Nutting & Anor v Khaliq & Anor

The Court of Appeal considered the proper allocation of costs in insolvency proceedings concerning two applications by the appellants: an application to suspend a warrant for possession of the matrimonial home and an application to vary an earlier December 2009 order concerning sale of a second property. The court reaffirmed that the starting point for costs is CPR Part 44 but that, in insolvency proceedings, the Insolvency Rules permit a trustee to recover properly incurred costs from the bankruptcy estate subject to the court's scrutiny.

The court held that the District Judge was entitled to find fault on both sides and to consider limiting a trustee's right to recoup costs from the estate where the trustee had been culpably inactive, applying IR Rule 6.224(1)(a)(i) and IR Rule 7.39. The High Court judge's substituted order capping recoverable costs at 30 per cent of the trustee's recoverable costs was within the ambit of a reasonable exercise of discretion in respect of the first appellant. However, the Court of Appeal held that the second appellant, who was wholly successful and not criticised, should receive her costs in the ordinary way under CPR 44 and that it was impermissible to penalise her by reducing the trustees' entitlement to recover costs from the bankrupt's estate on account of her legal aid status.

Background and parties: The first appellant was made bankrupt. The respondents are his trustees in bankruptcy. The appellants owned the matrimonial home (Branksome Crescent) in joint names and the first appellant owned another dwelling (19 Sawrey Place) which was unregistered. District Judge Lingard made a December 2009 order vesting the properties in the trustees, requiring steps to obtain title and to sell Sawrey Place first, and providing that if the bankruptcy debt remained unpaid Branksome Crescent should be sold. The trustees were ordered summary costs of £5,000 in that earlier order.

Procedural posture: The trustees applied for a warrant of possession of Branksome Crescent. The first appellant applied to suspend the warrant and to vary the December 2009 order to permit the trustees time to effect first registration and then sell Sawrey Place. District Judge Lingard heard the applications, found fault on both sides, varied the order to prioritise sale of Sawrey Place, suspended the warrant and ordered that the first appellant pay 60% of the trustees' costs (to be a charge on the bankruptcy estate). The appellants appealed to HHJ Kaye QC, who allowed the appeal in part and substituted an order limiting the trustees' recoverable costs from the estate to 30% of the costs they would otherwise recover; the trustees appealed to the Court of Appeal and the appellants pursued a second appeal as to costs.

Issues framed:

• Whether the District Judge and the High Court judge had properly applied the principles in CPR Part 44 and the Insolvency Rules when making and substituting costs orders in insolvency proceedings.
• Whether a trustee's usual entitlement to recover costs from the bankruptcy estate could be capped because of the trustee's conduct.
• Whether the fact that a litigant is legally aided limited the court's ability to order costs against or in favour of that litigant under the Access to Justice Act 1999.

Court’s reasoning and decision: The Court of Appeal treated CPR Part 44 as the starting point and observed that IR Rule 7.51(A)(1) applies CPR 44 in insolvency proceedings. The court accepted that the Insolvency Rules (including IR Rule 6.224(1)(a)(i) and IR Rule 7.39) protect a trustee's right to recoup properly incurred costs from the estate but that this right may be qualified where the trustee's conduct falls below the standard of a reasonable insolvency practitioner. The court rejected the appellants' contention that section 11(1) of the Access to Justice Act 1999 prevented any order which had the effect of making a legally aided bankrupt bear costs indirectly via the estate, concluding that section 11(1) governs adverse costs orders against a legally aided individual and not limits on a trustee's entitlement to reimbursement from the estate. Applying these principles, the court concluded that the High Court judge's substituted cap (30%) on recovery from the bankruptcy estate was within a proper judicial discretion in relation to the first appellant, but that there was no basis to deprive the wholly successful second appellant of her ordinary costs award under CPR 44; the reduction of the cap because she was legally aided was unjustified. The Court of Appeal therefore dismissed the first appellant's appeal and allowed the second appellant's appeal, awarding her costs of the applications (with the 30% cap applying as to recovery from the bankrupt's estate).

This was an appeal in relation to costs orders in insolvency proceedings. The Court of Appeal dismissed the first appellant’s appeal and allowed the second appellant’s appeal. The court held that CPR Part 44 is the starting point for costs, that Insolvency Rules permit trustees to recover properly incurred costs from the bankruptcy estate but that recovery can be qualified where the trustee has acted culpably, and that section 11(1) of the Access to Justice Act 1999 does not prevent the court from limiting a trustee's right to recoup costs from the estate. The High Court judge’s cap of 30% on recoverable costs from the bankrupt’s estate was within judicial discretion as to the first appellant, but the second appellant, being wholly successful and not criticised, was entitled to her costs in the ordinary way and could not be penalised because of her legal aid status.

Appeal from the County Court (Bradford) where District Judge Lingard made the December 2009 order and, after hearings, ordered the first appellant to pay 60% of the trustees' costs to be a charge on the bankruptcy estate (judgment 21 October 2010). HHJ Kaye QC (Chancery Division, Leeds District Registry) granted permission to appeal and allowed the appellants' appeal in part on 18 January 2012, substituting an order limiting the trustees' recoverable costs from the bankrupt's estate to 30%. The trustees/respondents sought further review and the matter was before the Court of Appeal which delivered the present judgment on 11 October 2012, dismissing the first appellant’s appeal and allowing the second appellant’s appeal.