Compensation payments to formerly bankrupt sub-postmasters not payable to their Trustees in bankruptcy
The ongoing inquiry into the Post Office “Horizon” accounting software scandal has, understandably, attracted much media attention and a great deal of public sympathy for those adversely affected.
Aside from those that faced criminal prosecution, a number of sub-postmasters were made bankrupt because of what appeared to be liabilities to the Post Office (apparent “shortfalls” or “losses” on post office branch accounts), according to the Horizon programme.
Various sub postmasters, including some of those that had previously been bankrupt, started a group compensation claim against the Post Office in 2016.
In order to bring such claims, sub postmasters who had previously been bankrupt had taken formal written assignments of the relevant claims from their respective trustees in bankruptcy, because their right to bring claims of this kind had formed part of their respective bankruptcy estates.
The effect of these assignments was to assign the bankruptcy trustees’ interests in the claim back to the relevant sub postmasters in return for payment of £1 plus a 49% share of any (net) proceeds of the claim.
This group compensation claim was the subject of a settlement agreement in December 2019. The agreement required the Post Office to make cash payments totalling £42m to the claimants but also to set up a scheme to pay compensation to those sub postmasters who were not part of the legal action (known as the Historic Shortfall Scheme (“the HSS”)).
Unfortunately, of the £42m, approximately £31m went to a litigation funder that had helped the claimants to bring their claim. The Trustees in bankruptcy received payments from the remaining settlement proceeds in respect of those of the claimants whose bankruptcy estates they were administering in accordance with the terms of the assignments. The net effect was that formerly bankrupt sub-postmasters only got a very small percentage of the £42m compensation that the Post Office had agreed to pay.
In March 2022, the government devised its own ex gratia compensation scheme – “the GLO Scheme” – to make funding available to claimants to enable them to receive “fair compensation”.
However, the trustees in bankruptcy of the formerly bankrupt postmasters laid claim to any compensation payments under the GLO Scheme, arguing that the relevant rights had vested in the sub-postmasters when the bankruptcy orders were made against each of them. Therefore, the right to apply for or receive such compensation represented “property” forming part of the bankrupt’s estate at the commencement of their bankruptcy.
They also advanced an alternative argument that they were contractually entitled to recover a proportion of the compensation under the terms of the relevant assignments of the causes of action to the bankrupts.
The trustees argued that they owed duties and responsibilities to the creditors within the relevant bankruptcies who had, themselves, suffered financially in consequence of the events in question. A number of these creditors were small businesses.
Faced with a scenario where it appeared that the sub postmasters might lose out yet again, the government sought directions from the court as to how the compensation under their GLO Scheme should be paid. The court’s decision, in the case of Secretary of State for Business and Trade v Mustafa Hassanali Abdulali and another, was given on 5 July 2024.
The fundamental issue was whether the entitlement to compensation under the GLO Scheme was comprised within the bankruptcy estate, and thus vested in the Trustees pursuant to s.306(1) Insolvency Act 1986, because it was “property” that belonged to or was vested in the bankrupt at the commencement of her bankruptcy.
The court concluded that it was not. The definition of “property” in s.436(1) of the Insolvency Act 1986 is very wide in its scope (“property” includes money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property).
However, there are nonetheless limits to the width of the definition. One such limitation relates to a mere possibility of benefit, e.g. that of a beneficiary under a discretionary trust, or the possibility of receiving a legacy. Whilst these mere possibilities may be capable of realisation, the mere fact that they might be capable of realisation in some way will not, of itself, mean that the possibility is to be regarded as “property”.
On proper analysis, the entitlement to compensation under the GLO Scheme could not properly be said to “arise out of”, or to be “incidental” to the claims against the Post Office notwithstanding that the GLO Scheme was established specifically to alleviate the deficiencies in outcome arising from the Settlement Agreement. There was insufficient connection between the pursuit of the relevant claims and the entitlement to compensation under the GLO Scheme.
It was of crucial significance that:
- i) The GLO Scheme was an ex gratia scheme established as a matter of government decision and discretion;
- ii) The claims and causes of action against the Post Office were extinguished by the Settlement Deed so as to leave the GLO claimants without any further remedy against the Post Office and that was the position that pertained at the time that the GLO Scheme was announced and set up; and
iii) The ability to make a claim under the GLO Scheme was not exclusively linked to the person or entity that might have been entitled to the benefit of the relevant claim against the Post Office because the GLO Scheme permitted claims to be made on behalf of deceased sub postmasters or shareholders or directors of companies that had ceased to exist or partners of partnerships that had been dissolved.
The entitlement to apply for compensation under the GLO Scheme arose on an ex gratia basis solely as a matter of governmental decision and discretion, rather than as being something “arising from”, or “incidental” to ownership of “property”, namely claims against the Post Office, which were exhausted prior to the GLO Scheme being established.
In this respect, it was important to distinguish between something simply being consequential upon the past ownership of “property”, and something arising from, or being incidental to it.
In any event, the “property” or “interest” had to exist at the commencement of bankruptcy, as only then could it be said to have belonged to or been vested in the bankrupt at that time. Here, it only came into existence when the GLO Scheme was established from and after March 2022.
At the time of the commencement of the bankruptcy, the bankruptcy had, at the very most, a hope or expectation that if, for whatever reason, mediation or litigation involving the Post Office then under contemplation did not provide a fair and just solution for sub postmasters, then the government might ultimately step in and offer ex gratia compensation along the lines of that provided for by the GLO Scheme. This was very different from a contingent interest that exists on bankruptcy.
As to the alternative argument that the Trustees were contractually entitled to recover a proportion of the compensation under the terms of the relevant assignments, the court concluded, based on definitions used in the assignments, that the former bankrupts were only obliged to account for a proportion of recoveries made from the Post Office itself and not the proceeds of a claim for compensation made against an ex gratia compensation scheme such as the GLO Scheme.
The case demonstrates the distinction between a contingent interest, which falls within the definition of “property” and therefore falls within the bankruptcy estate; and the mere possibility or hope of some kind of benefit, which does not.
Disclaimer: this article is not to be relied upon as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.
