Where a company has been the victim of a fraud and subsequently goes into insolvency, its liquidator must investigate and, if appropriate, bring claims against the wrongdoer. But what if the liquidator themselves defrauds the company, or is suspected of doing so?
Nicholson v Insolvency Practitioners Association [2026] EWHC 686 (Ch) provides the answer. In doing so, the judgment provides a detailed analysis of three topics of wider application and interest:
- whether decisions of the Insolvency Practitioners Association in respect of insolvency practitioner bonds are amenable to judicial review;
- how a trust which is neither a resulting nor constructive trust can arise without wording which declares the existence of a trust in terms; and
- whether the court can order persons to transfer intangible property to insolvency office holders under section 234(2) of the Insolvency Act 1986 (the “IA”).
Context
Section 390(3) of the IA provides that a person is not qualified to act as an insolvency practitioner (“IP”) unless they have security for the proper performance of their functions. The security must be a bond in a form which satisfies the Insolvency Practitioner Regulations. The Regulations require that the security provides for the IP and a surety to be jointly and severally liable for losses caused by the fraud or dishonesty of the IP. An IP will take out a bond, and each month they notify the surety of their new appointments in respect of particular insolvent estates by adding them to the cover schedule of the bond.
The person who will have suffered loss from the fraud or dishonesty covered is the insolvent, but, at the time the bond is taken out, it is not known what estates the IP will be appointed to and anyway an insolvent can only act through its IP. The statutory structure would not work if a potentially fraudulent IP could compromise claims against themself.
The solution in practice is that the IP’s Recognised Professional Body (“RPB”) is named in the bond as “beneficiary”. The form of bond approved by the Secretary of State also contains a provision permitting assignment by the RPB to IPs without consent of the surety. Where an IP has defrauded an estate, it is therefore possible for them to be replaced and the right to make a claim under their bond be assigned to the successor IP.
Facts
The problem that arose in Nicholson was this.
- IPs had been replaced as liquidators of three companies and, following investigations, their successors formed the view that the original IPs had dishonestly overcharged the insolvent estates by inflating the records of the time spent working on the insolvencies.
- The successor IPs asked the RPB, the Insolvency Practitioners Association (the “IPA”), to assign the bonds to them, or alternatively to bring claims itself.
- The IPA declined to do either, although it passed details of the claims to the surety (“Intact”).
- The IPA said that its practice where bonds were called on was to encourage successor IPs and the surety to negotiate and agree a sum of money to be paid for the benefit of the creditors. Once a sum was reached, the IPA said that a tripartite agreement would be entered into between the surety, the successor IPs and the IPA for payment of the sum to the successor IPs for distribution to the creditors (after the successor IPs costs were discharged).
- In this case, no agreement was reached. The IPA did not want to bring a claim itself because that would have involved alleging dishonesty in circumstances where it had not made any such finding against, and had not withdrawn the authorisation of, the original IPs. It was also unwilling to assign the bonds.
The successor IPs brought proceedings against the IPA seeking a declaration that the bonds are held on trust by the IPA for the insolvent estates, and seeking an order that the right to make relevant claims on the bonds be transferred to the successor IPs under IA section 234(2). Intact and one of the original IPs were joined as defendants to the action.
The defendants said that neither the bond nor the statute gave rise to a trust. Intact argued that the IPA performs a public function in relation to IP bonds and, as such, there is no need or room for the existence of a trust.
HHJ Brian Rawlings disagreed, holding that the IPA holds claim rights under the bonds on trust for the insolvent estates and ordering it to assign them to the successor IPs.
Public function
The judge rejected the argument that the IPA’s functions in relation to IP bonds were public functions.
He found that the IPA’s functions are limited to accepting and holding the bonds and (to the extent it does) exercising claim rights under them. The IPA’s functions do not include investigating, supervising or managing claims under the bonds, or collecting or distributing funds realised from the bonds. The IPA did not in practice do any of these things, and had not agreed to do them in a Memorandum of Understanding (“MOU”) reached between RPBs and the Secretary of State. Further, since the bonds covered reasonable costs of successor IPs but not costs incurred by the IPA, it was not clear how the IPA could be paid for investigating and bringing claims other than at the expense of creditors.
The judge considered that whether the IPA was exercising public functions in respect of IP bonds is synonymous with the question of whether any decision it makes in that connection would be amenable to judicial review. He found that any such decision would not be amenable to judicial review. He addressed two tests: the source of power and the characteristics of the powers and functions.
First, following a detailed review of the primary and secondary statutory provisions, the judge concluded that they did not provide the source of the IPA’s powers in respect of the functions in question. None of an RPB’s statutory regulatory functions concern IP bonds, and there is no statutory requirement that an RPB enter into an IP bond. The source of the IPA’s powers was the contractual provisions of particular IP bonds its members put in place and the IPA accepted.
Secondly, the characteristics of the IPA’s powers and functions were not such as to suggest that it was performing a public function:
- the IPA was not under any duty to enter into IP bonds, and it did so voluntarily;
- it was not acting in a quasi-judicial capacity;
- its relevant functions were not woven into the fabric of public regulation;
- it was not inevitable that the Government would regulate directly if RPBs had not taken on the role the IPA actually had in relation to IP bonds;
- it is not a normal function of Government to be party to a contract of indemnity or to hold or assign the benefit of such a contract; and
- there were no characteristics of the IPA’s functions which suggested that they were public functions.
Trust of Claim Rights
The judge then turned to whether the IPA held claim rights under the bonds on trust for the insolvent estates. He found that, properly construed, the bonds create a trust.
The principal issue was whether there was certainty of intention to create a trust. The successor IPs argued that the IPA did not accept Intact’s promise of indemnity for the IPA’s own benefit and that the statutory context made clear that the purpose of IP bonds is to protect insolvent estates from the fraud and dishonesty of IPs. They also pointed out that, if the bonds were not held on trust, the IPA could retain the proceeds for itself, which was inconsistent with the statutory scheme. Further, the terms of the bonds anticipated that successor IPs will investigate and pursue claims since it is only their costs which are covered by the bonds.
The judge accepted that the statutory provisions in force at the time the bonds were entered into were relevant to their construction, as was both the MOU between RPBs and the Secretary of State and the IPA’s practice as to how it treated bond claims immediately before the present bonds were entered into. What happened after the bonds were entered into was not relevant, nor was the IPA’s subjective view that it did not intend to act as trustee.
The IPA itself accepted that the purpose of the bonds is to protect insolvent estates, a concession the judge held was rightly made since it was apparent from the wording of the bonds that they provided security for losses to insolvent estates, the statutory context and MOU made clear that the bonds were designed to compensate insolvent estates, and the IPA’s prior practice was to direct the surety to pay successor IPs direct (pursuant to a tripartite agreement). It would be inconsistent with the statutory purpose of the bonds, and the MOU, if the IPA were able to mix the proceeds of the bonds with its own funds, risking dissipation, before payment to the insolvent estates. The IPA’s practice of entering into tripartite agreements, rather than receiving the proceeds of claims itself, also showed a clear intention to keep such proceeds separate from its own funds. Furthermore, the judge found that the MOU imposed a contractual and/or fiduciary duty on the IPA to make arrangements to ensure that potential claims for fraud or dishonesty of its members were identified and made. The bonds were entered into pursuant to that duty.
The IPA’s only reason for arguing that there was no trust at all (as opposed to a bare trust) was that it held claim rights as part of its functions as a public body, but the judge had already rejected that contention.
The judge went on to hold that the trust was a bare trust in any event. The fact, relied on by the IPA, that there was nothing in the bonds which would prevent the IPA from investigating and bringing claims itself was not relevant. The IPA did not intend to exercise any such rights when the bond was entered into, so the theoretical possibility of exercising them did not affect matters. In any event, even if the IPA had intended to use such powers, that would not be inconsistent with the existence of a bare trust. The beneficiaries of a bare trust can give directions to the trustee as to how to exercise its powers.
There was no real dispute about certainty of subject or object of the trust. The subject matter of the trust was the claims against Intact as surety for losses suffered by the insolvent estates as a result of the fraud or dishonesty of the previous IPs (the “Claim Rights”). The object was the relevant insolvent estates.
The judge also briefly indicated that if, on their true construction, the bonds did not create a trust, then there was an implied trust because it was so obvious as to go without saying, a trust was not inconsistent with the terms of the bonds and it would be equitable to imply a trust.
Claim Rights as “property… to which the company appears to be entitled”
As a result the judge’s ruling on the existence of a trust, the insolvent companies (acting through the successor IPs) could bring claims against Intact as beneficiaries of a trust. The successor IPs, however, also wanted to have the Claim Rights assigned to them, which would enable them to issue proceedings in their own name, and would avoid the need to join the IPA as a defendant. The successor IPs sought an order for assignment under section 234(2) of the Insolvency Act which provides that the Court can order to be transferred to an IP “any property… to which the company appears to be entitled”.
The judge rejected Intact’s argument that “property” in section 234(2) does not include intangible property. In Welsh Development Agency v Export Finance [1992] BCC 270, Staughton LJ took the view that intangible property was not within the scope of section 234. However, HHJ Rawlings distinguished that case on the basis that it was concerned only with section 234(3) and (4), which provide that an office holder is not liable for seizing or disposing of property which is not the company’s provided they have reasonable grounds for seizing or disposing of the property. The judge relied in this respect on Lord Nicholls’ minority opinion in OGB v Allan [2007] UKHL 21.
The judge accepted that an application under section 234(2) is a summary procedure which is not suitable for determining complex disputes as to title. However, in this case the application was being heard at the same time as a Part 8 claim for a declaration. The Part 8 proceedings determined the complex issues and, once they had been determined, there was no difficulty in deciding the application for an order for assignment. He ordered the IPA to assign the Claim Rights.
Conclusion
The judge granted declarations that the Claim Rights are held on trust for the insolvent estates and that the insolvent companies are entitled to bring claims under the bonds subject to joining the IPA as a defendant. He also granted orders requiring the IPA to assign the Claim Rights to the claimants.
Ben Strong KC appeared for the claimant successor IPs.
View Judgment