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Bankruptcy: who pays Trustee’s costs on annulment?

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Posted by Caroline Benfield on 10 September 2014

Caroline Benfield Partner

A case that came before the High Court in 2013 has highlighted the discretion of the court to decide whether, and if so by whom, the Trustee’s costs, arising from a bankruptcy order which was subsequently annulled, should be paid.

Dr and Mrs Oraki were declared bankrupt after a refusal to pay the legal fees of their solicitor who, they alleged, was guilty of misconduct. On appeal, their bankruptcy orders were annulled. However, the matter was not over: the couple then appealed against the order to pay the costs (which were considerable) accrued by the Trustee in Bankruptcy and then to reclaim the sum from their solicitor’s firm. 

When an annulment can be made

An annulment of a bankruptcy order is, for practical purposes, an order of the Court cancelling the original bankruptcy order made against a debtor and may be made on one of the following grounds:

  • if it appears that there were any grounds, when the bankruptcy order was made, for believing that the order ought not to have been made;
  • if it appears that, to the extent required by the rules, the bankruptcy debts and the expenses of the bankruptcy have all, since the making of the bankruptcy order, been either paid or secured to the satisfaction of the Court; or
  • if an undercharged bankrupt enters into an individual voluntary arrangement with their creditors.

The effect of the annulment of bankruptcy order is that it sets aside the bankruptcy order as though it was never made i.e. the debtor resumes liability for their debt and has their assets and property, previously vested in the Trustee in Bankruptcy, returned.

Who should pay the costs of an annulled bankruptcy?

The costs of an annulment of bankruptcy order will be paid depending on how the bankruptcy is annulled. If it is annulled by a payment in full, then the payment will doubtless already take into account the debts and expenses of the bankruptcy. However, if the bankruptcy is annulled on the basis that a bankruptcy order should never have been made, then the Court has discretion as to what costs order to make and which party should bear the costs.

The amount of costs, how they should be paid and the party responsible for paying them should be included in the annulment order for the avoidance of doubt.

Background to Dr & Mrs Oraki’s case 

The Claimants, Dr and Mrs Oraki, had been made bankrupt (in September 2005 and January 2006 respectively) as a result of a judgment in default obtained by their solicitor, Dr Mireskandari of Dean & Dean in respect of unpaid legal fees in the region of £20,000.

Dr and Mrs Oraki challenged the debt by alleging that their solicitor was guilty of misconduct (although at this stage, disciplinary proceedings had commenced but had not been determined). They also applied to have their bankruptcy order annulled. Although their initial applications failed, they appealed in January 2013 on the basis that their solicitor was never a bona fide solicitor and therefore was not authorised to charge any legal fees. The court agreed and annulled their bankruptcy orders . The Judge then had to decide whether the Official Receiver’s and Trustee in Bankruptcy’s costs should be paid by the Orakis. The costs were substantial given the amount of time that had passed since the matter began.

Although it was decided that the bankruptcy order should never have been made and, as such, the Orakis should not have had to pay any costs; the Trustee had carried out his work in good faith and in line with his statutory duties and therefore should be paid.

The Court concluded, on the facts of this case, that Dr and Mrs Oraki should pay the costs of the Trustee in Bankruptcy but gave them leave to apply to Dean & Dean to reimburse them, and to challenge the Trustee’s conduct and remuneration.

On Appeal

Dr and Mrs Oraki, believing themselves wholly innocent in the matter, subsequently appealed to the Court of Appeal. In the judgment, the Court approved Redbridge LBC v Mustafa [2010] EWHC (Ch) 1105 and identified four categories of costs to be contemplated on annulment of bankruptcy as follows:

  • costs of the original petition;
  • costs of the annulment application;
  • the Official Receiver’s costs; and
  • the Trustee in Bankruptcy’s costs.

The Court held that there was no presumption in favour of  the Trustee and that the Court has an unfettered discretion as to costs when annulment of bankruptcy is made. Dr and Mrs Oraki’s appeal was dismissed as the Court found that the previous order was adequate in that it allowed them to apply for the Trustee in Bankruptcy’s remuneration to be reduced and for Dean & Dean to bear the costs.

Points considered

The Court considered a number of points in arriving at its decision, particularly that it is in the Court’s discretion to award costs and that there is no presumption in favour of the Trustee despite the fact that the Order should never have been made.

The Court also pointed out that a Trustee in Bankruptcy is essential fulfilling a function for the Court and if it is conducted properly, they should expect to recover their costs, but that the facts of the case will determine the outcome.

The Court mentioned that although it is usual for the Petitioning Creditor to pay costs if the Bankruptcy Order should never have been made, consideration will be taken as to the Petitioning Creditor’s ability to pay; and in the Oraki case, Dean & Dean did not appear to have sufficient funds.

What it means for Trustees in Bankruptcy

While the Oraki decision was in favour of the Trustee in Bankruptcy, the Court of Appeal’s analysis proved to all Trustees in Bankruptcy that it should not be assumed that Trustees will inevitably recover all costs and expenses on annulment.

If the bankrupt questions the issuing of a bankruptcy order, Trustees are well advised to seek legal advice as soon as possible and, if appropriate, flag the issue to bring the matter to a sensible conclusion.

This kind of pro-active management of a bankruptcy by a Trustee not only benefits the bankrupt, but also increases the prospect that the Court will make an Order for Trustee’s costs and expenses to be met by either the bankrupt or a third party.

About the author

Caroline advises on all aspects of contentious and non-contentious personal and corporate insolvency matters.

Caroline Benfield

Caroline advises on all aspects of contentious and non-contentious personal and corporate insolvency matters.

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