Case law update

IPA Insolvency Practitioner newsletter, August 2024

An insolvency case law update prepared by Tanya Barrett, Associate Director at Manolete Partners PLC.

Tanya joined Manolete as an Associate Director in July 2018. Before joining Manolete, she was part of the Insolvency team at Moon Beever where she qualified as a Solicitor in September 2010 and largely acted for Insolvency Practitioners. Tanya has experience of a broad range of contentious insolvency matters, including both personal and corporate insolvencies and from low value to multi-million-pound claims.

Sub-postmasters’ payout does not constitute property vested in their Trustees in bankruptcy

Secretary of State for Business and Trade v Abdulali & Anor [2024] EWHC 1722 (Ch) (05 July 2024)

Background

This test case involved sub-postmasters who were victims of the “Horizon” accounting software scandal.  The individuals involved are referred to collectively as “postmasters,” in the Judgment although, the term “sub-postmasters” might be more accurate in many instances (see Note 1 to judgment).  This summary uses the term “postmasters” for consistency with the judgment.

As a result of irregularities and alleged liabilities to Post Office Limited (“POL”) some postmasters were made bankrupt.  A group of postmasters later brought claims against POL following the discovery of serious issues with Horizon.

A compensation scheme under the Group Litigation (GLO) Compensation Scheme (“the GLO Scheme”), was set up by the Secretary of State to compensate those postmasters who were parties to the group litigation (“the GLO Litigation”) against POL.  

The main issue that arose in this case was whether any such compensation constituted “property” under sections s283(1), 306(1) and 436(1) Insolvency Act 1986 (“IA 1986″), and therefore vested in the bankruptcy estates of those discharged postmasters.

The Application

The Application dated 16 October 2023 (“the Application”) specifically concerned those postmasters who had been made bankrupt (albeit subsequently discharged from bankruptcy), and who participated in the GLO Litigation having taken assignments of the relevant causes of action from their respective trustees in bankruptcy.

The Applicant, the Secretary of State for Business and Trade, sought directions from the Court on how compensation payable to postmasters under the GLO Scheme (available to postmasters who were parties to the GLO Litigation against POL) ultimately compromised by a settlement deed dated 10 December 2019, ought to be paid and applied.

The Respondents were the trustees in bankruptcy (“the Trustees”) of Ms Suzanne Lesley Palmer (“Ms Palmer”) and eight others of the relevant postmasters now discharged from bankruptcy.

The Trustees adopted the position that the entitlement to apply for or receive compensation does constitute “property” falling within the bankruptcy estate, alternatively that the effect of the assignments is that the bankruptcy estate is entitled to 49% of any sums received by way of compensation.

The Secretary of State argued that there is no basis, either as a matter of construction of the IA 1986, established precedent, or general principle to say that the proposed post-discharge GLO Scheme compensation payments would form part of the bankruptcy estate; and that the Trustees have no entitlement to share in the compensation proposed to be paid under the GLO Scheme on the proper construction of the relevant assignments.

Effect of the Assignment

In clarifying the application of assignment provisions in this context, HHJ Cawson considered that the language of the assignment did not extend to include compensation claims under the ex-gratia GLO Scheme:

“it unduly strains the language of the Assignment to construe it in the way contended for by the Respondents.  I consider that the reasonable objective observer having all the background knowledge which would have been available to the parties at the time that the Assignment was entered into would have understood the language of the Assignment, and in particular the use of the expressions “action” and “proceedings” in the relevant provisions thereof, as being limited to the pursuit of claims and causes of action against POL, whether by the GLO Litigation or otherwise, and not a claim for compensation made against an ex gratia compensation scheme such as the GLO Scheme set up by the Government to compensate postmasters in the event that the pursuit of the claims against POL failed to produce a fair result.”

He concluded that very much clearer wording would have been required for the assignment to be construed as contended for by the Trustees.

Does the entitlement to the GLO Compensation vest in the Trustees?

HHJ Cawson concluded that the entitlement to claim and receive compensation under the GLO Scheme, and any compensation received under the GLO, does not constitute “property” vested in the Respondents as trustees in bankruptcy of Ms Palmer on a proper application of s.283(1), s.306(1) and s. 436(1) IA 1986; and that Ms Palmer is under no liability pursuant to the Assignment to account to the Respondents for any part of any compensation that she might receive pursuant to the GLO Scheme.

The judge held the definition of property under s436(1) is very “wide in its scope” and there are limits to its definition.  In this case, the claim for compensation under the GLO Scheme was not property and did not “arise out of” or be “incidental” to “property”.

Even if the right to the compensation payments was “property”, it did not exist at the time on the making of the bankruptcy order and therefore did not vest in the trustee in bankruptcy pursuant to section 306 IA 1986.  Further, section 283 IA 1986 which sets out that the bankrupt’s estate comprises “all property belonging to or vested in the bankrupt at the commencement of bankruptcy” is of relevance as the right did not vest in the bankrupt at the commencement of bankruptcy.

Summary

The judgment clarified that compensation under the GLO Scheme was not to be considered as property that vested in the bankruptcy estates of the postmasters as it was not property under the relevant sections for the Insolvency Act 1986.

With reference to the assignment, the judge has indicated that “very clear language” is necessary for it to include something not in the spirit of what was intended to be assigned.

The full judgment can be found here:  https://www.bailii.org/ew/cases/EWHC/Ch/2024/1722.html

Disclaimer: This article provides a general overview of the case and is not intended to be relied upon in place of legal advice.

Content courtesy of IPA corporate partner Manolete Partners PLC.

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