BPE Solicitors & Anor v Gabriel [2015] UKSC 39

Mr Gabriel's solicitors were found negligent over a £200,000 loan transaction, but the Court of Appeal reduced damages to nominal £2 and ordered costs against him. After his bankruptcy, his trustee sought a ruling on personal costs liability if adopting the pending Supreme Court appeal.

Facts

Mr Richard Gabriel lent £200,000 to Whiteshore Associates Ltd in a transaction handled negligently by BPE Solicitors. The trial judge awarded him the full sum recoverable under the facility agreement, but the Court of Appeal held the loss fell outside the scope of the solicitors’ duty and reduced the damages to a nominal £2, also finding (in the alternative) that contributory negligence would have reduced damages by 75%. The Court of Appeal set aside the trial costs order and ordered Mr Gabriel to pay BPE’s costs of approximately £469,170.60.

On 5 March 2014, after the Supreme Court granted permission to appeal, Mr Gabriel was made bankrupt on his own petition. Mr Hughes-Holland was appointed as trustee in bankruptcy on 25 March 2014. The right to pursue the appeal vested in the trustee, who had not yet decided whether to pursue it because of uncertainty about his potential personal liability for costs. The unsecured creditors stood to receive 3–5p in the pound without the appeal, potentially rising to 23–25p if it succeeded, but facing wipe-out if the trustee were personally liable for costs below upon a failed appeal.

Issues

Two issues arose: (i) whether the Supreme Court had jurisdiction to determine the question of the trustee’s potential costs liability in advance of the substantive appeal; and (ii) whether, by adopting the appeal to the Supreme Court, the trustee would, as a matter of law, become personally liable for BPE’s costs in the proceedings below (trial and Court of Appeal) which were incurred before his appointment.

Arguments

Mr Stewart QC, for BPE, argued that the Supreme Court had no jurisdiction to deal with the incidence of costs except as a condition of permission or as part of the ultimate disposition of the appeal. Mr Chichester-Clark, for the trustee, contended that the trustee, while accepting personal liability for the costs of the Supreme Court appeal itself, should not be personally at risk for BPE’s costs of the proceedings below merely by virtue of having adopted the appeal.

Judgment

Jurisdiction

Lord Sumption (with whom Lord Mance, Lord Carnwath, Lord Toulson and Lord Hodge agreed) rejected BPE’s jurisdictional objection. Section 40(5) of the Constitutional Reform Act 2005 and rule 46 of the Supreme Court Rules 2009 empower the court to make costs orders at any stage. A decision on a question of principle relating to costs could likewise be made at any stage. Ruling on the issue now was necessary to allow the trustee and creditors to make an informed decision about pursuing the appeal, and involved no discretionary considerations that required determination after judgment.

The question of principle

The court explained that, unlike a liquidator, a trustee in bankruptcy is personally a party to legal proceedings he adopts because the bankrupt’s assets vest in him under section 306 of the Insolvency Act 1986. If the trustee adopts an action, he becomes personally liable for adverse costs orders, subject to a right of indemnity against the estate.

The central authority, Borneman v Wilson (1884) 28 Ch D 53, had held that a trustee adopting proceedings could not adopt only part: Bowen LJ stated the trustee

“cannot adopt part of the action and leave out the rest”

and Fry LJ said the trustee had put

“himself into the place of the bankrupt as regards the action and cannot take one part of it and reject another”

. Lord Sumption held this was no longer good law. The decision was understandable in its Victorian context because (i) costs orders could only be made against parties (the non-party jurisdiction now in section 51(3) of the Senior Courts Act 1981 not being recognised until Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965); and (ii) a contingent costs liability was not then provable in bankruptcy — a position overruled in In re Nortel GmbH [2014] AC 209, which established that participation in litigation creates a contingent liability for costs provable as a contingent debt.

Free of those misconceptions, there is no absolute rule requiring the trustee, by virtue of adoption alone, to pay the other side’s costs incurred before adoption. At most, such an order may be appropriate as a matter of discretion. Crucially, however, a trial and successive appeals are distinct proceedings for costs purposes, each attracting its own costs order (citing Wright v Bennett [1948] 1 KB 601). Mr Gabriel had conducted the trial and Court of Appeal proceedings personally, before his bankruptcy, and the Court of Appeal’s costs order against him was a provable debt against his estate.

Were the Supreme Court to dismiss the appeal, it would normally only affirm the existing order, which would remain Mr Gabriel’s liability, not the trustee’s. To require the trustee to pay those earlier costs personally would improperly give BPE priority over other unsecured creditors via the trustee’s indemnity against the estate.

Declaration

The court declared that, if the trustee adopts the appeal to the Supreme Court, he will not be held personally liable for any costs incurred by BPE in the action up to and including the Court of Appeal’s order of 22 November 2013, by virtue only of his office or his adoption of the appeal.

Implications

The decision departs from Borneman v Wilson and clarifies that adoption of an appeal by a trustee in bankruptcy does not automatically expose the trustee to personal liability for costs incurred at earlier, distinct stages of the litigation conducted by the bankrupt before bankruptcy. The principle is grounded in two developments: the statutory jurisdiction to make non-party costs orders, and the recognition in Nortel that contingent costs liabilities are provable debts in bankruptcy.

For trustees in bankruptcy, the decision is practically significant: it enables them to assess realistically the costs risks of adopting pending appeals, without being deterred by the prospect of inheriting historical costs liabilities that would otherwise constitute provable debts. It also protects the pari passu distribution to creditors, since allowing such costs to be paid as trustee expenses would confer an unwarranted priority on the costs creditor.

The court was careful to limit its ruling. It confined the declaration to liability “by virtue only” of the trustee’s office or adoption of the appeal — leaving open the possibility of discretionary orders, including non-party orders against the bankrupt or against the trustee in suitable cases. The court also noted that where a bankrupt had succeeded below but failed on appeal, so that costs below were first ordered in the appeal court, similar principles ought to apply, though procedurally a non-party order against the bankrupt might be required to render the liability provable; those questions were left to future cases. The decision is therefore important for insolvency practitioners, litigators, and creditors, but its precise reach in more complex procedural scenarios remains to be worked out.

Verdict: The Supreme Court declared that if the trustee in bankruptcy adopts the appeal to the Supreme Court, he will not be held personally liable for any costs incurred by BPE in relation to the action up to and including the Court of Appeal’s order of 22 November 2013, by virtue only of his office as trustee or his adoption of the appeal.

Source: BPE Solicitors & Anor v Gabriel [2015] UKSC 39