Trustees' costs liabilities in bankruptcies: BPE Solicitors v Gabriel

It was previously somewhat unclear whether or not trustees in bankruptcy could be held liable to pay the costs of litigation which commenced prior to their appointment by the bankrupt in circumstances where they were pursuing appeals in place of the bankrupt.

Following a recent decision of the Supreme Court in BPE Solicitors and another (Respondents) v Gabriel (Appellant) [2015] UKSC 39 the position has been made clear. By virtue of the provisions of the Insolvency Act 1986, all property belonging to or vesting in a bankrupt at the commencement of the bankruptcy forms part of their estate and will vest in the trustee in bankruptcy upon appointment. Property for this purpose includes rights of action which were being pursued at the date of bankruptcy.

Following the making of a bankruptcy order, a bankrupt is consequently unable to bring or continue legal proceedings. The right of action vests in the trustee who must decide whether to pursue or continue the litigation.

Personal liability

Trustees will be treated as party to any proceedings they commence or adopt. Standing in the bankrupt’s shoes, a trustee will usually be substituted as a party pursuant to Civil Procedure Rule 19.2. Even without a formal order, if the trustee conducts litigation, they will be treated as a party. They thereby become personally liable for costs orders made against them and must satisfy such orders as an ‘expense’ of their office, from assets comprised within the estate. If the estate assets are insufficient to meet these costs, in the absence of any indemnity from creditors, they will have to be paid by the trustee personally.

It had previously been a grey area as to whether trustees would be personally liable for costs that had already been incurred in cases where appeals had been lodged, which the trustee wished to continue. This was the issue that arose in BPE Solicitors, where the trustee sought clarity as to appeal costs as a preliminary issue.

The bankrupt, Mr Gabriel, had lent £200,000 to Whiteshore Associates Limited. It was found that his solicitors, BPE, had been negligent in the handling of the transaction. At first instance Gabriel was awarded the full amount Whiteshore ought to have repaid plus costs. The Court of Appeal reduced the award to £2, saying the loss was not within the scope of BPE’s duty and there was some considerable contributory negligence on Gabriel’s part.

The court also reversed previous costs orders, requiring Gabriel to pay the costs of the proceedings and of the appeal. Gabriel petitioned for his own bankruptcy a few months after the Court of Appeal’s order, the order being made on the same date he was granted leave to appeal to the Supreme Court.

Gabriel’s trustee applied for directions pending any appeal, asking the Supreme Court whether or not he would be held liable for the costs of the courts below if he proceeded with the appeal and lost.

The Supreme Court referred to Borneman v Wilson (1884) 28 Ch D 53, commenting this was the authority for proceedings being adopted by trustees in their entirety (including a requirement to pay costs). It found that case to no longer be good law, primarily because costs orders can now be made against non-parties, a concept which has been recognised by the court (see Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965). Such costs are also now provable in bankruptcy estates.

The Supreme Court held that if the trustee did proceed with the appeal, it would not be justifiable for him to be ordered to pay the previous costs orders. It was a factor in the court’s decision that the proceedings below had concluded before Gabriel’s bankruptcy commenced. If the court had found the trustee liable for the costs of those proceedings, they would have been treated as an expense of the bankruptcy and BPE would have effectively obtained priority for the payment.

BPE will be welcomed by trustees. First, it shows willingness on the part of the court to rule on practical costs issues at directions hearings when asked to by trustees. Second, the decision may increase the number of cases in which trustees decide to adopt cases and proceed to appeal.

It will provide encouragement to trustees appointed in estates where the bankrupt has been involved in proceedings and the decision of the lower court is potentially appealable to carefully consider pursuing appeals for the benefit of creditors. SJ

Joanne Williams is a solicitor in the commercial dispute resolution team at Weightmans