Understanding what constitutes property in insolvency law

It’s one of the largest miscarriages of justice in the UK in recent times. The Post Office scandal caused hundreds of postmasters to lose their livelihoods. They also faced criminal convictions and imprisonment because the Post Office prosecuted claims based on unreliable accounting data from Fujitsu’s Horizon IT system.?

In the matter of Suzanne Palmer [2024] EWHC 1722 (Ch), the Court was required to deal with resolving one of the many follow-on issues. Namely, who was entitled to the postmasters’ compensation under the recently established “GLO Scheme”, where the postmaster was a discharged bankrupt?

HHJ Crawson KC handed down the judgment, which examines the extent to which something is “property” in the context of insolvency law, or section 436 of the Insolvency Act 1986 (“s436”).

The JFSA is founded and the fight begins

In 2009, postmasters formed the Justice for Subpostmasters Alliance (“JFSA”). The JFSA obtained forensic reports discrediting the Horizon system, causing Post Office Limited (“POL”), in 2013, to create the Complaint Review and Mediation Scheme (“CRMS”), which awarded compensation to wronged postmasters.

In the context of CRMS, JFSA identified an issue concerning postmasters who had been made bankrupt. Bankrupt postmasters’ claims against POL formed ‘property’ and was automatically vested in their trustees in bankruptcy, per section 283 Insolvency Act 1986. Essentially, the postmasters had lost their right to claim compensation from the CRMS, unless they obtained assignments of those claims back from their trustees in bankruptcy.

The respondents, who were the trustees in bankruptcy for 34 bankrupt postmasters, entered assignments that assigned the claims against POL back to the postmasters in return for a 49% share in the compensation. In other words, the postmasters made bankrupt, in some cases through no fault of their own, would only receive 51% of the claim.

Then in 2015, CRMS was scrapped because it was not providing a meaningful remedy for postmasters.

Litigation against the Post Office begins

In March 2016, a significant number of postmasters (the “GLO Claimants”) commenced litigation against POL. The GLO Claimants were funded by Therium Litigation Funding (“Therium”). These funding arrangements required variations to the assignments, which entitled the trustees in bankruptcy to receive ￡11,000 before the 49/51 division.

Ms Palmer was made bankrupt on 11 May 2015 and discharged on 11 May 2016. She obtained an assignment of her claim against POL from her trustee in bankruptcy on 15 November 2017 in exchange for the requirement to pay her trustee in bankruptcy 49%.

In March 2019, the High Court upheld the postmasters’ claim. In December 2019, the GLO Claimants entered a settlement deed that settled the claims for a sum of ￡42m. In total of ￡42m paid, Therium received ￡31m, leaving only ￡11m payable to the GLO Claimants (the “Settlement Deed”).

Introducing the Historic Shortfall Scheme

Postmasters who had not subscribed to the GLO Claimants were able to recover their claims under a new scheme set up, the Historic Shortfall Scheme (“the HSS”). In the words of the judge at paragraph 34: “[t]his gave rise to the unfair result that those being compensated under the HSS would end up significantly better off than those who had pursued the GLO Litigation and who had secured for their non-participating peers, through the Settlement Deed, the establishment of the HSS”.

This unfairness caused the Government to announce its decision to make funding available to the GLO Claimants to enable them to receive “fair compensation” (the “GLO Scheme”). On 23 March 2023, the full details of the GLO Scheme were published.

Disputes over the GLO scheme

Trustees in bankruptcy argued that the compensation payable under the GLO Scheme arose from a claim that existed at the time of the postmasters’ bankruptcy. The compensation “arose from” or was “incidental” to the underlying causes of action and was ‘property” that the trustees in bankruptcy were entitled to receive.

The Secretary of State relied on the recent establishment of the GLO Scheme to argue that the GLO Scheme was not in existence at the time of the bankruptcies. Accordingly, the compensation could not be considered as ‘property’, which meant that the postmasters were entitled to the compensation if they were discharged from their bankruptcies.

The trustees in bankruptcy also argued that the relevant assignments entitled them to 49% of the compensation from the GLO Scheme. However, this argument depended on whether the property was vested in the trustees in bankruptcy at the time of bankruptcy, so closely linked with their primary argument.

The legal analysis

HHJ Cawson KC applied himself to interpreting the meaning of “property” in s436. The issue concerned whether the claim to compensation under the GLO Scheme existed with the bankrupt at the commencement of the bankruptcy. The postmasters’ were entitled to claim compensation from the GLO Scheme from the underlying facts that had existed at the time of bankruptcy. Conversely, the GLO Scheme was only recently in existence.

S436 has a very wide definition of “property” (including “every description of interest”) and the court of appeal’s judgment in Gwinnutt v George [2019] Ch 471 provides for only limited exceptions. HHJ Cawson KC had the difficult task of considering whether one of those exceptions applied.

HHJ Cawson KC noted that “[t]here can be no doubt but that the intention behind the GLO Scheme is to make good the deficiencies of outcome consequential upon the Settlement Deed and, in particular, the requirement to pay Therium some 75%...” He went on to note that the GLO Scheme had certain features that were of particular significance:

1.???? The GLO Scheme is an “ex gratia” scheme established by the Government as a matter of political will rather than any obligation to respond to the position of postmasters who have exhausted and compromised their claims against POL in circumstance that have produced an unfair result.

2.???? The GLO Scheme is not linked to the cause of action because former shareholders or directors of companies that have ceased to exist are able to claim under the GLO Scheme as a “linked individual”, which would be unworkable in law.

3.???? Part of the GLO Scheme includes compensation for postmasters who can show that they were made bankrupt as a consequence of Horizon.

HHJ Cawson KC found that the cause of action vested in the trustee, as it constituted property. However, the cause of action was extinguished by the Settlement Deed and that: “…the entitlement to apply for compensation under the GLO Scheme arises on an ex gratia basis solely as a matter of governmental decision and discretion, rather than as being something “arising from”, or “incidental” to the ownership of “property”, namely claims and causes of action against POL which were exhausted prior to the GLO Scheme being established.”

HHJ Cawson KC also decided that, if he was wrong on his primary finding, he would have decided that the GLO Scheme would have needed to have been in existence at the date on which Ms Palmer became bankrupt.

In conclusion...

Insolvency practitioners will take interest in this judgment. They will take reassurance that most things constitute property under s436, which will automatically vest in the trustee in bankruptcy, per section 283 Insolvency Act 1986.

HHJ Cawson KC has however created a new exception to “property” under s436, based on the settlement of the postmasters’ claims and the nonexistence of the GLO Scheme at the time of the relevant bankruptcies. While not dealt with in the judgment, it would appear that any postmasters who are in bankruptcy following the introduction of the GLO Scheme may have lost their claims to their trustees in bankruptcies.

For Ms Palmer, the timing of her bankruptcy and introduction of the GLO Scheme has resulted in her avoiding the clutches of s436 and s283 Insolvency Act 1986. She will receive full compensation under the GLO Scheme.

The information contained in this article is general guidance only. The application and impact of laws can vary widely depending on the specific facts involved. The information in this article is provided with the understanding that the authors and presenters are not giving legal, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional legal, tax or other competent advisers. Before making any decision or taking any action, you should consult a Child & Child professional.?

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