303(2) IA provides that: “The trustee of a bankrupt’s estate may apply to the Court for directions in relation to any particular matter arising under the bankruptcy”.

Further, the Court of Appeal held that Harman J was also correct in his conclusion that the Court has the power to appoint a replacement liquidator in a compulsory liquidation under s168(3) IA (being the equivalent provision to s303(2) IA).

The Discharged Bankrupt had submitted that the Court could not, under the Insolvency Act 1986 (specifically ss292 and 297 IA), appoint the New Office Holder as her trustee in bankruptcy. The relevant statutory provisions conferred on the Court only a limited express power to appoint a trustee in bankruptcy, which power did not extend to appointing a replacement in circumstances in which a trustee in bankruptcy wishes to resign. In such circumstances it is for the creditors (and not the Court) to decide on the issue of his replacement. The Court of Appeal was not persuaded by this argument. It was satisfied that bankruptcy is a Court controlled process in relation to which the Court has wide powers, exercisable for the purpose of the insolvency process as a whole,

2 [2008] EWHC 387 (Ch). 3 s298 IA provides for removal of a trustee in bankruptcy by the Court or a creditors’ meeting.

2 Bankruptcy & Insolvency Group Legal Alert which are not limited to those conferred expressly by the relevant legislation. The Court also has the power to direct that things be done (or not done) in apparent conflict with express provisions of the legislation. The Court of Appeal held that ss292 and 297 IA (which deal with the Court’s power to appoint a trustee in bankruptcy but which are silent on the appointment of a replacement trustee) ought not to be construed so as to preclude a Court from using its general powers in relation to bankruptcy to appoint a new trustee upon removing the previous incumbent.

In submissions the Discharged Bankrupt contrasted the statutory regime applicable to bankruptcy and compulsory liquidation with that applicable to voluntary , voluntary arrangements and administrations (the latter containing express provisions on appointment of a replacement office holder). Notwithstanding this legislative distinction (which may just as well be explained by the different legislative history of the various regimes as by a deliberate decision by the drafters) the Court of Appeal held that it would be counter-intuitive to find that a Court has less power in relation to the appointment of a new office holder in a bankruptcy or a compulsory winding-up than it does in relation to a voluntary liquidation, an or a voluntary arrangement, the former being regarded as officers of the Court and, more importantly, the former processes being entirely Court administered whereas not all of the others are.

Comment

The Court of Appeal’s decision provides clarification in this area, not only in relation to the appointment of a replacement trustee in bankruptcy but also in the context of compulsory liquidation.

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0207rbi August 2008