BPE Solicitors and another v Gabriel

A trustee in bankruptcy who adopts an appeal becomes personally liable for the costs of that appeal, subject to an indemnity from the estate. Adoption of the appeal does not, by itself, make the trustee personally liable for costs incurred in distinct proceedings below which the bankrupt conducted before bankruptcy.

A trial and successive appeals are distinct proceedings for costs purposes. A pre-bankruptcy costs order against the bankrupt remains the bankrupt’s provable debt. Treating it as the trustee’s personal expense would give the costs creditor an unwarranted priority over other creditors. There is also no absolute rule that adopting pending litigation makes a trustee liable for every cost incurred before adoption.

Mr Gabriel lent £200,000 to a company in a transaction negligently handled by BPE Solicitors. The trial judge awarded substantial damages, but the Court of Appeal, in [2013] EWCA Civ 1513, reduced the award to £2 and ordered Mr Gabriel to pay BPE’s costs of the trial and appeal.

Mr Gabriel became bankrupt after the Court of Appeal’s order. His trustee, Mr Hughes-Holland, acquired the right to pursue the pending Supreme Court appeal but had not decided whether to adopt it. The trustee accepted potential personal liability for the Supreme Court costs. He sought a ruling on whether adoption would also make him personally liable for BPE’s costs below, which exceeded the estate’s assets.

The central issues were whether the Supreme Court could determine that question before the substantive appeal and whether adoption of the Supreme Court appeal necessarily entailed adoption of the distinct proceedings below.

1. Declaration granted unanimously. Lord Sumption delivered the judgment, with which Lord Mance, Lord Carnwath, Lord Toulson and Lord Hodge agreed. If the trustee adopted the Supreme Court appeal, he would not, merely because of his office or adoption, be personally liable for the respondent’s costs incurred up to and including the Court of Appeal’s order of 22 November 2013.

2. The Supreme Court had jurisdiction to decide the question before the substantive appeal. Section 40(5) of the Constitutional Reform Act 2005 empowered it to determine questions necessary to do justice in an appeal. Rule 46 of the Supreme Court Rules 2009 permitted costs orders, and therefore decisions on principles governing costs, at any stage. An immediate ruling was just because it enabled the trustee and creditors to make an informed decision about pursuing the appeal.

3. Property comprised in a bankrupt’s estate vests in the trustee under section 306 of the Insolvency Act 1986. A trustee who adopts litigation becomes the relevant party and is ordinarily personally liable for adverse costs incurred in that litigation, subject to indemnity from the estate for liabilities properly incurred.

4. Borneman v Wilson (1884) 28 Ch D 53 was no longer good law insofar as it imposed an absolute rule that pending proceedings must be adopted in their entirety. Its approach reflected obsolete assumptions that costs could be ordered only against a party and that a post-bankruptcy costs order was not provable. Modern non-party costs jurisdiction and the recognition of contingent costs liabilities removed that foundation. Responsibility for pre-adoption costs may instead depend on the court’s discretion.

5. More fundamentally, a trial and successive appeals are distinct proceedings for costs purposes. Mr Gabriel had conducted the trial and Court of Appeal proceedings to completion before bankruptcy. The resulting costs order remained his provable debt. Adoption of the Supreme Court appeal did not amount to adoption of those earlier proceedings.

6. Making the trustee personally liable for the existing costs order would convert BPE’s provable debt into an administration expense indemnified from the estate ahead of ordinary distributions. That would give BPE an unwarranted priority. Questions concerning a costs order made for the first time after a bankrupt had succeeded below were left for a case in which they arose.

1. United Kingdom Supreme Court: On an application for directions in the pending appeal, the court unanimously declared that adoption of the appeal would not, by itself, make the trustee personally liable for costs incurred through the Court of Appeal’s order.

2. Court of Appeal: In [2013] EWCA Civ 1513, reduced the damages award to £2, alternatively assessed contributory negligence at 75%, set aside the trial judge’s costs order and ordered Mr Gabriel to pay BPE’s costs through the appeal.

3. Trial court: Found BPE negligent, awarded Mr Gabriel the full sum recoverable under the facility agreement and awarded him the costs of the claim through trial.