In a Judgment handed down in June 2015 in the case of BPE Solicitors and another v Gabriel [2015] UKSC 39, a Trustee in Bankruptcy sought direction from the Supreme Court as to whether he would be held personally liable for any adverse costs orders made against the bankrupt in earlier stages of proceedings prior to the commencement of the bankruptcy and the appointment of the Trustee in Bankruptcy.

The general principle is that a Trustee in Bankruptcy stands in the shoes of the bankrupt and as such automatically becomes a party to any legal proceedings which he commences or adopts.  It follows that the Trustee in Bankruptcy is also personally liable for any costs order which may be made against him subject to obtaining an indemnity from the creditors up to the value of the assets held in the estate. 

Should a Trustee be held personally liable?

The Supreme Court considered the issue of whether a Trustee in Bankruptcy should in fact be held personally liable for adverse costs orders purely in virtue of occupying the office of Trustee in Bankruptcy and adopting proceedings that were underway prior to his appointment.  It held unanimously that if a Trustee in Bankruptcy decides to pursue the appeal, he will not as a matter of course, in view of his appointment or of his adoption of the proceedings, be held personally liable for the costs of the previous hearings.

Background to the case

Mr Gabriel issued a claim against his solicitors, BPE Solicitors, alleging negligence in their handling of a transaction in which he lent £200,000 to his business associate, Peter Little.  He alleged that they failed to warn him that Mr Little intended to use the funds to repay personal debts rather than purchase and develop an airfield site in accordance with their agreement.  At trial, the judge awarded Mr Gabriel the full amount that he would have received under the loan agreement and his costs up to the conclusion of the trial. 

However, this decision was overturned on appeal in May 2012 on the grounds that the loss claimed fell outside the scope of solicitors’ duties which required them only to provide commercial information rather than advice.  Mr Gabriel’s award was reduced to a nominal amount of £2 and a costs order was made against him for BPE’s costs of the proceedings up to and including the appeal which amounted to circa £470,000.   

Mr Gabriel sought leave to appeal this decision from the Supreme Court.  Permission was granted on 5 March 2014, the same day on which Mr Gabriel declared himself bankrupt.  Mr Hughes-Holland was appointed as a Trustee in Bankruptcy of the estate and as such, the right to appeal the earlier decision vested with him together with the liability for any adverse costs orders made against him by the Supreme Court (subject to a right of indemnity against the insolvent estate to the full value of the assets).  The question he put before the Supreme Court was whether he would be liable for the adverse costs order made by the Court of Appeal against the bankrupt in the same manner.        

Trustees are party to any legal proceedings adopted

In accordance with s306 of the Insolvency Act 1986, the bankrupt’s estate vests in the Trustee in Bankruptcy immediately upon his appointment taking effect and the trustee personally becomes a party to any legal proceedings he chooses to adopt, without the need to effect a formal substitution. 

The Trustee in Bankruptcy is not bound to adopt any ongoing legal proceedings commenced by the bankrupt and is entitled to seek a stay or a dismissal of the proceedings.  However, should he choose to adopt the proceedings, it is clear that he does so in place of the bankrupt. 

Lord Sumption said that this is an easy point of law to apply when the costs in question are all incurred during the Trustee in Bankruptcy’s time in office but it is less clear in circumstances where the proceedings were conducted by a litigant who subsequently becomes bankrupt before the conclusion of proceedings.  

A change in the law

The only case that considered these facts is that of Boreman v Wilson in which the Court of Appeal had held that the costs incurred by the other side prior to the Trustee in Bankruptcy taking office should be borne personally by the Trustee in Bankruptcy. However, the premise of that decision was no longer good law and Lord Sumption said that it should be reviewed as to whether there is in fact any reason why a Trustee in Bankruptcy should be required to bear the liability for costs that were incurred prior to his appointment. 

In circumstances where a Trustee in Bankruptcy chooses to adopt an appeal, the Supreme Court might not necessarily be justified in making an order for him to pay costs which were initially ordered to be paid by the bankrupt.    

Trustees should know the extent of liability at the outset

It is important for a Trustee in Bankruptcy to be able to make an informed decision whether to adopt proceedings upon taking up office and to ascertain at the outset the extent of any possible personal liability in adopting proceedings so as to ensure that it has discharged its duty to try to bring assets into the estate. 

Furthermore, in considering whether to adopt proceedings that are already afoot, a Trustee in Bankruptcy should have sufficient information about his liability to decide whether to possibly seek an indemnity from the creditors or obtain After The Event (ATE) insurance.