Oraki & Anor v Dean & Dean (A Firm) & Ors

On annulment of a bankruptcy which ought never to have been ordered, the court has an unfettered discretion over the trustee’s costs. No presumption or rule prevents an innocent bankrupt from being ordered to pay them. A trustee who has acted properly can normally expect provision for reasonable remuneration and expenses.

The court must consider the positions of both the bankrupt and the trustee. It may consider the petitioning creditor’s inability to pay and the trustee’s need for security. Misconduct by the trustee may reduce or extinguish recovery. The court may make annulment conditional upon payment, defer annulment until payment, or, in an appropriate case, annul immediately while retaining sufficient assets to meet debts and expenses.

The appellants were made bankrupt on petitions founded on a supposed debt for solicitors’ fees. The High Court concluded that the debt did not properly exist and that the bankruptcy orders ought not to have been made. It allowed their appeal in principle but deferred annulment until conditions were met, including payment of the trustee’s properly recoverable costs and expenses: [2012] EWHC 2885 (Ch).

The appellants challenged that costs order. They argued principally that wholly innocent bankrupts could not be required to bear the trustee’s costs and that the judge had wrongly treated the trustee’s conduct as irrelevant. They also sought immediate, unconditional annulment.

The central issues were who should bear the trustee’s expenses after an annulment under section 282 of the Insolvency Act 1986, and whether annulment could properly be deferred until those expenses were determined and paid.

1. Appeal dismissed. The judge’s treatment of the trustee’s costs and his decision to defer annulment were proper exercises of discretion. Floyd LJ gave the leading judgment. Davis LJ agreed, and Arden LJ agreed while adding reasons concerning the protection of the trustee’s expenses.
2. The court has an unfettered discretion to decide whether a trustee’s expenses should be paid and by whom. There is no presumption in the trustee’s favour because a presumption would contradict that discretion. Nevertheless, a trustee who performs the court-appointed function properly can normally expect provision for reasonable remuneration and expenses. The court must examine the position from the trustee’s perspective as well as that of the bankrupt: paras [28]–[40].
3. No general rule prevents an entirely innocent bankrupt from being ordered to pay the trustee’s costs. Innocence as between the bankrupt and the petitioning creditor does not determine the separate balance between the bankrupt and a trustee who has acted properly. The court may consider practical realities, including the petitioning creditor’s inability to pay and whether another order would leave the trustee without effective security: paras [35]–[42].
4. The trustee’s conduct remains relevant. Improper conduct may reduce or eliminate recovery. The judge had left the appellants free to challenge both the trustee’s conduct and the amount of his remuneration. He had therefore not treated conduct as legally irrelevant: paras [43]–[49], [69].
5. Under section 282(4)(b) of the Insolvency Act 1986, the court may annul immediately on terms protecting payment of the trustee, or defer annulment until conditions have been met. Arden LJ added that immediate annulment may be possible by vesting sufficient assets in the trustee or another person to permit later payment of debts and expenses. On the evidence here, however, the unresolved disputes, insufficient cash and likely further expenses justified deferment: paras [50]–[60].
6. The proper expenses of the trustee should normally be paid or secured before the assets are removed from the trustee. The judge was entitled to transfer the risk of non-payment to the appellants while preserving their right to challenge the expenses and seek an indemnity from the petitioning creditor: paras [62]–[69].

1. Court of Appeal (Civil Division): The appeal was dismissed. The conditional and deferred annulment, including provision for the trustee’s costs, was upheld: [2013] EWCA Civ 1629.
2. High Court, Chancery Division: Mr Robert Ham QC, sitting as a deputy judge, held that the debt did not properly exist and that the bankruptcy orders ought not to have been made. He allowed the appeal in principle but deferred annulment subject to conditions, including provision for the trustee’s costs: [2012] EWHC 2885 (Ch).
3. Bankruptcy registrar: Deputy Registrar Cheryl Jones had refused annulment on 9 April 2010 because the application was premature.