Bankruptcy estates can now be compensated for loss caused by breaches of trust

In a recent void disposition case concerning a Trustee in Bankruptcy’s entitlement to claim compensation from the recipient for loss arising out of a breach of trust, the Court of Appeal (Ahmed and others v Ingram and another [2018] EWCA Civ 519) has upheld the decision of the court below.  The latter determined in the Joint Trustees’ favour an application under Section 284 of the Insolvency Act 1986 relating to transfers of minority shareholdings in three companies made, firstly, by the Debtor to his brother and, later, transfers by the Debtor’s brother to their sisters.

The brief facts are as follows:

The Bankruptcy Petition was presented against the Debtor on 23 January 2007, the transfer of shares by the Debtor to his brother took place after presentation of the Petition on 6 June 2007, and a Bankruptcy Order was subsequently made against the Debtor on 21 April 2009. The exact date(s) of the transfers from the Debtor’s brother to their sisters is not known but it was agreed to have been sometime between 2008 and 30 June 2009 from the public records available.

The shares were eventually re-transferred back to the Joint Trustees by the Debtor’s brother and sister but their value had fallen in the intervening period. The Joint Trustees claimed not only that the transfers of the shares were void but also sought compensation for the diminution in value between the initial transfer date of 6 June 2007 and the date of the transfer back on 27 February 2015.

At first instance, Mrs Justice Proudman, sitting in the High Court of Justice (Ingram v Ahmed [2016] EWHC 1536 (Ch)) upheld the Joint Trustees’ application and determined that the transfers were void and that the Debtor’s brother and sisters were liable to pay to the Joint Trustees the diminution in value based upon a fair value of the shares at the relevant dates as opposed to market value.

The Court of Appeal determined the following issues: -

1. Section 284 of the Insolvency Act 1986 voids the relevant dispositions but is silent as to what remedy is available. Any claim to compensation for the diminution in value and loss caused to the Bankruptcy Estate as a result, is governed by the general law and that right of recovery is restitutionary.

2. However, compensation can only be ordered if there is a breach of trust. Liability for compensation for breach of trust is fault-based and the relevant loss to the Bankruptcy Estate, for which compensation is payable, must be caused by the actions or omissions of the relevant trustees of the property (i.e. the then recipients) acting in breach of trust. You have to be able to identify the following: -
   • what constituted the breach of trust;
   • when the breach of trust occurred; and
   • the loss actually caused to the Bankruptcy Estate as a result of the breach of trust.

3. It did not matter that the Joint Trustees had not proved or pleaded actual loss because at the date of the hearing the relevant issues had already been expressed in a non-binding agreement in relation to issues outstanding.

4. The breach of trust occurred when the Joint Trustees were appointed but the date on which the loss to the Bankruptcy Estate occurred, or should be calculated from, is the date at which the Joint Trustees would or could have actually sold the shares had they been in possession of the shares at the date of their appointment. (The loss should not have been calculated from the date of transfer of the shares by the Debtor to his brother as determined at first instance.) On the facts it was decided that the Joint Trustees would not have been in a position to sell the shares until 30 June 2010; some 14 months after the date of the Bankruptcy Order.

5. A fair value was the appropriate value to attribute to the shares as opposed to market value on the basis that the sale was between family members to keep the shares within the family and so that a third party did not acquire 24% of the shares in the companies.

6. The Debtor’s sisters acted in breach of trust, they were dishonest and they took the shares transferred to them without any consideration given to the Bankruptcy Estate. As a result, the sisters were jointly liable with the Debtor’s brother to the extent of their respective shareholdings, but as for the Debtor’s brother, only in respect of the diminution in value between 30 June 2010 (the date at which the Joint Trustees would or could have actually sold the shares) and 27 February 2015 (the date of transfer back to the Joint Trustees).

The issues decided in this case may be affected by the implementation of Section 291A of the Insolvency Act 1986 as the Official Receiver is now appointed First Trustee in Bankruptcy from the date of the Bankruptcy Order, so that in future cases the date of breach is likely to be the date of the Bankruptcy Order (as the date of appointment).

This is a decision of note for Trustees in Bankruptcy and Debtors alike in void disposition cases as it highlights an additional entitlement of the officeholder to claim compensation from the recipient for loss suffered to the Bankruptcy Estate where there has been a breach of trust.

If you are looking to bring or defend a claim of this nature and require some advice, then do please get in touch with us on 020 7353 1000 and ask to be put through to one of our specialists in Personal Insolvency.  Alternatively, email lhook@isadoregoldman.com with your contact details and we will arrange for you to be called back.

Disclaimer: this article is not to be relied upon as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.