18 December 2013

[2013] EWCA Civ 1629

Court of Appeal (Arden, Davis, Floyd LJJ)

Who pays the trustee's costs on an annulment?

The Court of Appeal considered the trustee’s recovery of costs following a successful application by bankrupts, Dr and Mr Oraki, for annulment of bankruptcy orders.  The Court approved Redbridge LBC v Mustafa [2010] EWHC (Ch) 1105), identifying four types of costs to be considered when a bankruptcy is annulled:

  1. The costs of the original petition;
  2. The costs of the annulment petition;
  3. The Official Receiver’s costs; and
  4. The trustee’s costs.

On the question of the trustee’s costs and expenses, the following main points of principle emerged: following an annulled bankruptcy, the Court’s discretion to decide whether the Trustee’s costs should be paid and by whom is unfettered.  The petitioning creditor will usually, but not always, be ordered to pay.  When formulating the order, the court will take into account the ability of the petitioning creditor to pay the trustee’s costs.

In most cases where a trustee has acted properly he will receive his remuneration on the basis that trustees may not wish to act if remuneration was contingent on the bankruptcy not being annulled.  Furthermore, trustees are officers of the court and, prior to the annulment, hold a valuable right of property to retain such sums as may be necessary to pay the expenses of the bankruptcy (see section 323 of the Insolvency Act 1986), and should usually be paid to relinquish this.

The position will, however, be different if the trustee has acted improperly.  The Court may order the trustees’ costs to be paid by an ‘innocent’ party who has successfully applied to annul his bankruptcy.  The Court will examine the matter from the position of the bankrupt and of the Trustee.        

In this case the trustee’s costs were high and the petitioning creditor was unlikely to be able to pay. The trial judge made a conditional annulment requiring the Orakis to pay the costs of the trustee.  The effect of this, as Arden LJ noted, was to “transfer the risk of non-payment of expenses from the trustee to the Orakis”, the “appropriate place for that risk to lie”.

The Court will carefully examine the question of who should pay the trustee’s costs, not only from the point of view of the bankrupt but also that of the trustee.