Insolvency Practitioners Not Allowed Costs From Estate Overview
This article Insolvency Practitioners Not Allowed Costs From Estate is derived from a little judgment that sprouted earlier today in the matter of Patley Wood Farm LLP & Ors v Kicks & Anor [2022] EWHC 3118 (Ch).
This is yet another in a long line of judgments being handed down by HHJ Paul Matthews arising from the mountains of litigation in the bankruptcy of Mr and Mrs Brakes.
This update on costs consequences for the Insolvency Practitioners is a little sequel to the earlier judgment that this site featured under the rubric Section 303 Trustee In Bankruptcy Application Succeeds. That article had some features that even the incurious mind might struggle to overlook. This one has similar attributes.
Insolvency Practitioner Recoupment Of Costs From Insolvent Estates
The notable highlight in this judgment was the issue of the inability of the Insolvency Practitioners to be able to recover costs (both their own and those they were ordered to pay) from the bankruptcy estates:
The problem for the respondent trustees in this case is that I have held that their decision to continue to resist intervention in the Cottage Eviction Proceedings was perverse, in the sense that no reasonable trustee in bankruptcy would have done so (at [55]). I have also held that in so acting they did not act in the interests of the creditors but instead sought to be neutral as between the creditors and the bankrupts (at [54]). In addition, I also impliedly criticised the trustees for lacking the ordinary robustness needed for officeholders (at [52]).
These are all factors that have featured in decisions to prohibit recoupment of costs out of the insolvent estate. I also take account of the fact that creditors representing 60% of the total debts are among the applicants, and to allow the trustees to recoup their costs will mean the position of those creditors is made significantly worse, even though they succeeded. That does not seem fair to me.
Moreover, even if the facts had been such that it were reasonable for the trustees to decline to act without the reassurance of a court order, it does not follow that the trustees should oppose the order tooth and nail, as these trustees have done. They could have remained neutral on the application, as the applicants invited them to do. Nor does the trustees’ submission sit well with the fact that they are even now seeking permission to appeal.
Circumstances Where Costs Cannot Be Recovered From The Estate
The usual position is that an Insolvency Practitioner acting as Trustee in Bankruptcy will absent some exceptional circumstances be entitled to have their costs paid by the insolvent estate.
An application was made by creditors of the bankruptcy estates for Mr and Mrs Brakes that the Trustees in Bankruptcy should not be permitted to recoup such costs as an expense of the bankruptcy estates. The judge in this matter fleshed out the well known case law on the point:
… The applicants rely on the decision of Richard Snowden QC (as he then was), sitting as a deputy judge of the High Court, in Re Capitol Films Ltd [2010] EWHC 3223 (Ch). That was the case of an administration.
The judge said:
“100. When an administrator leaves office, any expenses properly incurred by him in performing his functions in the administration are charged on the property of which he has custody or control and are to be paid in priority to any floating charge: see paragraph 99(3) of Schedule B1 and rule 2.67(1)(a) of the Insolvency Rules 1986. The liability of an administrator for an adverse costs order made against him, and his own costs of unsuccessful litigation brought by him as administrator, are both capable of being an administration expense in an appropriate case. However, by analogy with cases on liquidation expenses, I believe that the court plainly has a discretion to deprive an administrator of such right of recoupment: see e.g. Mond v. Hammond Suddards [2000] Ch 40 (CA), affirmed in Lewis v. IRC [2001] 2 BCLC 392 (CA).
101. The circumstances in which the court might exercise its discretion to deprive an office-holder of a right of recoupment have, in the case of liquidations, been said to include cases in which the office-holder has been guilty of misconduct (see Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 at 286f-g); where he has made a “blunder” or serious mistake (see Re Silver Valley Mines (1882) 21 Ch D 381 at 385-386); or where it would be unjust for other reasons to permit such recoupment (see MC Bacon Ltd (No.2) [1990] BCLC 607 at 615-616). In the latter case, Millett J. held that it would plainly be unjust for a liquidator to recover his costs of an unsuccessful challenge to the validity of a floating charge from the very property which was subject to that charge in priority to the holder of the charge.
102. In the instant case, whilst I have not needed to decide whether the Administrators were guilty of misconduct, I have held that the approach of the Administrators to the application under paragraph 71 was irrational and misconceived. That conduct is, in my judgment, in the same category as the “blunder” or serious error discussed in the Silver Valley Mines case, and justifies an order preventing the Administrators from recouping themselves from the assets of the Company.
On the other side, the respondents refer to the decision of Chief ICC Judge Briggs in Re Nimat Halal Food Ltd [2020] EWHC 734. That case too concerned the costs of an application made by the administrator of a company, and whether they should be an expense of the administration. The judge reviewed the authorities (including Re Capitol Films Ltd [2010] EWHC 3223 (Ch)), and said:
“13. It is apparent that the court has not spoken with one voice when it comes to nomenclature, but it has enunciated a principled approach. In my judgment the starting point is the Rule 14.9(2). An order should not ordinarily be made against an office holder personally. Something more is required. Something more relates to the conduct of the office holder. The degree of conduct deserving of a personal costs order will depend on the circumstances of each case. A mere mistake is unlikely to be sufficient. Acting in a neutral manner, on an appeal from a rejection of proof, is unlikely to be sufficient. Acting for a personal advantage in resisting an appeal is very likely to lead to a personal costs order. Such conduct would present a ‘special case’ and a ‘good reason’, and may be characterised as ‘irrational conduct’, or ‘unreasonable conduct‘.”
The respondents also refer to the decision of the Court of Appeal in Nutting v Khaliq [2012] EWCA Civ 1726, for the proposition that the court may cap the extent of the prohibition. In that case the court dismissed an appeal from the decision at first instance, applying a 30% cap. The respondents, whilst contending that all their costs should be expenses of the bankruptcies, submit that, if the court is against them on that, then they should be able to claim 50% of their costs in the bankruptcies.
As it happens, the test of “misconduct” referred to in Re Capitol Films Ltd as derived from liquidation cases chimes with that applied in the case of private trusts. In such cases it has been said that the trustees will generally lose their right of indemnity against the trust fund if they commit “misconduct”: see Turner v Hancock (1882) 20 ChD 303, Re Jones [1897] 2 Ch 190, Re Londonderry’s Settlement [1964] Ch 594, 614, Armitage v Nurse [1998] Ch 241.
Permission To Appeal
The other interesting feature of this little judgment was the impression that might have come across that the judge did not appear enthusiastic about the Trustees in Bankruptcy seeking permission to appeal his earlier decision:
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By way of an initial observation, there is perhaps something rather incongruous in the respondents seeking permission to appeal at all. They are trustees in bankruptcy, officers of the court. The court has given a direction as to what they should do, and as a general proposition officers of the court should simply go ahead and do it, and not appeal. If they had remained neutral during the application for a direction, they could not have been criticised for doing so, and (as the applicants confirmed in correspondence) costs would not have been sought against them.
Court Of Appeal Decision
The Trustees subsequently appealed to the Court of Appeal which said their decision was not perverse:
… the Trustees’ decision not to apply to join the Eviction Claim appeal cannot possibly be stigmatised as perverse.
The Court of Appeal’s decision can be reviewed in an article called Trustees’ Decision Not Perverse Says Court Of Appeal.
It may be the costs position outlined above may be varied as a result.
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