Can a trustee in bankruptcy be paid for dealing with trust property? (Bell v Birchall and Ors)

In Bell v Birchall & Ors, the Chancery Division was asked whether a trustee in bankruptcy appointed over the bankruptcy estate of a solicitor was entitled to recover his costs and expenses incurred—and to be incurred—in connection with storing the solicitor’s practice’s files and the reconciliation of sums held in the practice’s client accounts.

Original news

Bell v Birchall & Ors [2015] EWHC 1541 (Ch)

The applicant acted as trustee of the bankruptcy estate of the first respondent, a solicitor. Following his appointment, the trustee preserved the files and records of the first respondent’s practice as well as sums held in separate client accounts, and sought an order permitting him to deduct his time costs and disbursements pro rata from those sums in respect of the storage of the files and the reconciliation of the client accounts that the trustee considered were necessary for the protection of clients.

The Chancery Division dismissed the application. The first respondent’s bankruptcy did not absolve him of his obligation to conduct an orderly winding up of his practice—including the reconciliation of the client accounts—at no cost to clients. In the event of an intervention by the Solicitors Regulation Authority (SRA), that obligation would pass to the SRA—again at no cost to clients. The client account monies did not form part of the first respondent’s bankruptcy estate, and the facts of the case did not allow the trustee to recover his costs for dealing with this trust property.

Briefly, what were the facts of the case?

The first respondent carried on a solicitor’s practice (the practice) as sole principal as at the date he was made bankrupt in August 2013. The trustee was appointed a little over a week later.

The practice held sums totalling about £250,000 in 12 separate client accounts, and possessed a large number of files that were largely related to non-current instructions.

The SRA did not at that time intervene in the practice, and the trustee—alleging that the first respondent was not co-operating (a point disputed by the first respondent)—made arrangements for the files to removed and stored at a secure facility, and for the client account monies to be protected.

There followed various communications between the trustee and the SRA.

The SRA was first notified in July 2014 of the trustee’s intention to seek an order permitting him to recover his costs and disbursements, both already incurred and to be incurred. Notwithstanding that, it was not until October 2014 that the SRA wrote to the trustee in respect of the threatened application.

The SRA’s letter pointed out to the trustee that it was the first respondent’s duty to reconcile and distribute the client account monies at no cost to clients, and that if he failed to do so, an alternative mechanism was provided by the SRA’s statutory powers, also at no cost to clients. In March 2015, the SRA intervened in the first respondent’s practice.

What were the legal issues that the judge had to decide?

His Honour Judge Pelling QC had to decide the following two questions:

  • whether he had jurisdiction to make the order sought by the trustee (the jurisdiction issue), and
  • even if he did, whether he ought to make that order in the exercise of his discretion (the discretion issue)

What were the main legal arguments put forward?

It was accepted by the trustee that the sums held in the client accounts were exclusively client monies and that no sums were owed to the practice’s office accounts. On that basis, the trustee’s case relied exclusively on what is known as the Berkeley Applegate principle (after Re Berkeley Applegate (Investment Consultants) Ltd (in liquidation) [1988] 3 All ER 71) which, briefly, provides the court with a discretion when dealing with a claim by a person seeking to enforce a claim to an equitable interest in property to require an allowance to be made for the costs incurred in the administration of that property.

For the SRA, it was submitted that the trustee had no role to play in the safeguarding of the client monies as, until the SRA’s intervention in the practice, that responsibility rested with the first respondent under the Solicitors Accounts Rules (SARs), both before and after he was made bankrupt. Following the intervention, that responsibility passed to the SRA. As neither the first respondent (prior to the intervention) nor the SRA (after the intervention) would undertake that work at any cost to the clients (except, in the case of the SRA, to any extent provided in Re Ahmed & Co [2006] EWHC 480 (Ch), [2006] All ER (D) 195 (Mar)), it was not reasonable for the trustee to recover his costs and expenses.

What did the judge decide, and why?

The jurisdiction issue

The judge held that he did not have jurisdiction to make the order sought by the trustee, for the following reasons:

  • the first respondent was under an obligation to manage the client monies in accordance with the SARs both before and after he was made bankrupt, and until the SAR intervened in the practice (at which point that obligation passed to the SRA)
  • accordingly, and distinguishing the facts in this case with those in Re Berkeley Applegate, those persons entitled to the client monies did not require the court’s assistance to enforce their rights
  • the work carried out by the trustee could have been carried out by the first respondent or SRA at no cost to the clients
  • the Berkeley Applegate principle was not sufficiently wide to cover the costs of storing the old files, which were not trust property

The discretion issue

As a consequence of the decision on the jurisdiction issue, it was unnecessary for the judge to consider the discretion issue, but he did so in the event that he was wrong on the jurisdiction issue. He held that, even if he did have jurisdiction to make the order sought by the trustee, he would not have exercised his discretion and made such order on the basis that:

  • there was no need for the trustee to incur costs where the obligation to manage the client monies (including the storage of the files) was imposed on the first respondent and, latterly, the SRA—if the trustee was concerned that the client monies or files were at risk had they been returned to the first respondent, he could have notified the SRA of that view in clear and unequivocal terms
  • even if the Berkeley Applegate principle was sufficiently wide to cover the costs of storing the old files, the complete mismatch between the amount of the monies held in the client account and the volume of files would make it unfair for those entitled to the client monies to pay for the storage of files unrelated to their matters, especially where neither the first respondent nor the SRA would impose any charge for such storage

What practical lessons can those advising take away from the case?

This case will be of interest to insolvency practitioners and those advising them who are appointed over, principally, solicitors’ firms but also over other professional practices where client assets (whether client monies or otherwise) are held on trust for the clients by that practice.

Assets held on trust are unlikely to form part of the insolvency estate, but the terms of the trust(s) should be considered at as early an opportunity as possible and advice sought by the office-holder. This will include an assessment of whether the office-holder or some other person is responsible for the trust assets, and a consideration of any appropriate professional rules will be necessary. The judge in this case commented that the trustee did not appear to have appreciated that the client monies were held on trust by the first respondent, nor that it was the responsibility of either the first respondent or the SRA—and not the trustee—to distribute those funds.

Where there is a professional body, early contact should be made with them (as happened in this case), and a plan should be agreed with them as soon as possible. The professional body should be actively chased if it fails to respond to communications, and any concerns relating to the ability of the bankrupt to properly deal with trust assets should be raised with that professional body.

The judge also made the point that the trustee’s application contained no information whatsoever as to the amount of costs and expenses he had already incurred and expected to incurred. Knowing what amounts were claimed was material to the exercise of discretion. Therefore, if an office-holder makes any similar kind of application, it should contain information as to the costs and expenses that the office-holder seeks to claim.

In the absence of being able to recover costs and expenses from trust assets, an office-holder may encounter reluctance on the part of creditors to approve any remuneration dealing solely with trust assets unless it can be demonstrated that there was some benefit to creditors in that work being undertaken.

Stephen Leslie, solicitor in the LexisPSL Restructuring & Insolvency team

Further Reading

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What assets vest in the trustee in bankruptcy and what steps does the official receiver/trustee in bankruptcy need to take?

Roles, powers, functions and duties of the trustee in bankruptcy

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First published on LexisPSL Restructuring and Insolvency

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