Where a trustee in bankruptcy comes to the final distribution stage, governed by s.330 of the Insolvency Act 1986 ('1986 Act'), and there is a surplus of funds, s.330(5) sets out that the bankrupt is entitled to that surplus[1]. But prior to that point, does the bankrupt have any entitlement to that surplus? In other words, in the interim period, between: (a) the bankruptcy order being made, and (b) the surplus, both its existence and quantum, being ascertained, does the bankrupt hold an interest / a proprietary claim, to the unascertained surplus, if any?

This article will consider this question, in light of the cases of: (1) Bird v Philpott [1900] 1 Ch 822 ('Bird'), Farwell J (27 March 1900); (2) Ram v Ram [2004] EWCA Civ 1684; [2005] 2 FLR 75; [2005] BPIR 628 ('Ram'), Court of Appeal (Thorpe LJ; Arden LJ; Neuberger LJ) (16 November 2004); (3) Phillips v Symes [2005] EWHC 2867 (Ch); [2006] BPIR 1430 ('Phillips'), Peter Smith J (3 October 2005); (4) James v Rutherford-Hodge [2005] EWCA Civ 1580; [2006] BPIR 973 ('James'), Court of Appeal (Chadwick LJ; Dyson LJ; Smith LJ)(27 October 2005); (5) KK v MA [2012] EWHC 788 (Fam); [2012] BPIR 1137 ('KK'), Charles J (29 March 2012); (6) Oraki v Bramston [2014] BPIR 1374 ('Oraki 1374'), Deputy Master Julia Clark; and (7) Oraki v Bramston [2016] 3 WLR 1231('Oraki 1231'), Proudman J (15 July 2015)[2]; (8) Brake v The Chedington Court Estate [2023] UKSC 29, [2023] 1 WLR 3035 ('Brake 2023'), Supeme Court (Lord Richards gave the only judgment - with whom Lord Briggs, Lord Hamblen, Lord Leggatt and Lady Rose agreed) (10 August 2023). For those short on time, there is a summary at the end of the article.

After ascertainment - Section 330(5) of the Insolvency Act 1986 - Destination for any surplus

At the end of the administration of a bankrupt estate, s.330 of the 1986 Act will apply, entitled 'Final Distribution'. Section 330(1) to (5) provide:

'(1) When the trustee has realised all the bankrupt’s estate or so much of it as can, in the trustee’s opinion, be realised without needlessly protracting the trusteeship, he shall give notice in the prescribed manner either-

(a) of his intention to declare a final dividend, or

(b) that no dividend, or further dividend, will be declared.

(1A) A notice under subsection (1)(b) need not be given to opted-out creditors.

(2) The notice under subsection (1) shall contain the prescribed particulars and shall require claims against the bankrupt’s estate to be established by a date (“the final date”) specified in the notice.

(3) The court may, on the application of any person, postpone the final date.

(4) After the final date, the trustee shall-

(a) defray any outstanding expenses of the bankruptcy out of the bankrupt’s estate, and

(b) if he intends to declare a final dividend, declare and distribute that dividend without regard to the claim of any person in respect of a debt not already proved in the bankruptcy.'

After s.330(4) has been completed, there may be a surplus of funds left over in the bankrupt estate. Section 330(5) deals with this, and provides that:

'If a surplus remains after payment in full and with interest of all the bankrupt’s creditors and the payment of the expenses of the bankruptcy, the bankrupt is entitled to the surplus.'.

Accordingly Parliament has provided that if there is any surplus, then the bankrupt shall be entitled to that surplus. In other words, the bankrupt, at this point, has a right to a share in the final distribution, the surplus left over.

Pending ascertainment - what interest, if any, does the bankrupt have?

So far, the bankrupt's position is clear and is governed by express statutory provisions. What the statute does not deal with, is what, if any interest, does the bankrupt hold, prior to the ascertainment following the trustee in bankruptcy ('TIB') completing s.330(4). Prior to this point, does the bankrupt hold any right or interest in the surplus? That is, prior to it being ascertained that there will be a surplus, and indeed, the quantum of that surplus?

While for a time, the case law was unsatisfactory, the position may said to be clear now from Ram and Brake 2023 (see summary below). Previously, case law was unsatisfactory because of a core failure in certain later authorities, to refer to earlier authorities. This was, presumably, a failure of counsel to cite all the earlier authorities in the later cases. Only in Ram does there appear to have been a full citation of earlier authorities. The judgments in Ram don't set out quite what authorities were cited, but the strong impression is that it was extensive[3]:

(1) Bird was not expressly referred to in Ram (though may have been in argument); Ram was not referred to in Phillips; neither Bird, Ram, nor Phillips was referred to in James; only Bird (wrongly referred to as Jones v Philpott [1900] 1 Ch 822) and Phillips, but not Ram or James, were referred to in KK. Oraki refers to Bird, Phillips and James, but not Ram nor KK.

(2) Ram (Court of Appeal) was decided before Phillips, but it was not, apparently, cited to Peter Smith J in Phillips , so Peter Smith J's decision in in Phillips is rendered per incurium.

This article will look at how the unsatisfactory case law progressed, but as stated, for those looking for the final position, reference should be made to the summary.

Because Bird and Phillips follow the same approach, it is convenient to discuss those first, before back-tracking to the Ram.

CASE LAW

Bird

In Bird, Farwell J considered a case under the Bankruptcy Act 1883 (now superseded), wherein (to simplify) a Mr Templeman had been adjudged bankrtupt, and while undischarged, he acquired 3 sets of properties (subject to certain charges). He was then made adjudged bankrupt for a second time. There was therefore a first TIB (over the first bankrupt estate) and a second TIB (over the second bankrupt estate). It was common ground that the after acquired 3 sets of properties, if they belonged to the first TIB, the result would be that the first bankrupt estate  would have a surplus. The parties in the litigation were the both TIBs as defendants, with the claimant (then plaintiff) being a person who lent money to Mr Templeman to buy the properties (so before Mr Templeman was made bankrupt for a second time). What title did the second TIB get of this surplus. The second TIBs contended that '...such surplus never belonged to the debtor in such a way that he could deal with it to the exclusion of the trustee in the second bankruptcy.' (828) on the basis that all the debts in the first bankruptcy had not been paid and the surplus has been ascertained.

In support of this proposition, the second TIB sought to rely upon: (1) Ex parte Sheffield/ In re Austin 10 Ch. D. 434; and (2) in Re Leadbitter 10 Ch. D. 388. However, Farwell J disagreed that any such proposition was set down in those cases. Farwell J said, at 828:

'It has been said that Ex parte Sheffield, In re Austin, and In re Leadbitter decided that a bankrupt cannot deal with the possibility of surplus until all the debts in the first bankruptcy have been paid and the surplus has been ascertained. I do not think that these decisions decided anything to that effect at all. If they did, they would have overruled prior decisions - of the Lord Chancellor amongst others - which were not referred to and they would be, in my opinion, contrary to the whole spirit and principles on which the Bankruptcy Act is now built.'

He continued, at 828:

'As I read the Bankruptcy Act, the trustee takes all the bankrupt's property for an absolute estate in law, but for limited purposes, namely, for the payment of the creditors under that bankruptcy, and that bankruptcy only - payment of principal and interest, and all the costs of the bankruptcy. Subject to that, he is a trustee for the bankrupt of the surplus. He as a trustee is in a better position than an ordinary trustee to the extent pointed out in Ex parte Sheffield, In re Austin, and In re Leadbitter, that is to say, the bankrupt has not the ordinary right of a cestui que trust to intervene until the surplus has been ascertained to exist, and all the creditors and interest and costs have been paid. He cannot trouble the trustee by taxing the bill of costs or interfere with the administration of the estate in any way, but, subject to that and subject to his non-interference with the administration and with the management of the trustee during the bankruptcy in the due course of the execution of his duty, he can, in my opinion, demand the surplus, and he has a right to the surplus - a right which he can dispose of by will or deed or otherwise during the pendency of the first bankruptcy, even before the surplus is ascertained, although such disposition will of course be ineffectual unless in the event there prove to be a surplus upon which it can operate.'[4] [bold added]

After dealing with a different point, Farwell J said, at 830:

'In my opinion the trustee in the second bankruptcy has no claim to any part of the surplus which the bankrupt has effectually dealt with. He can only take the property of the bankrupt at the time of the second receiving order. What that property is depends on what the bankrupt has done with it between the date of the first order and the date of the second order, and if and so far as the bankrupt has effectually dealt with it, then, in my judgment, it is not property of the bankrupt which can pass to the trustees in the second bankruptcy.'[5]

Phillips

In Phillips, a Mr Symes was adjudged bankrupt in 2003. In 2005, Mr Symes (the 'bankrupt') failed in his defence to a claim brought against him, and he was ordered to pay an interim payment of c.£2,300. The bankrupt did not pay that sum and the judgment creditors applied for charging order over the bankrupt respondent judgment debtor's surplus, as might arise [6], from the bankrupt's bankrupt estate (the administration of the bankrupt estate being complex and still ongoing in 2005 (paragraph 2)). 

While the bankrupt did not participate in the charging order proceedings, the bankrupt's joint TIBs objected to the applicant judgment creditors' interim charging order being made into a final charging order, and contended the interim charging order should be discharged. The joint TIBs primary argument was that 'there is no interest that is capable of being charged' (paragraph 3), until there was an ascertainment, the bankrupt held no surplus or interest in a surplus, capable of being made subject to a charging order (an equitable charge), on the basis there was no certainty that there would be a surplus. Subsequently, for financial reasons[7], the joint TIBs did not attend the court hearing, to pursue their objection. 

Peter Smith J granted the application and made the interim charging order into a final charging order. Though withdrawn, Peter Smith J went into the joint TIBs' objection. 

(1) Peter Smith J said, it had been a matter of obligation upon the applicants, to have served the charging order application, upon the joint TIBs (rather than as merely a matter of courtesy, as the applicant had described it as). The rational being that the applicants '...were seeking to say that the trustees held a surplus upon trust for the claimants...' (paragraph 3)

(2) Peter Smith J recorded the joint TIBs primary argument, in more detail, at paragraph 3:

'Their primary argument is that there is no interest that is capable of being charged. That is on the basis that there is no certainty that there will be a surplus and until there is an ascertainment that there is a certainty of a surplus no interest arises under the trust and, therefore, no charging order can be made because there is no property capable of being charged before that ascertainment. Therefore the trust fails one of the three basic certainty requirements, it is submitted, and as the claimants seek to charge the property of the surplus under s.2(1)(a)(ii) of the Charging Orders Act 1979 on the basis that it is trust property; if there is no trust there can be no charge. It was also submitted by [solicitors for the joint TIB] that there was no authority on this point.'

(3) As to this argument, Peter Smith J said, at paragraph 5 'I am quite satisfied that [solicitors for the joint TIB]'s stance is misconceived.' Peter Smith J set out the law, in two substantial paragraphs, paragraphs 6 to 7:

'The starting point is s.330(5) of the Insolvency Act 1986, which enshrines the principle which has long been in the insolvency law of a bankrupt individual, that if there is a surplus after payment in full and with interest of all the bankrupt's creditors, and the payment of the expenses of the bankruptcy, the bankrupt is entitled to the surplus. It is long established and acknowledged that the trustee in bankruptcy holds the surplus upon trust to give effect to that provision. It might be that when the final account is taken that there is nothing, but it does not, in my view, lead to the conclusion that until there is an ascertainment that there is nothing or there is something, there is nothing that is property for the purposes of the Charging Orders Act 1979. One can test it by an easy example. If [solicitors for the joint TIB]'s argument was correct and the applicants in this case had, for example, petitioned for a second bankruptcy based on the non-payment of the monies which were out with the first bankruptcy, there would be a second bankruptcy. The applicants would prove in that second bankruptcy that on [solicitors for the joint TIB] arguments any surplus not then ascertained would not vest in the second trustee in bankruptcy because it is not trust property for the purposes of the section, so it cannot vest in the trustee in bankruptcy of the second bankruptcy. Then the second bankruptcy would be discharged and [the bankrupt] would then be released from the debt on which the second bankruptcy were based, and if a surplus was then found under the first bankruptcy he would then have that surplus (because it then vests in him) free from the claims in the second bankruptcy. It seems to me that it would be a bizarre result if that was the law.

I am quite satisfied that it is not the law and the clearest indication of that is the decision of Mr. Justice Farwell in Bird v Philpott [1900] 1 Ch.822. I do not propose to set out the facts of that case, but, in my judgment, they are precisely the same as the present dilemma, save that here the charging order which operates involuntarily as an equitable charge underhand, whereas in the Bird v Philpott case there was a voluntary charge given. Nevertheless, the same arguments were put up at the suggestion of a second bankruptcy, that the charge was ineffective because until ascertainment there was no interest that was capable of being charged in respect of the bankrupt's surplus. Mr. Justice Farwell dismissed those arguments and I refer, for the purpose of the transcript, to his judgment at p.828 starting at:

“He cannot trouble the trustee by taxing the bill of costs or interfere with the administration of the estate in any way, but, subject to that and subject to his non-interference with the administration and with the management of the trustee during the bankruptcy in the due course of the execution of his duty, he can, in my opinion, demand the surplus, and he has a right to the surplus - a right which he can dispose of by will or deed or otherwise during the pendency of the first bankruptcy, even before the surplus is ascertained, although such disposition will of course be ineffectual unless in the event there prove to be a surplus upon which it can operate.” [bold added]

Peter Smith J fortified this with a further passage from Farwell J in Bird v Philpott[8].

Bird and Phillips

Following this line of authority, the law appears to be that, pending the final bankruptcy distribution ascertainment, the bankrupt holds a property right in the unascertained surplus from the bankrupt estate, which he can deal with pending the final bankruptcy account. He can charge it, dispose of it by will or deed, or otherwise deal with it. It would fall into a second bankrupt estate, if he were to be made bankrupt for a second time.

However, the Court of Appeal in Ram, held that pending the final bankruptcy distribution ascertainment, the bankrupt does not hold a property right in the unascertained surplus from the bankrupt estate.

Ram

In Ram, there was 1 relevant[9] property - No.11 Westfield Road ('Westfield') and a husband and wife. The essential facts were that, in 1990, the husband bought Westfield with some family members (brother/father - not the wife). In about August 1998, the husband is adjudged bankrupt (paragraph 1). The husband's beneficial interest in Westfield fell into the bankrupt estate and vested in his trustee in bankruptcy ('TIB'). The bankrupt estate was not administered very expeditious, and was ongoing when, in May 2002, divorce proceedings commence between the husband and the wife. The husband and wife reach a settlement of the ancillary relief proceedings (now called financial provision proceedings), which the family judge made into a final order. However, the Judge (wrongly, as the Court of Appeal later went on to hold) went on to add immediate enforcement provisions to the order (paragraphs 5 and 17). Those provisions provided for the sale of Westfield (paragraph 18), a property in which, the Court of Appeal held, neither the wife nor husband held 'any current interest' (paragraph 19), the 'husband's interest in the property being vested in the [trustee in bankruptcy]' (paragraph 19). But the power purportedly used to make that order for sale of Westfield, relied upon at least one of the husband or wife, holding a beneficial interest in that property. This purportedly used power was contained in section 24A of the Matrimonial Causes Act 1973, with subsection (1) providing:

'Where the court makes under section 23 or 24 of this Act a secured periodical payments order, an order for the payment of a lump sum or a property adjustment order, then, on making that order or at any time thereafter, the court may make a further order for the sale of such property as may be specified in the order, being property in which or in the proceeds of sale of which either or both of the parties to the marriage has or have a beneficial interest, either in possession or reversion.'

The issue therefore on the appeal was: how had the s.24A(1) pre-condition (being property in which at least one of the parties has or have a beneficial interest) been satisfied where neither held a beneficial interest in Westfield (wife never had one; husband's had vested in the TIB)?

Thorpe LJ said, at paragraph 27:

'The court's power under section 24A(1) is a power restricted to property in which either or both of the parties has or have a beneficial interest either in possession or reversion. Plainly the wife had no interest of any sort in [Westfield]. The presentation to the judge that the husband had a beneficial interest in possession or reversion simply ignored the effect and consequence of the outstanding bankruptcy order. The reality was that the interest vested in the trustee and the extent of the husband's potential interest had to await the completion of the process of insolvency and the determination of whether or not there was any surplus. Such an interest could not properly be described as a present beneficial interest either in possession or reversion. [Counsel for the bankrupt/appellant] has produced an erudite skeleton argument in which he has referred to a number of 19th Century authorities, some of which he suggests are conflicting. He says that they should all be reviewed and some condemned by this court. However, both my Lady and my Lord are much more learned in this field of law than I am and my Lady will say more on this topic in due course. In particular she will refer to modern authority which makes it plain that it is unnecessary to pursue the resolution of the conflict which [Counsel for the bankrupt/appellant] suggests exists amongst the earlier authorities.' [bold added]

Arden LJ (the only lady justice in the appeal court) gave the next judgment. She went into the issue in much more detail:

(1) Upon the husband's bankruptcy order, section 306 of the 1986 Act applied, with the bankrupt estate vesting in the TIB[10]. Arden LJ said, at paragraph 38:

'Because of the statutory vesting under section 306(1) it cannot be said that a bankrupt retains the beneficial interest which he had immediately before the bankruptcy. Moreover, the automatic discharge does not affect this position.'

This dealt with a narrow question of whether, notwithstanding the husband's bankruptcy (and discharge from bankruptcy), he remained holding the beneficial interest in Westfield. The husband did not.

(2) turning to the wider question, which is the focus of this article, Arden LJ:

(a) posed the question 'Can it, however, be said that the bankrupt thereafter retains a beneficial interest in the property because there may be a surplus at the end of the day because the property in question may not need to be sold?'' (paragraph 40), noting that the first instance judge had '...thought that a bankrupt does retain such an interest.' (paragraph 40)

(b) noted, in relation to the facts in Ram, the bankruptcy was '...nowwhere near its conclusion' (paragraph 35), because there remained a number of uncertainties still be resolved, before the bankruptcy could be fully administered. However, the husband's TIB felt able to accept that 'there may be a small surplus in due course' (paragraph 35);

(c) noted s.330(5) provides the bankrupt with his right to the surplus, but observed:

'However, that provision does not of itself suggest anything more than a conditional interest - that is an interest that is conditional on a surplus being found to exist after the payment in full and with interest of all the debts and the payments of the costs, charges and expenses of the bankruptcy.' (paragraph 41)

(3) Arden LJ then set out her conclusions. She held that:

'In my judgment, a mere contingent interest of this nature is not within section 24A(1). However, it is not necessary to go this far as it is, in my judgment, clear that the interest of a bankrupt in a surplus is not an interest in property at all until the surplus has been finally determined.' [bold added] (paragraph 42)

'So far as assets held by a [TIB] following a person's bankruptcy are concerned, the bankrupt, or if there has been a discharge, the former bankrupt, has no present entitlement to anything until a surplus is established.' (paragraph 38)

In reaching this conclusion, Arden LJ based her reasoning on parts of Lord Diplock's speech in Ayerst (Inspector of Taxes) v C & K (Construction) Ltd [1976] AC 167 ('Ayerst'), a corporate insolvency case, where a statutory trust was found to exist, having the attribute that, no particular person who held any beneficial interest in the assets in the statutory trust (at least until final account/ascertainment):

(a) Arden LJ was able to base her reasoning on Lord Diplock's reasoning, because, when Lord Diplock in Ayerst was reaching his decision on a corporate insolvency point, he (rather helpfully) set out what he considered the position to be in bankruptcy law. Arden LJ in Ram said:

'Lord Diplock ... cites the position in bankruptcy as a further example of phenomenon, that is of a situation where one person, the “trustee”, has a legal but not beneficial interest but it cannot be said that any other particular person has any beneficial interest in the assets.' (paragraph 42)[11]

(b) Lord Diplock in Ayerst held that unsecured creditors do not have a beneficial interest in the unadministered assets of a company in liquidation. Arden LJ said, at paragraph 43:

'In my judgment, it was an essential part of Lord Diplock's reasoning that the beneficial ownership of property of a bankrupt is neither in the bankrupt nor in the creditor of the bankruptcy while the assets still remain unadministered. No interest in that property can accrue until it can be said with certainty what the creditors are entitled to receive. Assuming that the bankruptcy is being properly administered, that will rarely be until immediately prior to distribution.

(c) extending the logic, and applying this to bankrupts, Arden LJ said:

'Lord Diplock does not specifically deal with the position of the bankrupt himself. However...it would be touching on absurdity if you could say that a bankrupt has an interest in the surplus while the creditors have no such interest.' (paragraph 43)

Drawing the strings together, Arden LJ concluded, at paragraph 44:

'...in my judgment, any doubt on the position has been resolved by Ayerst. Until the surplus in [the husband's] bankruptcy is finally ascertained it cannot be said that he has any beneficial interest in the property.'

Neuberger LJ agreed with judgments to both Thorpe LJ and Arden LJ (paragraph 50).

James

In James, Mr Hodge and another owned a property. In 1992, they transferred it to the claimant. In 1999, Mr Hodge was adjudged bankrupt and subsequently Mr Hudson was appointed as TIB. Mr Hodge and another continue to live in the property, and in 2003, the claimant issued a claim seeking an order that Mr Hodge and another must give vacate possession to the the claimant. Mr Hodge resisted, on the basis he was the sole beneficial owner. At least he was, until his beneficial interest vested in Mr Hudson. The first instance judge held that, Mr Hodge held no beneficial interest in the property, only a lien for c.£21,000, which now resided in the bankrupt estate. 

Mr Hudson did not wish to appeal this determination, but Mr Hodge did appeal. The issue was, did he have standing to appeal. The Court of Appeal dismissed his appeal on the basis that, following Heath v Tang [1993] 1 WLR 1421, he had no standing to pursue the appeal. 

At paragraph 12 and 13, Chadwick LJ said:

'On a true analysis the position is this. The appointment of Mr Hudson as trustee in bankruptcy - following the making of the bankruptcy order ... - had the effect that the bankrupt's estate vested in Mr Hudson pursuant to section 306 of the Insolvency Act 1986. Whatever interest Mr Hodge might have had in [the property] as beneficiary under a trust immediately before the appointment of his trustee in bankruptcy, his interest thereafter was to have the estate administered in accordance with the bankruptcy code and to share in any final distribution under section 330(5) of the Insolvency Act 1986. Mr Hodge retained no beneficial interest in individual assets in the estate; and his right to share in the final distribution would arise only if there were a surplus after payment in full and with interest of all the creditors in the bankruptcy and the payment of the expenses of the bankruptcy.

That right has not yet arisen.' [bold added]

Does this support Ram? In the author's view:

(a) most of this is unremarkable. For instance, the reference to vesting pursuant to s.306 of the 1986 Act, and the reference to the the bankrupt (Mr Hodge) having retained no beneficial interest in individual assets in the estate. The bankrupt claimed to hold a beneficial interest in the property, in order to found his defence, but that was wrong because the beneficial interest had clearly vested in the TIB. But an interest, a right, in any general surplus in the bankrupt estate, is distinct from a bankrupt having an interest in specific individual assets in the bankrupt estate, prior to ascertainment.

(b) arguably also, the words 'interest thereafter was to have the estate administered in accordance with the bankruptcy code and to share in any final distribution under section 330(5) of the Insolvency Act 1986.... his right to share in the final distribution would arise only if there were a surplus after payment in full and with interest of all the creditors in the bankruptcy and the payment of the expenses of the bankruptcy.' warrant further analysis, but are also relatively unremarkable. When Chadwick LJ refers to 'right to share in the final distribution', he is simply referring toa  'share in any final distribution under section 330(5) of the Insolvency Act 1986' - which is a statutory right, which does only arises when the pre-conditions in s.330(5) are satisfied. This is unremarkable. It does not deal with whether there exists a property right, pending s.330(5) pre-conditions being satisfied, held by the bankrupt, not in in any individual pieces of property in the bankrupt estate, but in the unascertained surplus, if any, due to the bankrupt under s.330(5). In other words, Chadwick LJ says nothing about the existence and nature of the surplus, in particular, prior to ascertainment. He does not say, pending ascertainment, there is no property interest held by the bankrupt, in respect to the surplus, within a statutory trust structure.

Overall, James is consistent with Ram, but it is arguable whether it actually supports it, rather than simply not saying anything on the key point.

Ram and James

Pausing there, the law from Ram (and perhaps James) is that the bankrupt, pending s.330(5), has no property right in the surplus from the bankrupt estate.

However, the next authority is KK, which cites Bird (as Jones v Philpott [1900] 1 Ch 822) and Phillips, and reverts to the position that the bankrupt has an interest in the surplus, which the bankrupt can deal with - can charge.

KK

In KK, a husband held the beneficial interest in certain shares in a company and his sister held legal title to the shares. Subsequently, the husband was adjudged bankrupt. The issue was whether the beneficial interest vested in the Official Receiver. Charles J explained how he viewed the law, at paragraphs 28 and 29:

'The statutory vesting covers beneficial interests in shares and is for a statutory purpose. The result is that the trustee in bankruptcy holds those assets (and their product) for that purpose and that if and when there is a surplus he holds that on trust for the purpose of giving effect to the bankrupt's entitlement to the surplus (see s. 330(5), Jones v Philpott [1900] 1 Ch 822 and Phillips v Symes [2005] EWHC 2867 (Ch), [2006] All ER (D) 16 (Oct), [2006] BPIR 1430).

The effect of that combination is that the bankrupt has an interest in the surplus that he can deal with (e.g. charge) see Phillips v Symes. The surplus is identified as and when all debts, interests and costs have been paid, until then the trustee in bankruptcy holds the estate of the bankrupt and its product to perform his statutory task, and so effectively on a purpose trust.

It follows that, any dealings of the bankrupt with the surplus crystallises when it is identified and, before that, the trustee in bankruptcy can deal with the assets vested in him and their product as he thinks fit in the performance of his statutory task.'

However, KK does not cite Ram or James, and so is per incurium of those authorities.

Oraki

Last in this analysis of the authorities, are the two Oraki authorities.

(1) In Oraki 1374, Deputy Master Julia Clark, under the subheading 'Whether the claimants owed any duties to the defendants' said, at paragraphs 14 and 15:

'The primary duty of a trustee in bankruptcy is to get in, realise and distribute the bankrupt’s estate in accordance with the statutory scheme provided for by the Insolvency Act 1986: s 305(2). For this purpose (and subject to certain exceptions) the bankrupt’s property vests in the trustee on his appointment: s 306. Where a surplus remains after payment in full of the creditors and the expenses of the bankrupt, s 330(5) provides that the bankrupt is entitled to the surplus.

However even where, as here, it is clear that there will be a surplus, the bankrupt’s right is to have the estate administered in accordance with the statutory code: James v Rutherford-Hodge [2005] EWCA Civ 1580, [2006] BPIR 973, para [12]. It is only once that has been done and the surplus has been ascertained that the trustee can be said to hold the surplus on trust for the bankrupt. In this case, that has not occurred, so that although the claimants have an interest in their respective estates, they have no real prospect of arguing that they have a ‘reversionary/beneficial’ interest.'

Deputy Master Julia Clark was appealed successfully, but the deputy High Court Judge, Mr Nicholas Strauss QC, that allowed the appeal, did not directly criticise this view.

(2) In Oraki 1231, Proudman J said, at paragraphs 30 to 32, and 34:

'Bankruptcy case law has long recognised that a trustee in bankruptcy is not a trustee for the bankrupt until it has been established that there is a surplus after payment in full of all the creditors: see Bird v Philpott [1900] 1 Ch 822, 828, In re Leadbitter (1878) 10 Ch D 388, 391, In re A Debtor, Ex parte the Debtor v Dodwell [1949] Ch 236, 240–241 and James v Rutherford-Hodge [2006] BPIR 973, paras 12 and 14.

In James v Rutherford-Hodge [2006] BPIR 973  it was held: see especially Chadwick LJ, at para 12, that the ability of the bankrupt to challenge the actions of the trustee was limited. A bankrupt had no beneficial interest in his property. He merely (subject to his rights to pursue a remedy under section 303(1)) had a right to participate in any surplus once the bankruptcy was concluded with all creditors and expenses paid: see also Heath v Tang [1993] 1 WLR 1421 especially, at p 1424E, per Hoffmann LJ.

[Counsel for bankrupts] relied to the contrary on Phillips v Symes [2006] BPIR 1430, saying that this case had not been cited to the Court of Appeal in James v Rutherford-Hodge [2006] BPIR 973 which was therefore per incuriam. I observe that it would be a brave puisne judge indeed who would make any such finding of per incuriam as he or she will always believe that the Court of Appeal is more likely to be right than he or she is. Most importantly, Phillips v Symes is about charging orders. In that case Peter Smith J applied Bird v Philpott [1900] 1 Ch 822, saying that it was not necessary to wait until a surplus was ascertained before making a charging order, even if no surplus could be ascertained.

...

...the trustee owes a statutory duty to the bankrupt because of section 330(5) of the 1986 Act, at any rate where the estate proves to be solvent: see Hoffmann LJ in Heath v Tang [1993] 1 WLR 1421, 1422G, “The effect is that the bankrupt ceases to have an interest in either his assets or his liabilities except in so far as there may be a surplus returned to him upon his discharge”.'

Brake 2023

In Brake 2023, Lord Richards (with whom Lord Briggs, Lord Hamblen, Lord Leggatt and Lady Rose agreed) said, at paragraph 11:

'The bankrupt has only a contingent statutory right to participate in any eventual surplus after payment in full and with interest of all creditors in the bankruptcy and the payment of the costs and expenses of the bankruptcy, including the trustee's remuneration: James v Rutherford-Hodge [2005] EWCA Civ 1580 at [12] per Chadwick LJ.'

Describing it as only a 'statutory right' very likely closes off any contention that the bankrupt holds, prior to ascertainment, a proprietary right in the unascertained surplus.

SUMMARY

In the author's view, the following points can be made:

(1) the authorities were unsatisfactory in this area. Particularly, Peter Smith J's decision in Phillips being per incurium of the decision in Rams;

(2) But now, seemingly, the position is clear (at least, pretty clear):

(a) In Ram, Arden LJ, with whom the Thorpe LJ and Neuberger LJ agreed, said 'it is, in my judgment, clear that the interest of a bankrupt in a surplus is not an interest in property at all until the surplus has been finally determined.' (paragraph 42) [bold added]; and

(b) In Brake 2023, Lord Richards (with whom Lord Briggs, Lord Hamblen, Lord Leggatt and Lady Rose agreed) said, 'The bankrupt has only a contingent statutory right to participate in any eventual surplus...' (paragraph 11) [bold added].

(3) Until the surplus is finally determined/ascertained, there exists a 'phenomenon' - a statutory trust (Ayerst, at 178) - the TIB holds the bankrupt estate as statutory trustee: (a) not for his own benefit, but (b) for the benefit of others, though there is actually nobody holding the beneficial interest in the bankrupt estate. In particular, the bankrupt does not hold: (a) a beneficial interest in any individual property in the bankrupt estate, by virtue of his s.330(5) right in due course to any surplus in the bankrupt estate; and (b) seemingly, any property/proprietary interest at all, in the yet to be ascertained surplus (if any) of the bankrupt estate; his s.330(5) entitlement does not give the bankrupt a property/proprietary right, prior to the moment his surplus is finally determined/ascertained. This view is supported by Oraki 1374 and Oraki 1231.

(4) It is just about possible to say 'seemingly' however, when making point (2) and for part of (3) above, because:

(a) the question posed by Arden LJ in Ram was 'Can it, however, be said that the bankrupt thereafter retains a beneficial interest in the property because there may be a surplus at the end of the day because the property in question may not need to be sold?'' (paragraph 40) [bold added]. Posing this question, is arguably not quite the same as considering whether the bankrupt, pending s.330(5) conditions being satisfied, holds a property/proprietary interest in the general unascertained surplus of the bankrupt estate (an 'interest in the general surplus'), as distinct from a property / proprietary interest in an individual and particular piece of property within the bankrupt estate. However, against the above, is the fact that Arden LJ said, in the key passage from paragraph 42, that what the bankrupt has, prior to the s.330(5) conditions being satisfied, 'is not an interest in property at all' - she did not say what the bankrupt has 'is not an interest in the property at all' (added word, in bold). Arden LJ said the bankrupt does not hold an interest in property at all - which rules out the bankrupt holding, pending the s.330(5) conditions being satisfied, a property/proprietary interest in the general unascertained surplus - the interest in the general surplus. But it will be recalled that the issue in Ram was whether the pre-conditions in s.24A(1) existed - which was whether either party to the marriage, held a beneficial interest in the Westfield property ordered to be sold. That is not quite the same as asking whether a bankrupt had an interest in a general surplus, unascertained (so it may or may not include the relevant property) - which leads to: if the Ram decision went further than was necessary for the purposes of determining the issue under the appeal, does this mean that, to the extent that the decision was unnecessary (bankrupt holds no property interest at all), that part of her decision was Arden obiter (i.e. non-binding)?

(b) the nature of the unascertained right was not the focus of Brake 2023. The quotation was part of a summary of the background legal position and relies upon the 'only' closing off there also being a (concurrent) property/proprietary right there also.

(5) Though seemingly not the law, there is an obvious attraction to the approach adopted in Bird and Phillips. That is, that the bankrupt, prior to the s.330(5) conditions being satisfied, holds a property/proprietary interest in the general surplus (as distinct of course, from a property/proprietary interest in an individual and particular piece of property in the bankrupt estate) - the 'interest in the general surplus'. As a property / proprietary interest:

(a) the bankrupt can dispose of it, whether by deed or will or otherwise, notwithstanding the 'interest in the general surplus' is in its inchoate / contingent / unascertained phase. In the event that, on ascertainment/determination, it turns out that there is no s.330(5) surplus from the bankrupt estate, then the 'interest in the general surplus' will simply be valueless. But so what? The risk of it being valueless, or not as much (or as little) as anticipated/predicted, can be built into the value put on the 'interest in the general surplus' in the period prior to the ascertainment.

(b) the 'interest in the general surplus' property interest the bankrupt holds, will, if held by the bankrupt when a second/subsequent bankruptcy order is made against the bankrupt, fall into his second/subsequent bankrupt estate, as might be thought proper/as it should be. The picture is not as clear on this where the Ram analysis governs.

(6) While KK reverts to Bird and Phillips approach to the law, it is per incuriam of Ram and James (if material). Both Ram and James are Court of Appeal decisions, whereas Bird, Phillips and KK are all High Court.

(7) In Oraki, Proudman J put emphasis on the fact that Phillips involved charging order ('Most importantly, Phillips v Symes is about charging orders' - paragraph 32). But it would seem odd to attempt to say, that, prior to the s.330(5) conditions being satisfied, the bankrupt holds:

(a) a property interest in the general surplus of the bankrupt estate, for the purpose of imposing charging orders upon it; but

(b) no property interest in the general surplus of the bankrupt estate, otherwise.

Leading text books

Does this match what the leading text books state?

(1) In Sealy & Milman: Annotated Guide to the Insolvency Legislation 26th Ed. 2023, vol 1, in the commentary to:

(a) section 306 of the 1986 Act, the learned authors state:

'The bankrupt retains no immediate beneficial interest in this property until a surplus has been determined - Ram v Ram (No.2) [2004] EWCA Civ 1684; [2005] B.P.I.R. 628. Once the estate has vested in the trustee the bankrupt merely has a contingent right to participate in any eventual surplus that might materialise; that did not confer an immediate beneficial right - on this see James v Rutherford-Hodge [2005] EWCA Civ 1580; [2006] B.P.I.R. 973. The earlier decision of Peter Smith J in Phillips v Symes [2005] EWHC 2867 (Ch); [2006] B.P.I.R. 1430 (on the meaning of s.330(5)) is difficult to reconcile with this view.'

(b) section 330(5) of the 1986 Act, the learned authors state:

'Any surplus goes to the bankrupt. Subsection (5) was considered in Phillips v Symes [2005] EWHC 2867 (Ch); [2006] B.P.I.R. 1430. Here Peter Smith J made the point that the trustee holds the estate on trust for the bankrupt against the possibility of a surplus arising at the end of the day. That being so, an immediate charging order could be granted against the bankrupt’s interest in the potential surplus even before such surplus was ascertained. This case may need to be viewed in the light of the later Court of Appeal ruling in James v Rutherford-Hodge [2005] EWCA Civ 1580; [2006] B.P.I.R. 973 (mentioned in the annotation to s.306 above). On s.330(5) see the judgment of Charles J in KK v MA [2012] EWHC 788 (Fam); [2012] B.P.I.R. 1137 at [28]. On s.330(5) and the link with s.304 see McGuire v Rose [2013] EWCA Civ 429. For comment on s.330(5) see the views expressed by Proudman J in Oraki v Bramston [2015] EWHC 2046 (Ch); [2015] B.P.I.R. 1238.'

(2) in Muir Hunter on Personal Insolvency, vol 1, in the commentary to s.330(5), the learned authors state, at paragraph 3-2158:

'A bankrupt’s entitlement to any surplus that there may eventually prove to be is a species of property that can lawfully be charged or otherwise disposed of by him at any time during the bankruptcy (Bird v Philpott [1900] 1 Ch. 822; Phillips v Symes [2005] EWHC 2867 (Ch); [2006] B.P.I.R. 1430). However, the possibility of a surplus does not entitle the bankrupt to appeal against a judgment regarding property vested in the estate: James v Rutherford-Hodge [2005] EWCA Civ 1580; [2006] B.P.I.R. 973.'

It is therefore a mixed picture on where the leading textbook stand on this issue.

Interim Period - Likelihood of surplus giving bankrupt standing

While not the focus of this article, it might be helpful to note an important point about a bankrupt's standing, arising from the bankrupt's potential to receive the surplus (which somewhat qualifies what Farwell J said in Bird, at 828). The leading case in this area, is Brake 2023, in the Supreme Court.

In Brake 2023, Lord Richards (with whom Lord Briggs, Lord Hamblen, Lord Leggatt and Lady Rose agreed), so far as is relevant:

(1) began his judgment by stating 'This appeal concerns the standing of a bankrupt to challenge the acts, omissions or decisions of the trustee of the bankrupt's estate under section 303(1) of the Insolvency Act 1986.' (paragraph 1);

(2) set out s.303(1) of the Insolvency Act 1986:

'If a bankrupt or any of his creditors or any other person is dissatisfied by any act, omission or decision of a trustee of the bankrupt's estate, he may apply to the court; and on such an application the court may confirm, reverse or modify any act or decision of the trustee, may give him directions or may make such other order as it thinks fit.'

(3) said, at paragraph 7, that section 303 of the Insolvency Act 1986 was expressed:

'...in very broad terms the persons who may apply to challenge a trustee...The express terms are not, however, to be given a literal reading. On both principle and authority, there are limitations on the persons who have standing to apply under these provisions.'

(4) said at paragraph 8, that the section was not '...intended to provide a means of redress to a party with no connection to the bankruptcy ....', before agreeing with (and drawing on) the observation of Peter Gibson LJ in Mahomed v Morris [2000] 2 BCLC 536 at para 26 : “It could not have been the intention of Parliament that any outsider to the liquidation, dissatisfied with some act or decision of the liquidator, could attack that act or decision by the special procedure of section 168(5).”

(5) then said, at paragraphs 9 to 11:

'9. Limitations apply also to bankrupts, creditors and others who are connected with the bankruptcy or liquidation. In accordance with the principles that serve to confine standing under these sections, the authorities have established the following propositions. First, subject to very limited exceptions discussed below, a bankrupt must show that there is or is likely to be a surplus of assets once all liabilities to creditors, and the costs and expenses of the bankruptcy, have been paid. The same is true of a contributory of a company holding fully paid shares, although there has been no decided authority on this point. Second, a creditor will not have standing, except as regards a matter which affects the creditor in its capacity as such. As a matter of principle, this limitation applies also to bankrupts, even when they can demonstrate a surplus. Third, there are other, very limited, circumstances which will provide standing to an applicant, whether or not the applicant is the bankrupt, a creditor or a contributory. So far as the authorities go, those circumstances are confined to cases where the challenge concerns a matter which could only arise in a bankruptcy or liquidation and in which the applicant has a direct and legitimate interest.

10. The general requirement that a bankrupt must show there is or is likely to be a surplus necessarily follows from the structure and purposes of bankruptcy and from the functions and duties of a trustee in bankruptcy. On the making of a bankruptcy order, all property belonging to the bankrupt, with a few exceptions, vests in the official receiver or other trustee of the bankrupt's estate. The property is held by the trustee on a statutory trust to be administered in accordance with the provisions of the IA 1986 and the applicable Insolvency Rules. Section 305(2) sets out the function of the trustee as being “to get in, realise and distribute the bankrupt's estate in accordance with the following provisions of this Chapter [Chapter IV of Part IX]; and in the carrying out of that function and in the management of the bankrupt's estate the trustee is entitled, subject to those provisions, to use his own discretion”.

11. The bankrupt ceases to have any beneficial interest in his former property, now constituting “the bankrupt's estate”. Under the IA 1986, as under its statutory predecessors, “the principle that the bankrupt is divested of an interest in his property and liability for his debts remains fundamental”: Heath v Tang [1993] 1 WLR 1421, 1427, per Hoffmann LJ. The bankrupt has only a contingent statutory right to participate in any eventual surplus after payment in full and with interest of all creditors in the bankruptcy and the payment of the costs and expenses of the bankruptcy, including the trustee's remuneration: James v Rutherford-Hodge [2005] EWCA Civ 1580 at [12] per Chadwick LJ. Unless, therefore, there is or is likely to be a surplus, the bankrupt has no legitimate interest in the administration of the estate. It follows that he lacks standing under section 303(1) to challenge the administration by the trustee of the estate. Parliament cannot have intended the bankrupt to be able to interfere in the administration of an estate in which he has no interest. For a robust exposition of the principle, see the judgment of Harman J in In re A Debtor; Ex p The Debtor v Dodwell [1949] Ch 236, 240–241.' [bold added]

In Tyshchenko v Hyde [2024] EWHC 838 (Ch), Bacon J said, at paragraph 67:

'As explained in [Brake 2023], §§9–11, Parliament cannot have intended a bankrupt to be able to interfere in the administration of an estate in which the bankrupt has no interest. The bankrupt must therefore (in general) show that there is or is likely to be a surplus of assets once all liabilities to creditors and the expenses of the bankruptcy have been paid.'

SIMON HILL © 2024*

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