Insolvency practitioners: Teflon trustee no longer stuck with costs

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4 min read

We report on the recent Supreme Court decision of BPE Solicitors v Gabriel, in which the liability of a trustee in bankruptcy for costs awarded prior to bankruptcy was considered.

In the recent Supreme Court decision of BPE Solicitors v Gabriel, five Supreme Court justices considered whether, by adopting a pending appeal, a trustee in bankruptcy would become personally liable for costs awarded prior to bankruptcy in the lower courts. Before tackling that issue, the justices were first required to decide whether they had jurisdiction.

Facts

In 2010 the claimant, Richard Gabriel, brought proceedings against his former solicitors, BPE, for professional negligence. Gabriel alleged that BPE had failed to advise him that the £200,000 loan he had made to a third party company was to be used to purchase, rather than develop, a former airfield site. Gabriel claimed that he would not have granted the loan had he known that fact and sought to recover all his losses.

Gabriel succeeded at trial in the High Court and was awarded approximately £190,000, together with interest and costs. However, BPE successfully appealed the decision and, in November 2013, Gabriel’s damages award was reduced to just £2. In addition, BPE was awarded the costs of both the High Court and Court of Appeal proceedings (claimed at approximately £470,000).

Gabriel then applied to the Supreme Court for permission to appeal but, before permission was granted, he was adjudged bankrupt by his own petition. Peter Hughes-Holland was appointed as Gabriel’s trustee in bankruptcy and was left with a difficult decision whether to adopt the appeal in circumstances where it was unclear if, by doing so and if unsuccessful, his personal liability would extend to the costs of the High Court and Court of Appeal proceedings (as previously ordered) in addition to any costs of appealing to the Supreme Court.

Mr Hughes-Holland applied to the Supreme Court for a determination of the issue in December 2014.

Issues

The primary issues for the Supreme Court were:

  • Whether the application fell within its jurisdiction.
  • If so, whether Mr Hughes-Holland would be personally liable for the costs previously awarded to BPE by reason only of him having adopted the appeal as Gabriel’s trustee in bankruptcy.

Decision

The justices were unanimous in deciding that:

  • The Supreme Court’s power to determine any question necessary to be determined for the purposes of doing justice in an appeal extended to Mr Hughes-Holland’s application.
  • While unusual for a costs issue to be decided before the hearing of the appeal, it was necessary in this case to enable Mr Hughes-Holland to decide whether to proceed.
  • If Mr Hughes-Holland adopted the appeal he would not, by reason of his adoption, be personally liable for BPE’s costs in relation to the earlier stages of proceedings.

Comment

This decision marks a departure from the longstanding judgment of the Court of Appeal in Borneman v Wilson, decided in 1884. In Borneman, the Court of Appeal held that the personal liability of a trustee did cover costs incurred before he/she took on the proceedings, on the basis that a trustee could not choose to adopt part of the proceedings but not the rest.

As was recognised by the Supreme Court in BPE, Borneman was decided at a time when the courts had no power to make costs orders against non-parties to litigation and where cost orders not made at the time of bankruptcy were not provable (neither of which is the case now). Moreover, holding Mr Hughes-Holland liable for previous cost awards would have provided BPE with a priority over other creditors.

Before relying on this decision, it should be noted that the principles it confirms are narrow in scope: while a trustee will not now be held personally liable for earlier cost awards merely by virtue of his adoption of an action, he/she may still be held liable for such costs in appropriate circumstance and by operation of the court’s discretion.

Given the limited time that has passed since this decision, its wider impact remains to be seen. It is certainly possible that it will encourage action to be taken by more trustees and creditors, the former of whom will no longer face being automatically stuck with personal liability for an earlier costs award (although those costs should be a priority liability of the estate). For defendants and their insurers, it removes a costs advantage that they had previously enjoyed but, it seems, one that was opportunistic and ultimately impossible to justify.

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