Expenses in insolvency

Insolvency and expenses - an evolving issue. In recent months it has been the corporate insolvency court which has been the busiest. However, the bankruptcy court has recently come up with its own decision. We analysed that on our website but thought we would share it. (remember if you are interested in what you see and want to see more on our Restructuring & Insolvency content, please see www.trialpsl.com)

This note looks at the case of Appleyard v Wewelwala and examines the lacuna in bankruptcy law on whether a trustee's expenses should be paid and by who when the bankruptcy order is set aside on appeal.

Appleyard v Wewelwala--the facts

Appleyard v Wewelwala [2012] EWHC 3302 (Ch)

This is a decision of Mr Justice Briggs, following an application by the trustee in bankruptcy (Andrew Appleyard) (the trustee) of Chithra Wewelwala (the bankrupt) for directions following the bankruptcy order made against the bankrupt being set aside on appeal.

The bankrupt was made bankrupt in April 2011 on the petition of a creditor, Davenham Trust (the creditor). It was noted in the judgment (para 3) that after the bankruptcy order, the bankrupt made a written application seeking permission to appeal the bankruptcy order, which was refused by Mr Justice Floyd. Following that refusal, the Official Receiver (OR) appointed the trustee to act. From that date (July 2011), the trustee began incurring expenses in discharging his duties (ie collecting information on assets and claims).

In October 2011, the bankrupt made an application for permission to appeal, this time to be heard orally. The application was adjourned and the creditor was directed to attend the adjourned hearing. The order adjourning did not state that the appeal would immediately follow if permission to appeal was granted, or that the bankrupt should notify the trustee of the adjourned hearing.

It was common ground that the bankrupt had not informed the trustee. In December 2011, the application was heard and the appeal was allowed. The consequence of this was that the bankruptcy order was set aside. This order made no provision for the trustee's release from office or for the payment of his expenses. The trustee was not informed of the order setting aside the bankruptcy until January 2012, when the bankrupt informed him on the telephone. The trustee subsequently incurred further expenses in making statutory reports to creditors. It was common ground that the trustee should be released from office, even though the order setting aside the bankruptcy did not expressly provide so. The trustee sought the payment of his expenses.

The issues for the court and the lacuna in the bankruptcy law

The issues for the court to determine were:

• whether the trustee should have his expenses paid?
• who should pay those expenses and from what fund?

As to the lacuna, this is set out in para 31 of the judgment. Where a bankrupt appeals a bankruptcy order, as opposed to making an application to rescind the order, neither the Insolvency Rules 1986 (SI 1986/1925), nor the Insolvency Act 1986 make any provisions for the requirement to give notice to the trustee when a bankrupt appeals the order. Therefore, technically at least, the bankrupt's failure to give notice to the trustee was not procedurally improper.

The court's approach and reasoning

The court relied on its inherent jurisdiction to deal with the issues.

On the question of whether the trustee's costs should be met, the court held they should be. The court's jurisdiction to deal with the trustee's expenses came as a necessary consequence of the order setting aside the bankruptcy order and the failure to deal with them. There was no reason in principle why the trustee's expenses should not be paid, given that the trustee was an 'innocent party', at least to the extent that the expenses had been incurred prior to January 2012, when the trustee had been notified of the setting aside of the bankruptcy order by the bankrupt.

The trustee's right to recover his expenses, having acted entirely properly and innocently at least until January 2012, had to prevail over the bankrupt's right to enjoy her full estate upon its re-vesting in her as a result of the setting aside of the bankruptcy order. However, after having been notified of the setting aside of the bankruptcy order, the trustee should have incurred no further expense without first applying to the court for directions (see paras 18, 21, 32, and 33 of the judgment). In arriving at this decision Briggs J was persuaded by the reasoning in Thornhill v Atherton.

On the issue of who should pay the trustee's expenses, the bankrupt would be required to bear the burden of compensating the trustee for his reasonable expenses incurred until January 2012. That was so even if, as between the bankrupt and the creditor (now in administration), it might have been the creditor which had been largely to blame for the circumstances leading to those expenses having been innocently incurred. That was ultimately irrelevant on the issue between the bankrupt and the trustee. The bankrupt's property would stand charged with payment of the trustee's reasonable expenses up to January 2012, leaving him to obtain execution as he thinks fit, in the absence of an agreement.

What practitioners should do

This is an unusual case, not least because ordinarily one would expect the bankrupt to apply to rescind the bankruptcy order, rather than appeal and take advantage of the lacuna in the insolvency legislation. However, practitioners should be mindful of putting parties on notice of any application where they may be affected, even if they are not a party to the instant application. If there are any concerns, it would be sensible to seek the court's directions.