BPE Solicitors and another v Gabriel

The Supreme Court was asked to direct whether a trustee in bankruptcy who adopts an appeal becomes personally liable for costs incurred by the respondent in earlier proceedings conducted by the bankrupt before bankruptcy. The court held that a trustee who adopts an appeal to the Supreme Court is not, by virtue only of his office or of that adoption, personally liable for costs incurred up to and including an earlier Court of Appeal order that was made before the commencement of the bankruptcy.

Key legal principles applied include the contrast between the position of a trustee in bankruptcy (s.306 Insolvency Act 1986) and a liquidator, the court’s power to determine incidental questions of costs under section 40(5) of the Constitutional Reform Act 2005 and the Supreme Court Rules, and the modern recognition that costs liabilities can be provable contingent debts (following In re Nortel GmbH; In re Lehman Brothers International (Europe)). The court declined to treat the old authority in Borneman v Wilson as an absolute rule requiring adoption of all prior proceedings as a matter of law, and emphasised that discrete proceedings (trial and successive appeals) should be treated separately for costs.

Background and parties: Mr Gabriel had lent £200,000 to Whiteshore Associates Ltd. He sued and the trial judge found solicitors BPE negligent, awarding substantial damages. The Court of Appeal reduced the substantive award and, in the alternative, found contributory negligence; it also ordered Mr Gabriel to pay BPE’s costs of the proceedings up to and including the Court of Appeal. Mr Gabriel was made bankrupt after the Court of Appeal order and the trustee, Mr Hughes-Holland, contemplated adopting the pending appeal to the Supreme Court.

Nature of the application: The trustee applied for a declaration whether, by adopting the appeal, he would be personally liable for costs incurred by BPE in the proceedings below up to and including the Court of Appeal order of 22 November 2013. The practical stakes for creditors and the trustee’s decision whether to pursue the appeal made the point urgent.

Procedural history: Permission to appeal to the Supreme Court had been granted. The dispute arose following the Court of Appeal decision ([2013] EWCA Civ 1513) which had altered both damages and costs orders. The trustee’s application for directions was dealt with by the Supreme Court prior to determination of the substantive appeal.

Issues framed:

• whether the Supreme Court had jurisdiction to determine a pre-emptive question about the incidence of costs in a pending appeal;
• whether a trustee who adopts an appeal thereby becomes personally liable for costs incurred in prior proceedings conducted by the bankrupt before bankruptcy;
• the relevance of older authorities (notably Borneman v Wilson) and of modern statutory and procedural provisions governing costs and provable contingent liabilities.

Court’s reasoning: The court accepted jurisdiction under section 40(5) of the Constitutional Reform Act 2005 and the Supreme Court Rules to determine questions necessary to do justice in the appeal, including costs questions at an interlocutory stage. It reviewed authorities: it concluded Borneman v Wilson should no longer be treated as laying down a rule that adoption of proceedings by a trustee necessarily imports personal liability for all prior costs; that question is one of discretion and principle rather than automatic rule. The court emphasised the distinction between separate proceedings (trial and appeals) for the purposes of costs: a costs order made by the Court of Appeal before bankruptcy constitutes a provable debt of the bankrupt and would remain the bankrupt’s liability, not automatically the trustee’s, if the trustee adopts only the Supreme Court appeal. The court relied on modern authorities recognising contingent provable costs liabilities (In re Nortel GmbH; In re Lehman Brothers International (Europe)). The court observed that the trustee might in other circumstances be ordered to meet earlier costs by exercise of discretion or by making a non-party order against the bankrupt, but that is not the present question.

Relief sought and result: The trustee sought a declaration about his personal liability. The Supreme Court declared that if the trustee adopts the appeal he will not be personally liable, by virtue only of his office or of his adoption of the appeal, for costs incurred by the respondent up to and including the Court of Appeal order dated 22 November 2013.

Practical observation: the court noted this determination was necessary to enable the trustee and creditors to make an informed decision about pursuing the appeal and that the question involves no pre-emptive exercise of discretion affecting the substantive appeal.

The Supreme Court declared that the trustee in bankruptcy who adopts the appeal to the Supreme Court will not be personally liable, by virtue only of his office as trustee or of his adoption of the appeal, for costs incurred by the respondent in relation to the action up to and including the Court of Appeal order dated 22 November 2013. The court reached this conclusion because costs of the distinct earlier proceedings which produced a provable liability remain the bankrupt’s liability and adoption of the later appeal does not automatically import personal liability for those earlier costs; Borneman v Wilson does not establish an absolute rule to the contrary.

The case reached the Supreme Court with permission to appeal granted on 25 March 2014. The Court of Appeal had disposed of the earlier appeal and made an order for costs on 22 November 2013 ([2013] EWCA Civ 1513). The Supreme Court was asked to rule on the incidence of those costs after Mr Gabriel was made bankrupt and a trustee was appointed on 25 March 2014.