The recent Court of Appeal case of Hunt v Harb(1) has highlighted that care must be taken by trustees in bankruptcy when assigning claims in the bankrupt's estate. The case concerned a trustee in bankruptcy who assigned a claim to a third party on terms that the bankrupt's estate would receive a share in any sums recovered. The court held that the trustee could be found liable for the costs of the litigation, notwithstanding the assignment.
An insolvency practitioner may become an office holder in a variety of circumstances - for example, as:
liquidator or administrator of an insolvent company;
receiver of a charged asset; or
trustee in bankruptcy of an individual.
If an insolvency practitioner is appointed as liquidator or administrator of an insolvent company, in the normal course of events the company's assets - including legal claims - remain the property of the company. If a claim is pursued, it will be in the name of the company. If an insolvency practitioner is appointed as a receiver of a charged asset, he or she will be the agent of the chargor. Any claim will be brought in the name of the chargor.
In such situations, if the claim fails, the insolvency practitioner will not be personally liable for costs unless a non-party costs order is made against him or her. The case law suggests that this will occur only in exceptional circumstances, such as where there has been some form of impropriety.(2)
The situation is different with a trustee in bankruptcy. Under the Insolvency Act 1986, the bankrupt's estate vests in the trustee personally. If the trustee wishes to pursue a claim which the bankrupt had before the bankruptcy, the trustee will do so in his or her own name, because the claim is legally the trustee's. If the claim fails, the trustee is personally liable for the costs of litigation.
For this reason, a trustee in bankruptcy who wishes to pursue a claim will commonly take one or more of the following courses of action with a view to protection against a personal costs order:
seek an indemnity against costs liability from the assets in the bankrupt's estate (however, the value of the indemnity rests on the value of the estate);
purchase after the event (ATE) insurance cover to pass on the risk of an adverse costs order to insurers; or
assign the cause of action to a third party in return for a payment or a share of the proceeds of litigation if the claim is successful.
The case in question concerned Mrs Harb, the appellant before the Court of Appeal, who claimed to have secretly married the late King of Saudi Arabia in 1968. She further claimed that in 2003, several years after the parties had separated, she had reached a financial settlement with the king's son worth at least £12 million. This settlement was not upheld.
In 2008 the appellant was declared bankrupt, with liabilities of over £3.5 million and assets of just £200,000. Her claim against the king's son now vested in her trustee in bankruptcy. The trustee considered that the claim had a reasonable prospect of success, but due to the relatively low level of assets in the estate, the trustee intended to seek third-party funding to bring the claim, together with ATE insurance to cover any liability for an adverse costs order. The trustee issued the claim before this funding and insurance was in place, as expiry of the limitation period was fast approaching.
In the event, the trustee was unable to obtain third-party funding or ATE insurance and discontinued the claim. The appellant objected to this and applied to the court to set aside the notice of discontinuance.
The High Court allowed the application. In its view, before discontinuing, the trustee should have sought offers from third parties to take an assignment of the claim. The court set a timetable for the trustee to seek offers, in the absence of which the claim could be discontinued.
However, the court was conscious of previous case law(3) which indicated that a trustee in bankruptcy could face a non-party costs order if the trustee assigned a claim on terms by which he or she still stood to benefit from the claim. If a trustee assigned on terms that the bankrupt's estate would share in any of the proceeds of the litigation, then the trustee stood to benefit personally, as the bankrupt's estate vested in him or her personally. On the other hand, if the trustee assigned in return for a fixed sum, then he or she did not stand to benefit personally from the claim.
For this reason, the court's order contained a provision - Paragraph 9(i) - that specifically permitted the trustee to reject an offer which involved the bankrupt's estate sharing in the proceeds of the litigation. This avoided a situation where the trustee would have to accept an offer which exposed him to personal costs liability. The appellant appealed against Paragraph 9(i) of the order.
The appellant sought to persuade the Court of Appeal that the previous case law should be reversed, and that a trustee in bankruptcy who assigns a cause of action should be protected from adverse non-party costs orders. She argued that there is no logical difference between assigning in return for a fixed sum (which protects the trustee from a costs order) and assigning in return for a share of the proceeds (which does not give protection).
The court disagreed. In the latter case, the trustee can be fairly said to be someone who stands to benefit from the proceedings, and one of the "real parties". In the former case, the trustee cannot. The court further pointed out the traditional wide discretion given to trial judges to decide the costs of the claim, both in case law and under statute.(4) It would be undesirable for a court to restrict that discretion at a very early stage of proceedings.
The court dismissed the appeal and held that a costs order can be made against a trustee in bankruptcy, even though the trustee has assigned the claim and is not a party to the proceedings. However, the court did not rule out the possibility that a trustee in bankruptcy could, in an appropriate case, gain pre-emptive protection from adverse costs orders, saying that it was "at least conceivable" that the court could grant such an order.
Furthermore, the court considered that it was wrong to make an order in the terms of, or similar to, Paragraph 9(1) "before one even knows the existence, number, provenance and terms of any offers which the trustee may receive". Therefore, the court ordered the deletion of the paragraph. In this narrower sense, the appellant succeeded in her appeal.
The court expressly left open the question of whether a court could, in an appropriate case, having seen all offers which the trustee had received, make an order similar to Paragraph 9(i) - that is, to permit a trustee in bankruptcy to reject any offer whereby the bankrupt's estate would share in any proceeds of litigation, and thereby expose the trustee to liability for adverse costs.
What are the options for a trustee in bankruptcy who wishes to assign a claim, but also ensure personal protection from adverse costs orders?
First, the trustee may seek an indemnity. If the assets in the estate are insufficient to provide a worthwhile indemnity, the trustee may try to obtain an indemnity from the creditors - that is, the ultimate beneficiaries of any successful action - or from the party that takes the assignment.
Otherwise, the trustee could assign the claim in return for a fixed sum. This will provide the trustee with protection from adverse costs orders in the ordinary course of events.
Otherwise, the trustee can seek offers for the assignment of the claim on whatever terms are available. If the only (or best) offer available is for assignment in return for a share in any proceeds of litigation, the trustee can then apply to the court for protection from adverse costs, giving full details of the offers received. The Court of Appeal has expressly left the door open for such an application. The courts accept the principle that insolvency should not generally be allowed to stifle a legitimate claim. There is therefore no reason to believe that a court would not make an order in an appropriate case.