(the case of Segal –v- Pasram)
On 3 December 2007, Deputy High Court Judge Robin Knowles CBE, QC, issued a further judgment in the case of Richard Andrew Segal (Applicant) –v- (1) Nowrag Pasram (2) Henwanti Pasram (Respondents) (Ch) (Bankruptcy Court).
Background
The main trial had taken place in June 2007 when the trustee in bankruptcy had sought (and was granted) an order that a transaction between the bankrupt and his wife amounted to a transaction at an undervalue pursuant to Section 339 of the Insolvency Act 1986.
The Court had found in the trustee’s favour and made an order re-vesting the bankrupt’s interest in the trustee with consequential orders relating to the realisation of that beneficial interest on the sale of the property.
The property in this case was fairly unusual in that it was divided into two maisonettes although it was being used by Mrs Pasram as one residence.
The judge clearly had a great deal of sympathy for Mrs Pasram and indicated in his original judgment that he would look very favourably upon any request made by her which would allow the trustee to realise his share in the property by taking ownership of one of the maisonettes thereby allowing Mrs Pasram to own and reside in the other.
One of the potential obstacles to this being achieved, however, was the level of the trustee’s legal fees which, according to a schedule seen by the judge at the original trial were said to have reached £86,000 including VAT by the week before the hearing. Of that figure, £77,500 including VAT was solicitors’ fees. The judge was also told that there was a CFA in place with an agreed uplift of 80%.
Given the level of costs and the agreed uplift, the judge was concerned that if Mrs Pasram was ordered to pay the trustee’s costs, then that alone would jeopardise her ability to remain in one of the maisonettes.
The judge commented at the trial that on any assessment of the trustee’s legal costs, he believed that it would be important to closely examine the reasonableness of a CFA agreement with an agreed 80% uplift. This was particularly so in cases involving claims to a beneficial interest in a matrimonial home, where, in many cases, the trustee was likely to recover at least a substantial interest in the property with the risk of him not doing so seemingly low. The judge further noted that it would do nothing for the reputation of the administration of insolvent estates if large CFA uplifts were regularly agreed in such cases and also that the existence of a CFA with a large uplift may place undue pressure on a spouse of a bankrupt to accede to the trustee’s claims, since the spouse who chooses to contest may jeopardise significant part of the remaining equity in the home if the trustee is looking to recover the costs that are substantially increased by a large CFA uplift.
The judge also noted at trial that the costs should be seen against a further perspective, namely the creditor claims in the bankruptcy.
In this case the creditors were financial institutions who were owed a total of approximately £65,000, the largest of which held a legal charge over the property. The judge considered that the proposed costs lacked proportionality especially when the estate involved only one asset, the pursuit of which was left for many years.
By the time of the further hearing in December, the trustee’s costs were said to be £160,000 including VAT. This included a CFA uplift of 85% and comprised solicitors’ fees of £125,000 including VAT and counsel’s fees of £35,000 including VAT.
The judge repeated his concerns regarding the reputation of the profession and the undue pressure on non-bankrupt spouses which could result from such CFA uplifts. He also said that the previously indicated costs had appeared disproportionate and that the increased costs seemed even less proportionate. The judge stressed that on any assessment of the trustee’s legal costs (whether as a result of an order made in the proceedings or generally in the bankruptcy), it was extremely important that both the need for a conditional fee agreement and the reasonableness of an 80% or 85% uplift should be examined closely in the context of several matters:
adverse costs insurance was purchased by the trustee for a total sum of £9,450
whether the trustee had asked the creditors to fund this litigation. The judge had been told that the trustee had not asked the creditors to do so
the creditors were financial institutions, owed a total of £65,000. The largest of them held a legal charge over the property
- the pursuit of a beneficial interest in the property by these proceedings was left for many years, presumably with the acquiescence of the creditors
with the uplift, the total of legal costs and bankruptcy costs and fees would, on the face of the updated schedule seen by the court, be more than three times the total of the bankruptcy debts.
The judge clearly felt that if the costs claimed were allowed that this would jeopardise the proposed settlement and also the possibility of a surplus being returned to the bankrupt and/or Mrs Pasram after the debts and expenses of the bankruptcy had been paid in full.
The judge did not assess the costs claimed by the trustee’s solicitors, leaving them to be assessed in due course by a Costs Judge. He did, however, make an order that the trustee’s costs would not be paid by Mrs Pasram but as an expense of the bankruptcy.
Implications for Insolvency Practitioners
It is clear that the judge’s decision in this case was reached on the circumstances of the case and the desire for Mrs Pasram to remain living in one of the maisonettes. The position will vary from case to case but, as a general rule, the trustee should always consider whether the costs of a particular course of action are proportionate and reasonable and also, if he is thinking of entering into those proceedings on a CFA basis, he and his advisors should consider whether both a CFA agreement is appropriate, and if so, what the agreed uplift should be.
The trustee and his advisors will need to consider the nature of the claim, the extent of the bankruptcy debts, whether the creditors are prepared to fund the proceedings and whether the proposed costs are proportionate.
Ultimately, if challenged, it will be for a trustee in bankruptcy to show what he has done is reasonable and that the costs he has incurred in so doing are fair, reasonable and proportionate.
For more information or advice on any of the issues raised here, please contact
Andrew Harris.
