Insolvency Update: “Unfairness” in a binding settlement agreement

Re Young; Allen (trustee in bankruptcy of Young) v Young

The Bankruptcy High Court has held that an agreement, under which the bankrupt agreed to deliver up her share of funds from her deceased husband’s life insurance policy in consideration of the trustee in bankruptcy paying her a sum from those funds, was binding. However, in dismissing the trustee in bankruptcy’s application for relief, the court held he should not, in the interests of fairness, insist on his strict legal rights where to do so would result in a windfall to the bankruptcy estate of a wholly unjustified nature.

What were the facts of this case?

The bankrupt, Mrs Young, was the sole trustee and a beneficiary (along with her daughters) of a trust created by her late ex-husband over the proceeds of a life insurance policy. The trust provided Mrs Young with a 20% share of the fund and her daughters with a 40% share each. However, the interest was defeasible upon the exercise of a power of appointment. Mrs Young exercised this power to make an appointment of 40% of the fund in favour of each of her daughters.

Mrs Young’s trustee in bankruptcy asserted that he was entitled to the remaining 20% and entered into negotiations with Mrs Young through an intermediary. This culminated in Mrs Young agreeing to “assist in signing whatever was required” to realise the remaining 20% of the fund in return for her receiving the sum of £15,000 from the trustee in bankruptcy.

However, Mrs Young then instructed solicitors and failed to sign the draft agreement, clearly having changed her mind. She asserted that the intermediary did not have authority to make an offer and had not done so and, in any event, the trustee in bankruptcy had never been entitled to claim the funds for the estate.

The trustee in bankruptcy made an application to court pursuant to section 368 of the Insolvency Act 1986 for a declaration that there was a binding settlement between him and Mrs Young?

What were the issues?

There were two issues to be decided:

1. Whether there was a binding settlement agreement.
2. If there was a binding agreement, whether the trustee in bankruptcy was entitled to rely on his strict legal rights under that agreement.

As to the first issue, Mrs Young disputed that there was a binding settlement agreement. The court considered the elements needed for a binding agreement and found (1) offer and acceptance (in the form of emails between Mrs Young and the intermediary), (2) consideration (in the form of mutual promises made and/or the compromise of the dispute) and (3) an intention to create legal relations. Therefore, it concluded that there was a binding agreement between the parties.

The second issue arose during the course of the hearing, as a result of a concession by the trustee in bankruptcy, that the remaining funds in the trust did not form part of the estate in bankruptcy and that, but for the alleged agreement, he would have had no claim to them. In response, Mrs Young argued that the principles in Re Condon, ex parte James (1874) 9 Ch App 609 relating to unfairness applied and the trustee in bankruptcy should be prevented from relying on his strict legal rights.

The court agreed with Mrs Young and considered Ex parte James, which has been referred to and developed in several subsequent authorities, including Re Clarke [1975] 1 WLR 559 and Re Lehman Brothers (Europe) [2015] EWHC 2270 (Ch), [2015] All ER (D) 20 (Aug). The key conditions for the rule to apply include:

1. There must be unfairness.
2. There must be some form of enrichment.
3. The claimant must not be in a position to submit an ordinary proof of debt.
4. The claim must have no merit.

The court noted that it was the obligation of an office-holder to get in and realise assets properly available to creditors and make the required distributions from those, not to get in things which never were assets or make distributions from assets that were never properly available to the estate. There should not be a windfall to the estate of a wholly unjustified nature, for example in the present case where the trustee in bankruptcy acknowledged that he had never had a claim to the fund. All right-minded men would regard enforcing the agreement as unfair and so the applicant was refused permission to rely on his strict legal rights under the agreement.

What can be learnt from this case?

Insolvency office-holders are officers of the courts and this case demonstrates that courts may have recourse to “unfairness” as a substantive legal concept to control the conduct of their officers. Officers should not pursue claims which will result in a windfall to an insolvent estate of a wholly unjustified nature.

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The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.