This is an application by the trustee in bankruptcy (“the trustee”) of Spencer Michael (“Mr Michael”) for directions in relation to the disposal of the principal valuable asset in his estate, a counterclaim he has against Fairview New Homes (Farnborough) Limited (“Fairview”) in an action brought by Fairview against him.

That action relates to a dispute between Fairview and Mr Michael concerning a transaction in which Mr Michael was to acquire a substantial number of properties from Fairview. He did not complete the transaction - he maintains for good reason - and Fairview claims to be entitled to forfeit deposits payable by him. Fairview commenced proceedings to recover the balance of the deposits. Mr Michael counterclaimed against Fairview for breach of contract. The asset in the estate of Mr Michael in relation to which the trustee seeks directions is the thing in action consisting of his rights against Fairview under that counterclaim (“the counterclaim”). The action by Fairview was commenced in 2006 and Mr Michael brought his counterclaim also in 2006. The value of the counterclaim was pleaded as £121,250 plus interest.

On 29 March 2007 Mr Michael was made bankrupt by order of Mr Registrar Rawson on the application of a third party creditor. As a result of that order, Fairview’s action and Mr Michael’s counterclaim were stayed. Mr Michael’s counterclaim constitutes property for the purposes of the Insolvency Act 1986 (see section 463) and is part of his estate now vested in the trustee (see section 283(1)(a) and section 306).

Section 305(2) of the Insolvency Act provides:

Section 314(1) of the Insolvency Act provides:

Paragraphs 3 and 6 of Part 1 of Schedule 5 to the Act provide:

Applications may be made to court for directions to a trustee in bankruptcy by persons aggrieved by or interested in decisions made by a trustee or by a trustee himself (see section 303(1) and (2) respectively). The present application is made by the trustee under section 303(2). Mr Beswetherick for the trustee submits, and I accept, that the test according to which the court will intervene to overturn decisions of a trustee in the administration of a bankrupt’s estate, is the same whether an application is made by a person under section 303(1) or by the trustee himself under section 303(2). (Of course, a trustee might also apply for directions under section 303(2) where he has made no decision himself on the commercial merits of a particular course of action, but that is not this case).

The usual test is that laid down in Re Edennote Limited [1996] 2 BCLC 389 (CA), which concerned the actions of the liquidator of a company. It is common ground that the same test applies in relation to the actions of a trustee in bankruptcy in a case of personal insolvency. The test for intervention by the court was put in this way by the Court of Appeal, as summarised in the head note:

In my view, however, the test in Re Edennote Limited does not exhaustively state the grounds for intervention by the court. As is clear from the provisions of the Insolvency Act 1986, the court retains a general supervisory jurisdiction in respect of trustees in bankruptcy to ensure they behave properly and fairly as between persons affected by their decisions. That wider jurisdiction is in issue in the facts of this case.

An account of the bankruptcy of Mr Michael is given in the witness statement of the trustee. Upon his appointment as trustee in bankruptcy after a meeting of creditors on 28 June 2007, the trustee investigated Mr Michael’s financial position. Mr Michael had very few assets which vested in the trustee. The only asset he had which was potentially of significant value was the counterclaim.

The trustee described the bankruptcy thus at paragraphs 16 to 19 of his witness statement:

The current position in the bankruptcy is explained at paragraph 34 of his witness statement:

The trustee is considerably out of pocket on this bankruptcy. The trustee’s fees and expenses will rank in preference to any claims by creditors.

The trustee took legal advice about the merits of the counterclaim. The detail of that advice is not disclosed for reasons of legal professional privilege. The trustee’s decision was that he should not pursue the counterclaim due to problems with its merits, as he had been advised, and the fact that the bankruptcy is unfunded. He instead decided that it would be in the best interests of the bankruptcy to offer the counterclaim for assignment. He considered that each of Mr Michael and Fairview might be interested in bidding for the counterclaim: Mr Michael, because he maintained, on legal advice he had obtained, that it was a valuable claim; Fairview, because if it (putting it colloquially) bought the counterclaim it would, in substance, be released from any obligations it might have in respect of the counterclaim.

On 8 July 2008 the solicitors for the trustee wrote in these terms to Mr Michael:

Any pursuit of the Fairview Proceedings must be fully assigned and progressed in the name of the assignee.

As Trustee, our client is unable to give any warranty, undertaking, covenant for title or otherwise in relation to the causes of action contained in the Fairview Proceedings and the Trustee will bear no personal liability whatsoever.

Any assignee will have to agree to provide full indemnity to the Trustee against all actions, claims, costs, demands and losses arising in relation to the Fairview Proceedings.

The assignee must pay the legal costs of the Trustee associated with drafting the assignment and an application to court for an order that the Trustee be permitted to assign the claim.

On 18 July 2008 the solicitors for the trustee sent an email to the solicitors for Fairview in these terms:

Although the solicitors for the trustee acknowledged there that the same cap in relation to the costs referred to in point 5 of the letter of 8 July 2008 should apply to Mr Michael, it appears on the evidence before me that he was not told of this.

On 4 August 2008 - it seems in response to a query from Mr Michael - the solicitors for the trustee capped the indemnity referred to in the letter of 8 July 2008 (at point 4) at £3,000 and indicated that adjustment to the terms of the letter to both Mr Michael and Fairview.

The position in respect of the bids invited by the trustee, therefore, was that Fairview and Mr Michael both knew that the indemnity at point 4 of the letter of 8 July was capped at £3,000 and that Fairview, but not Mr Michael, knew that the costs at point 5 of that letter were capped at £5,000.

The time for bids was extended eventually to 25 November 2008. On 24 November 2008 the solicitor for the trustee emailed Mr Michael referring to a conversation between them and continuing:

Mr Michael was therefore given a clear indication that the trustee would be unlikely to find an offer based on a percentage of the recovery under the counterclaim attractive. He was also put on notice that the application to court contemplated by point 5 of the letter of 8 July might be contested by any party dissatisfied with the outcome of the bid process.

On the deadline of 25 November 2008, Mr Michael put in an offer by email for the assignment of the counterclaim to him, in these terms:

The email did not refer to the terms set out in points 4 and 5 of the letter of 8 July, but on an objective approach to construction of the email against the background of that letter Mr Michael accepted the terms set out there (with the indemnity at point 4 capped at £3,000 as he knew, but so far as he was aware the costs at point 5 being uncapped).

The same day the solicitors for Fairview put in an offer on behalf of Fairview in these terms:

Fairview’s offer was on the basis of a cap of the indemnity in point 4 of the letter of 8

The trustee considered both bids and decided that the bid by Fairview was the more attractive. The trustee’s decision was notified to Mr Michael and Fairview by letters of 16 December 2008 which included the following:

The present application to the court, pursuant to the trustee’s decision, was issued on 24 April 2009. The trustee put in a witness statement dated 14 April 2009 which disclosed relevant documents, including the email of 18 July capping the costs in point 5 of the letter of 8 July at £5,000.

Mr Michael filed a witness statement dated 22 May 2009 in reply. In paragraphs 32 to 35 of that witness statement he called attention to the email of 18 July, of which he had been unaware. He said that the cap on the trustee’s costs set out in that email “must have enabled Fairview to adjust the nature of their proposed offer” and complained that that was unfair. He said that had he been aware of this feature of the offer the trustee was prepared to accept he would have made a cash offer with the benefit of third party financial assistance which he said he had now obtained from a Mr Choudhury.

In Mr Michael’s witness statement of 22 May, at paragraph 38, Mr Michael offered an immediate lump sum cash payment of £12,000 for assignment of the counterclaim plus £38,000 payable out of recoveries under the counterclaim.

Fairview, for its part, submits that the outcome of the original bid process should be determinative. In the alternative, it has indicated that if the bid process culminating with the bids on 25 November 2008 is not to be treated as binding it would wish to make a further bid.

The trustee’s position is that a further round of final bids from each of Mr Michael and Fairview should now take place and proposes a draft order with a proposed bid process regulated in terms of a schedule to that order as follows:

The offer must be made in writing and be delivered to the Trustee’s solicitors by 10.30am on 23 July 2009.

The offer must specify the sum of money (as a fixed sum which is ascertainable from the offer document itself) that the party making the offer is prepared to pay in order to purchase an assignment of and/or to compromise the Counterclaim (“the sum”).

The offer must contain confirmation that, if its offer is accepted, the party making the offer will undertake to indemnify the Trustee (up to a cap of £3,000) in respect of any actions, claims costs, demands and losses arising, whether before or after the assignment or compromise, in relation to the proceedings brought under Claim No. HC05C00153.

The offer must contain confirmation that the party making the offer will undertake to contribute to the Trustee’s reasonable costs of the assignment and/or compromise and in relation to the Application, capped at £5,000 plus VAT, such costs to be assessed if not agreed.

The offer must contain an undertaking by the party making the offer to pay to the Trustee the Sum within seven days of notification by the Trustee that he proposes to accept that party’s offer.”

Mr Michael submits that the original bid process should not be treated as determinative for two reasons. First, he says it was not conducted fairly since Fairview was told, but he was not, that there was to be a cap of £5,000 in respect of the trustee’s costs in

I accept Mr Michael’s submission on the first point but not on the second. As for the second, whatever the legal niceties in relation to assignment of a claim to the person against whom it is brought, it is clear from paragraph 6 of Schedule 5 to the Insolvency Act 1986 that the trustee could compromise the counterclaim by accepting payment from Fairview. That, in substance, was what was lawfully and properly proposed by the trustee, and it is not necessary for me to go into the detail of the technicalities of the law on assignment put before me by Mr Oliver QC for Mr Michael to deal with that second submission.

However, on Mr Michael’s first submission, I consider that there was a material unfairness in the conduct of the bidding, to the detriment of Mr Michael. Fairview knew that the costs in point 5 of the letter of 8 July 2008 were capped at £5,000; Mr Michael did not. Fairview was therefore in a position to calculate its bid on that basis (i.e. knowing that its potential liability for costs under point 5 was limited), Mr Michael was not. Mr Michael’s evidence is that if he had known about that cap he would have reformulated his bid.

I have some doubt about whether in fact Mr Michael would have been able or would have chosen to do so. However, I am concerned that he was not afforded the same opportunity as Fairview to decide how to formulate his bid at the time, knowing that the potential exposure under point 5 was limited. This was not a trivial matter. The trustee had indicated that the application under point 5 might be contested. Mr Michael was a bankrupt and might have wished to seek monies from third parties to fund any offer by him. In relation to such approaches to third parties, knowledge of the limit placed on any potential liability under point 5 of the letter of 8 July 2008 could have been important.

Therefore, I cannot on the evidence exclude the possibility that knowledge of that cap may have made a difference to the formulation of Mr Michael’s bid. I cannot conclude that he would inevitably have lost the auction even if he had been properly informed about the terms on which it was being conducted. In those circumstances, I consider that it would not be fair or appropriate to require or allow the trustee to dispose of the counterclaim in accordance with the outcome of the first bid process. Putting this in another way, if it were necessary to do so: in light of the unfairness to Mr Michael of the way in which the first bid process was conducted, it would, in my view, be utterly unreasonable (within the terms of the Court of Appeal’s judgment in Re Edennote Limited) for the trustee now to proceed to give effect to that bid process.

The question arises, therefore, what should happen now? Mr Michael submits that the trustee should now dispose of the counterclaim to him, since the best extant offer is that put forward by him in his witness statement. I reject that submission. Such an approach would be very unfair to Fairview, which from its perspective participated in what appeared to be a fair and orderly bidding process in which each party was to make one bid without knowing what the other party had bid. Mr Michael’s current offer was made outside that process, and with knowledge of what Fairview had bid. Now that process is in effect to be set aside, Fairview is entitled to expect that there should be another fair and orderly bidding process.

That conclusion also corresponds with the trustee’s judgment that it would represent the best further conduct of the bankruptcy for a further orderly bidding process to take place. That is a judgment which cannot be faulted. I agree with it. Even if I did not myself agree with it, I consider that it is a judgment of the trustee on the commercial merits regarding the steps to be taken in the situation which has arisen, and that on the basis of the principles in Re Edennote Limited the court should not interfere with the trustee’s decision as to how to proceed.

If there is to be a further bid round, Mr Oliver submits that paragraph 3 of the schedule to the draft order should be amended to read:

The trustee resists this proposed amendment. He is concerned to ensure that the further bid round produces a clear and certain result in relation to which there is minimal scope for argument in future.

In my view, the trustee is entitled to adopt this approach and I reject Mr Oliver’s submission. The trustee’s judgment on this issue must prevail in accordance with the principles in Re Edennote Limited. There are a number of factors relevant to this assessment.

It is desirable that there should be a clear, common basis for bids to go in at this stage so as to ensure certainty of outcome and transparency of the process and to minimise scope for expensive argument later. The background to this bankruptcy, which I have already set out above, underlines the importance of these factors. The trustee has assessed the litigation risk in respect of the counterclaim and does not wish to bear it. The trustee wishes the bankruptcy to be brought to an end as early as possible. The bankruptcy has been a difficult one and the trustee’s unfunded costs have been high. There is no realistic prospect that they will be met in full, whatever is offered in exchange for the assignment of the counterclaim. Therefore, the trustee’s judgment about what should happen is entitled to be assessed as having a particularly strong weight in this case, since essentially the trustee is deciding what should happen with an asset held for his own benefit. Further, the trustee legitimately wishes to close the bankruptcy and avoid the further costs associated with keeping it open if a bid were made on terms offering a percentage of the recovery under the counterclaim. In addition, Mr Michael has already shown that he is in a position to make a cash bid. It is not unfair to him to limit the terms of the proposed schedule in the manner set out by the trustee.

I do not think it is necessary to build a provision into the proposed schedule to allow for a bid based on percentage recovery under the counterclaim, to deal with the unlikely event there might be a tiebreak in terms of the bids that are made (i.e. to allow Mr Michael to make a cash bid, with an alternative offer if his cash bid exactly matched that made by Fairview that he would in addition pay the trustee a percentage of the recovery under the counterclaim). The fair course in such a situation would be likely to be an invitation by the trustee to the parties to participate in a further round of bidding, but that would be a matter for assessment by the trustee should the problem ever arise, and one in relation to which the trustee would be entitled to form his own judgment.

For these reasons I make an order in the terms of the draft order and schedule as put before me on behalf of the trustee.

An application is made by Mr Michael against Fairview for an order that Fairview should bear his costs, or a substantial part of his costs, of this application. I reject that application. The fair outcome is that both Fairview and Mr Michael should bear their own costs. Fairview lost on the substantive argument that it put forward, which (if accepted) would have been to the detriment of Mr Michael. Mr Michael lost on a substantive argument he put forward against Fairview (i.e. that the trustee should simply be required to accept his current offer, as set out in his witness statement) which (if accepted) would have been to the detriment of Fairview. Honours between them were essentially even and it is not appropriate for any costs order to be made.

A further application is made by Mr Michael for permission to appeal in relation to the timetable set out in the order. It is a hopeless application and no permission is granted for that.