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Permission to make a second appeal to the court of appeal- test for permission by a bankrupt pursuant to s 304 Insolvency Act 1986- test to introduce new evidence on a second appeal.
Section 304 of the Insolvency Act 1986 provides:
‘(1) Where on an application under this section the court is satisfied-
(a) that the trustee of a bankrupt's estate has misapplied or retained, or become accountable for, any money or other property comprised in the bankrupt's estate; or
(b) that a bankrupt's estate has suffered any loss in consequence of any misfeasance or breach of fiduciary or other duty by a trustee of the estate in the carrying out of his functions,
the court may order the trustee, for the benefit of the estate, to repay, restore or account for money or other property (together with interest at such rate as the court thinks just) or, as the case may require, to pay such sum by way of compensation in respect of the misfeasance or breach of fiduciary or other duty as the court thinks just. This is without prejudice to any liability arising apart from this section.
(2) An application under this section may be made by the official receiver, the Secretary of State, a creditor of the bankrupt or (whether or not there is, or is likely to be, a surplus for the purposes of section 330(5) (final distribution)) the bankrupt himself. But the leave of the court is required for the making of an application if it is to be made by the bankrupt or if it is to be made after the trustee has had his release under section 299. ...'
‘I regret to say that Mr. McGuire has become obsessive about this litigation and cannot be trusted to conduct it proportionately or properly.'
1. These were the words of Lewison J hearing an appeal from a district judge who had decided not to permit Mr. McGuire to bring proceedings against his trustee-in-bankruptcy (‘TIB'). On an oral application to bring a second appeal to the Court of Appeal Lord Justice Laws said:
‘The history of this case, and the voluminous documents generated by Mr. McGuire with which we have been supplied demonstrate that Mr. McGuire has a very strong sense of grievance and has been pursuing a very long campaign against the trustee because he considers that he should never have been made bankrupt in the first place and then considers, without evidential justification, that the trustee has wrongly dissipated his estate.'
2. This story may sound familiar to all those who work in personal insolvency. The TIB is likely to view his appointment with regret. His time costs were £30,000. In addition he had incurred £15,000 of costs in defending proceedings brought against him by Mr. McGuire. The TIB had received £16,900 which was approved by creditors and a further £2,000. He had not been able to enforce any of the cost orders made against Mr. McGuire and there was no further money in the estate to pay the remainder of his fees or disbursements.
3. Mr. McGuire was adjudicated bankrupt on 14 November 1996. The TIB was appointed shortly after; the actual date is not disclosed in the law report. Since his appointment Mr. McGuire continually challenged both the bankruptcy order and the conduct of the TIB.
4. The principal assets of Mr. McGuire's estate comprised a number of income producing properties. In addition, after the bankruptcy order, his sister died and Mr. McGuire was the residuary beneficiary under her will. His sister jointly owed two further properties. The TIB claimed his interest in the residuary estate as after acquired property.
5. In December 2006 Mr. McGuire launched four applications which were heard by District Judge Sparrow in the Norwich County Court:
5.1 An application to remove the TIB.
5.2 An application pursuant to s 363 of the Insolvency Act 1986 (the ‘1986 Act') to review the TIB's administration of Mr. McGuire's late sister's estate.
5.3 An application pursuant to s 303 of the 1986 Act for an order reversing all acts, omissions and decisions of the TIB.
5.4 An application pursuant to s 304 of the 1986 Act requiring the TIB to pay to Mr. McGuire's bankruptcy estate the proper value of 8 income producing properties which he alleged had been ‘squandered' by the TIB (the ‘section 304 application').
6. The court ruled that first application was bound to fail on the grounds that the TIB had already vacated office and been released. The second application was found to be hopeless. The TIB did not administer his late sister's estate.
7. The third and fourth applications required consideration and in particular the s 304 application however the district judge dismissed all applications having found they were without substance.
8. Mr. McGuire appealed and acted in person.
The first appeal
9. On appeal Lewison J considered that the main argument in relation to all applications was that arising from the s 304 application. He considered the district judge's reasoning wrong. The district judge had treated the relevant question on the s 304 application as turning on whether Mr. McGuire could establish a reasonable case that his clams would result in a surplus to the estate. The district judge relied on an earlier ruling by Master Teverson that the claims would not be sufficient to provide a surplus. Lewison J thought that the district judge should have arrived at his own conclusions on the issue and because he had not done so, he had erred in principle. He therefore granted permission to appeal. Lewison J said:
‘In giving permission to appeal I said that in making his appeal, Mr. McGuire would have to persuade the appeal judge...court, that he has a real prospect of turning the shortfall into a surplus.'
10. As a result Lewison J set about analysing the value of the claims and deficiency in the estate:
‘....in my judgment the real question is whether Mr McGuire has a real prospect of succeeding in recovering £85,000 or more.'
11. He found that there was no real prospect of recovering £85,000 or more and dismissed the appeal.
The second appeal and the test for section 304 application
12. Mr. McGuire applied for permission to appeal (out of time) to the court of appeal. He drafted the grounds of appeal himself and applied to the Bar Pro Bono Unit for assistance. Counsel volunteered to represent him bringing ‘focus to the appeal'.
13. The authority that governs an application for permission is Brown v Beat  BPIR 421. In that case Mr Brown was declared bankrupt and the trustee-in-bankruptcy sold assets including a house and a shop/office with a flat above. Mr. Brown alleged that the sales were at an undervalue and therefore made in breach of duty. Mr. Brown was subject to an extended Grepe v Loam (1887) 37 Ch D 168 order but wished to issue an application under ss 303 and/or 304 of the Insolvency Act 1986 against his trustee-in-bankruptcy. Mr. Brown needed permission. Hart J said:
‘The factors which the court must bear in mind in deciding whether or not to grant permission, are first, whether or not a reasonably meritorious cause of action has been shown, and secondly whether giving permission for its prosecution is reasonably likely to result in a benefit to the estate.'
14. It was argued on behalf of Mr. McGuire that Lewison J should have applied a two staged test only: was the claim reasonably meritorious and if so is it reasonably likely that the litigation would result in a benefit to the estate. He should not have decided the appeal on the basis that Mr. McGuire had not real prospect of turning the shortfall into a surplus.
15. The court of appeal agreed that Lewison J had proceeded on the basis of a wrong interpretation of the requirements of s 304(2) of the 1986 Act.
16. There are no exclusive criteria by reference to which an application by a bankrupt under s 304(2) of the 1986 Act should be judged. The factors that Hart J set out were important and could be used. Nevertheless each case was fact sensitive and the court would have regard to the policy behind the requirement for permission: to apply a filter due of the risk of vexatious litigation by a bankrupt.
17. Accordingly the test for permission is wider than just asking is the litigation meritorious and is it reasonably likely that it will result in a benefit to the estate. Although it must be implicit that a court could take into account potential defences when deciding a s 304 application the court of appeal expressly said that it was permissible to do so.
18. Mr. McGuire through his counsel sought to introduce fresh evidence to the court of appeal. The evidence related to the value of a property disposed of by the TIB. It was argued the evidence should be admitted as it demonstrated that Mr. McGuire had a meritorious claim and good prospects of success. It was asserted that Mr. McGuire did not adduce the evidence at an earlier stage because he was impecunious and could not afford an expert valuation report. The court of appeal refused the admission of new evidence:
‘Although Ladd v Marshall does not now necessarily embody a complete set of principles applicable to adducing fresh evidence on appeal, it nonetheless embodies very relevant factors. Of particular significance in this case are the first two requirements- the extent of which the evidence could or could not have been obtained with reasonable diligence for use at the principal hearing, and the requirement that the evidence must have some important influence on the result of the case, though it need not be decisive.'
19. The Court of Appeal was not impressed. The court commented that the lack of means was not compelling and in any event Mr. McGuire did not provide evidence of lack of means at the material time.
20. The Court of Appeal found that the Mr. McGuire's case was without merit, new expert evidence would not be admitted rendering Mr. McGuire unable to support his contention that the TIB sold the assets at an undervalue; any claims ‘would not yield any or any worthwhile fruit', and in any event Mr. McGuire could not be trusted to pursue the litigation properly.
21. In order to conclude matters the Court of Appeal allowed the appeal out of time but refused permission to appeal because even applying the right test Mr. McGuire's appeal would have no real prospects of success.
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