Liability for trustee's costs when bankruptcy order is annulled?

Kooter v Official Receiver & Ors [2023] EWHC 594 (Ch)
Who is responsible for the costs of trustees in bankruptcy if the bankruptcy order is annulled?

Overview

This case considers who should bear the costs of trustees in bankruptcy when the bankruptcy order is annulled on the basis of COMI considerations.

Background

On 7 February 2019, the applicant, Mr Kooter, obtained a £206,000 judgment against the debtor, Ms Radeva. The judgment related to Ms Radeva inducing Mr Kooter to invest £192,000 but thereafter using the money for her own benefit. On 23 December 2017 and 5 January 2018, freezing orders were made against Ms Radeva in favour of Mr Kooter.

On 4 March 2019, Ms Radeva applied for a bankruptcy adjudication and stated that her COMI was in England. The bankruptcy order was made on 27 March 2019. On 23 July 2019, Mr Kooter made an application seeking to have the bankruptcy order annulled on the grounds that the debtor's COMI was not in England and Wales but remained in Bulgaria at the relevant time, and therefore England and Wales did not have jurisdiction to make the bankruptcy order.

On 24 October 2022, the Court made the annulment order but also directed a subsequent hearing to enable the Trustees in Bankruptcy, who had been appointed shortly before the annulment application, to make an application in relation to their costs. The main contested issue was whether the Court should order that Mr Kooter, the 90% creditor, be liable for any of the costs incurred by the Trustees (including both the legal costs occasioned by the annulment application and also the Trustees' remuneration, costs and expenses of the bankruptcy itself).

The Parties' Positions

Mr Kooter argued that he should not have to bear the Trustees’ costs, having been an innocent party and having succeeded on the annulment application. Mr Kooter also criticised the conduct of the Trustees, mainly on the basis that the costs being claimed were too high and that the Trustees had not carried out their functions in a proportionate way, in particular by not having taken into account the limited role of the Trustees in the annulment application based on its jurisdictional grounds.

The Trustees argued that they had acted entirely properly and that an order should be made that both Ms Radeva and Mr Kooter should be jointly and severally liable to pay the costs of the Trustees, totalling £32,508.96. They also argued that Ms Radeva would be unlikely to meet any costs order made against her. Finally, they took the position that Mr Kooter was not entirely an innocent party, as the Trustees had to prepare a bundle for the court to deal with a removal resolution brought by Mr Kooter which was ultimately unsuccessful.

The Court's Decision

The Court noted the well-known case of Butterworth v Soutter [2000] BPIR 582, a decision of Mr Justice Neuberger (as he then was), where he stated: "the fact that the trustee is fulfilling a function for the court, and that trustees could not be prevailed upon to act if their remuneration was contingent on the bankruptcy not being annulled, are both factors which may weigh heavily in the exercise of the discretion in an individual case." The Court examined the case and concluded that it demonstrated the width of the discretion of the Court in a given case, but also the relevance of the facts in each case.

The Court then considered the case of Oraki v Dean and Dean [2013] EWCA Civ 1629, which also clarified that there is no presumption in favour of awarding costs to the trustee, and also that the innocence of the bankrupt does not prevent the bankrupt being made to pay the costs of his or her trustee.

The Court ultimately determined that it was not fair to Mr Kooter to make him pay all of the costs, and that it was equally not fair to deprive the Trustees of any order in their favour in relation to Mr Kooter.

The annulment application made in this case was a jurisdictional challenge. The Trustees were served with the annulment application and the evidence in support. They took advice on it, and they would have been advised that a jurisdictional challenge meant that, if successful, the bankruptcy order would be annulled as of right. The Trustees ought to have been, on the facts of this case, very alert to the merits of the application.

The Court also emphasised that it was difficult to understand why the Trustees had filed two lengthy witness statements which included assessments as to the investigations which the Trustees would seek to carry out when a simple statement setting out the fees incurred to date was all that was needed, if that. Equally, the overall sums being claimed bore little resemblance to a case of a neutral trustee. The evidence filed in the annulment application demonstrated the uphill struggle which Ms Radeva faced in seeking to establish that her COMI was in England and Wales.

The Trustees should have been very careful in what investigations or other work they carried out. Mr Kooter was the main creditor with over 90% in value, and the Trustees could have consulted him and ensured that they kept their fees as small as possible.

The Trustees knew that this was a jurisdictional challenge, which meant that if Mr Kooter succeeded, then there would be no entitlement to any costs unless ordered by the Court. As for Mr Kooter, the Court accepted that he caused some additional expense for the Trustees with the removal resolution, but did not regard that as being substantial.

In light of the foregoing, the Court concluded that the most just outcome was to make a limited order against Mr Kooter, requiring him to pay a contribution towards, but not all of, the Trustees' costs. Ultimately, the Court directed that Mr Kooter should be liable to pay the sum of £7,500 plus VAT by way of a proportion of the legal costs occasioned by the annulment application and also the Trustees' remuneration, costs and expenses of the bankruptcy itself.

Judge: Deputy Insolvency and Companies Court Judge Agnello KC

Counsel: Kamen Shoylev of New Balkans Law Office for Mr. Kooter; Lauren Kreamer of Radcliffe Chambers (instructed by Julian Dobson Solicitors) for the Trustees in Bankruptcy