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The Supreme Court considered whether a trustee in bankruptcy who was considering adopting proceedings and lodging an appeal should be personally liable for historic adverse costs which had been awarded against the bankrupt prior to the commencement of the bankruptcy.
A trustee in bankruptcy is treated as party to any legal proceedings which he commences or adopts, and is personally liable for any costs which may be awarded to the other side in proceedings, subject to the trustee’s right of indemnity against the bankruptcy estate to the full extent of the assets.
A trustee is not obliged to adopt and continue any action which a bankrupt has already commenced, or which has already been commenced against the bankrupt. If a trustee does not commence an action in which the bankrupt was claimant, the action cannot proceed and will therefore be stayed or dismissed. In a case where the bankrupt is the defendant, an action which the trustee does not adopt can be stayed under section 285 of the Insolvency Act 1986. If the trustee does decide to adopt the action, he replaces the bankrupt as a party to the proceedings, regardless of whether there is a formal substitution.
The Court of Appeal previously considered the position where a claimant commenced proceedings and was successful against individuals who later became bankrupt, where some of the costs were incurred by the claimant before the bankruptcy commenced (Borneman v Wilson (1884) 28 Ch D 53). In that case, the trustee in bankruptcy was held to have adopted the proceedings, and the Court of Appeal extended the personal liability of the trustee to cover costs incurred by the claimant before the trustee adopted the proceedings. The Court commented in that case that a trustee in bankruptcy could not decide to adopt a part of the proceedings and attempt to leave the rest.
In BPE Solicitors and another v Gabriel , Mr Gabriel (the Bankrupt) won nominal damages in negligence from his solicitors in proceedings which had reached the Court of Appeal. However, despite winning these damages, the Bankrupt had costs of almost £470,000 awarded against him. The Bankrupt was unable to pay these costs and petitioned for his own bankruptcy.
The Bankrupt’s trustee in bankruptcy (the Trustee) considered an appeal against the Court of Appeal’s finding and asked the Supreme Court to rule whether, if the Trustee lost such an appeal, the costs that might be awarded against him personally because he had adopted the litigation would include the £470,000 costs order which had been awarded against the Bankrupt prior to the bankruptcy.
The first issue which the Supreme Court had to consider was whether it had jurisdiction to consider the Trustee’s application.
Section 40(5) of the Constitutional Reform Act 2005 (CRA 2005) empowers the Court "to determine any question necessary to be determined for the purposes of doing justice in an appeal to it under any enactment". In addition, Rule 46 of the Supreme Court Rules 2009 (SCR 2009) provides that the Court may make such costs orders as it considers just. It can do this either at final determination of an appeal, or application for permission to appeal, or in the course of proceedings.
In this case, the Supreme Court observed that although it is unusual for the Court to decide an issue relating to costs prior to hearing the substance of an appeal, the ruling on costs was necessary so that the Trustee could decide whether to proceed with the case. The Supreme Court therefore held that it had jurisdiction to deal with the application by the Trustee under the CRA 2005 and the SCR 2009, and that it was proper to exercise it in this case.
The Supreme Court stated in this case that Borneman v Wilson could no longer be considered good law. It held that there was no longer an absolute rule that, simply by adopting an action, a trustee should become liable to pay the other side’s costs incurred at a time when the action was being conducted by the bankrupt himself, and the trustee was therefore not a party to the action. However, the courts are still able to make an order against the trustee as a matter of discretion, or make an order after the commencement of a bankruptcy against a bankrupt, as a non-party in respect of costs incurred before the bankruptcy commenced.
The Supreme Court also found that the trial and successive appeals were each separate legal proceedings for the purposes of costs. Since the Bankrupt was responsible for the costs of the initial trial and appeal, the costs awarded against him should be proved in the bankruptcy, and should not be a personal liability of the trustee. The Court stated that if this were not the case, the solicitors who had the benefit of the costs order in the first place would obtain an unfair priority over the rest of the creditors in the estate.
It was therefore found that if the Trustee pursued the appeal, he would not be personally liable for costs incurred by the solicitors in relation to the earlier stages of the proceedings.
The ruling by the Supreme Court in this case will be of comfort to office holders who are considering whether they wish to appeal orders made against bankrupts prior to the commencement of bankruptcy, particularly because the Supreme Court has confirmed that it has the jurisdiction to deal with costs issues prior to a matter proceedings to the hearing of the substantive appeal.
This article was written by Simon Ridpath and Ashley Armitage. For more information please contact Simon on +44 (0)20 7427 6406 or firstname.lastname@example.org