Trustees in bankruptcy—who is liable for which costs in proceedings existing at the time of appointment? (BPE Solicitors v Gabriel)

Trustees in bankruptcy—who is liable for which costs in proceedings existing at the time of appointment? (BPE Solicitors v Gabriel)

If a trustee in bankruptcy were to pursue an appeal in place of the bankrupt, would he be liable for the costs of hearings before his appointment? Adam Chichester-Clark, of Thirteen Old Square Chambers, examines the Supreme Court’s decision in BPE Solicitors v Gabriel.

Original news

BPE Solicitors and another v Gabriel [2015] UKSC 39, [2015] All ER (D) 179 (Jun)

A trustee in bankruptcy, who was considering whether to pursue an appeal to the Supreme Court in an action which had so far been conducted by the bankrupt, asked the Supreme Court if he would be liable for the costs of the hearings before the trial judge and the Court of Appeal, which had taken place prior to his appointment. The Supreme Court ruled that he would not be held personally liable for any costs in relation to the action up to an including the order of the Court of Appeal by virtue of the fact of his office as trustee in bankruptcy or of his adoption of the appeal.

What was the background to this application?

The trustee was appointed on the same day that the bankrupt was granted leave to bring an appeal in the Supreme Court in an action he had originally brought against BPE Solicitors.

The trustee applied for a declaration as to the extent of his personal liability for BPE’s costs in the courts below, in the event that he adopted the appeal. According to the rule in Borneman v Wilson (1884) 28 Ch D 53, where a trustee decides to adopt proceedings previously carried on by the bankrupt, he becomes (potentially) personally liable for all of the opposing party’s costs, including those incurred prior to his appointment as trustee. The rationale for this rule was that the law, as it was understood prior to the decision of the Supreme Court in Re Nortel GmbH (in administration) [2013] UKSC 52, [2013] All ER (D) 283 (Jul), was that an opposing party would have no remedy for such costs, other than against the trustee, because they were not provable in the bankruptcy. It is now clear that such costs are provable.

What were the main issues?

There were two issues for the court:

  • whether it had jurisdiction to decide the issue prior to the hearing of the substantive appeal, and
  • whether Borneman v Wilson remained good law

How did the court decide those issues?

Lord Sumption (with whose judgment each of the other members of the court agreed) decided that it was just and practical to hear the trustee’s application prior to the hearing of the substantive appeal because it turned on a matter of principle, the determination of which was necessary to enable the trustee and creditors to make an informed decision as to whether to proceed with the appeal.

As to the question of principle, Lord Sumption determined that Borneman v Wilson was no longer good law. A trustee was not liable for the costs incurred in distinct proceedings prior to his appointment (ie in the proceedings in the courts below within the same action) by reason of his office or of the adoption of the appeal. More generally, Lord Sumption indicated that a trustee’s liability for an opposing party’s costs before his adoption of any proceedings was a matter for the court’s discretion.

What are the consequences of this decision?

It is reasonable to suppose that, in a significant number of cases, the decision in Borneman v Wilson has deterred trustees from adopting meritorious claims at the expense of creditors. The effect of the rule was to require a prudent trustee to obtain an indemnity sufficient to cover his personal liability for adverse costs before the date upon which he adopted the proceedings as well as those thereafter. In many cases, this will not have been possible due to the paucity of assets within the bankruptcy, the unavailability of after-the-event insurers on affordable terms and the reluctance of creditors to throw good money after bad. In such circumstances a trustee will then have been compelled to sell the right to bring the claim on the open market for the best price, considerably below the sum that would have been recovered at trial.

The basis upon which the court will exercise its discretion to make a trustee liable for costs incurred prior to his appointment remains to be seen. However, absent compelling reasons for doing so, it is difficult to see why a court would decide to do so, bearing in mind that they will ordinarily be provable as contingent debts within the bankruptcy. If that is correct, it is probable that the effect of this decision will be to increase significantly the number of cases adopted by trustees.

Adam Chichester-Clark appeared for the applicant in this case.

Interviewed by Robert Matthews.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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First published on LexisPSL Restructuring and Insolvency

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About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.