Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

The insolvency rule in ex parte James – another in a series of cases ‘dancing on pinheads’

A trustee in bankruptcy in England rejected a £5.7m proof of debt lodged by the revenue authority [HMRC][1] on what was found to be a technical though correct point of law. This raised what the Deputy Insolvency and Companies Judge said was “an interesting issue concerning the interaction between revenue and insolvency law in relation to the approach that an office holder should adopt when testing a proof of debt.” The trustee was directed to accept the proof, based on the rule in ex parte James

That rule applies in Australian law, but while English cases refer to the views of right thinking people, an Australian case has applied the view of the person on the Bondi bus.

The amount of £5.7m had been paid by HMRC to the bankrupt (who had since died) in 2012, based on a misunderstanding by HMRC; its subsequent notice of reassessment was then challenged as being defective.  The details of that legal interaction are not so relevant to Australian readers but the outcome is because the Deputy Judge reversed the trustee’s decision as being contrary to the trustee’s duty to act fairly under the rule in ex parte James.[2]

Lehman Bros v MacNamara

The Deputy Judge referred to the comprehensive review of that rule recently given by the English Court of Appeal in Lehman Brothers Australia v MacNamara[3] which in effect said that the court will not permit its officers to act in a way that it would be clearly wrong for the court itself to act. That is to be judged by the standard of the right-thinking person, representing the current view of society.

(MacNamara applied the rule in a case where a clerical error was made in showing some values in Australia dollars, not euros.  The error was initially made by the administrators and not noticed by the other side, resulting in it being admitted to proof for some £1.67 million less than it was entitled to on the agreed basis.

As to insolvency practitioners, in that case Richards LJ said that

“as a public authority and given its role in society, the court is expected to apply standards to its own conduct which may go beyond bare legal rights and duties. …

Trustees in bankruptcy, liquidators in compulsory liquidations and administrators are all officers of the court. … As such, they are acting on behalf of the court and they will accordingly be held to these standards by the court.

The court applies the standard on an objective basis. It is not concerned to ask whether the officeholder is consciously proposing to take a course which falls below the standard set by the court. It asks only whether the course proposed would or would not, on an objective basis, meet that standard. As a regulated profession, insolvency practitioners may feel aggrieved at a challenge to their conduct or proposed conduct on this basis and may be tempted to argue that the challenge is an attack on their personal integrity. This would be a misapprehension on their part”.

In saying that each case would depend on its own facts, Richards LJ also said that the formulation of the various tests in the numerous cases had “something of the quality of dancing on pinheads” …).   

In the matter before the Deputy Judge, the parties agreed that “the repayment of the tax was plainly wrong”. The consequence would be that there would be a “significant loss to the public purse and a significant windfall to the otherwise insolvent estate which would then become solvent by some margin”.

Adopting the test in MacNamara, the Deputy Judge said that it would be clearly wrong for the court to stand idly by and allow the rejection of the proof to stand.

The trustee’s case could not justify the retention of the repayment other than on a highly technical point. His counsel however had argued that

“the court was not dealing in matters of morality and in effect that the Court must adopt a robust approach and that if the Court did not follow that direction, the statutory scheme would be undermined to the extent of driving a coach and horses through it”.

The Deputy Judge rejected that approach. In fact, the trustee’s case arguably involved

“the driving of a coach and horse through the legislation, but with the Court tightly and judicially holding the reins. For the insolvent estate to retain a windfall of over £5m at the expense of HMRC and the public purse would in my judgment offend the views of any right-thinking person”.

Following MacNamara, the Deputy Judge said that the question was not whether or not the trustee had departed from the proper standard. Rather, the question was only whether the conduct of the trustee, on an objective basis, fell below the standard expected of the court itself. Since the trustee’s subjective motivations were irrelevant,

this finding was “not, in any way a rebuke of the [trustee] or his personal integrity”. 

See Revenue And Customs v Sanders [2021] EWHC 1843 (Ch) (07 July 2021) (bailii.org)

Comment

I do not now comment on or compare the latest Australian cases on ex parte James partly for the reason that it might involve further dancing on pinheads, although one would not expect any difference of substance.

But it is worth noting that while the English cases refer to the standards of the “right thinking person”, Australian law defers to “the person on the Bondi bus”, at least as Justice Young once put it: Presbyterian Church Trust v Scots Church Development [2007] NSWSC 676.  That bus traveler rarely allows the rule to apply here.

Much will depend on the facts of each case and as AFSA says, if an issue does arise where the rule might apply “unless the answer is obvious or all the creditors agree, the trustee would be wise to take legal advice or seek the direction of the court under section 90-15 of the Schedule”. [4]  In one case, the trustees sought directions out of concern that if they accepted an in specie distribution from a deceased estate, an unfair tax liability would be imposed on the bankrupt; the court held that this did not raise a duty under the rule and directed them to accept the distribution: Re Rambaldi, in the matter of Houston (Bankrupt) [2008] FCA 1519.

That advice or directions would be guided locally by a decision from New Zealand, also involving a mistakenly paid tax refund – GST of NZ$169,000 – which, properly, the Court said the liquidators were not entitled to keep: Burns v Commissioner of Inland Revenue [2011] NZHC 1363; upheld on appeal Strategic Finance Ltd (in rec and in liq) v Bridgman [2013] NZCA 357; [2013] 3 NZLR 650, at [107]-[120].

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[1] Her Majesty’s Revenue and Customs.

[2] (1874) LR 9 Ch App 609

[3] Lehman Brothers Australia Limited (in liquidation) (scheme administrators appointed) v MacNamara and others [2020] EWCA Civ 321.

[4] See AFSA’s IGPD 14 – Proper performance of duties of a bankruptcy trustee.

 

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