Litigation costs for office holders – dealing with interim applications
In this article we consider the potential litigation costs implications for office holders when dealing with interim applications, in the context of the following three recent bankruptcy cases:
- Kooter v Official Receiver and others  EWHC 594 (Ch)
- Horton (as trustee in bankruptcy of Kraus) v Eurobeam Services Ltd and others  EWHC 173 (Ch); and
- Patley Wood Farm LLP and others v Kicks and others  EWHC 2973 (Ch),  EWHC 3118 (Ch)
As the judgments in each of these cases demonstrate, office holders need to carefully consider their position and the extent of the work they decide to carry out (or not, as the case may be) in relation to any interim application in insolvency proceedings, both at the outset and throughout each stage of the application as it progresses through the Court.
Kooter v Official Receiver and others  EWHC 594 (Ch)
This case related to the costs of a successful application by a creditor to annul a bankruptcy, as well as the Trustees' remuneration, costs and expenses of the bankruptcy itself.
In February 2019, Mr Kooter was awarded a judgment in his favour against Ms Radeva in the sum of around £206,000 (following a dispute concerning an investment arrangement between the parties).
Shortly after this judgment, Ms Radeva applied for a bankruptcy adjudication and, as part of her application, she stated that her centre of main interest (COMI) was in England. The bankruptcy order was duly made on 27 March 2019, and the Trustees were duly appointed on 2 July 2019.
However, on 23 July 2019 (only days after the appointment of the Trustees), Mr Kooter applied to have the bankruptcy annulled pursuant to Section 282(1)(a) of the Insolvency Act 1986 (the Act) on the grounds that the order should not have been made because Ms Radeva's COMI was in fact in Bulgaria (and, consequently, that the English Court did not have any jurisdiction in the matter).
Mr Kooter's application was successful and the bankruptcy was annulled on 24 October 2022 (notably well over three years after the Trustees were appointed). A further hearing took place in December 2022 to deal with the issue of costs – primarily whether Mr Kooter should be liable for all, or at least part of, the Trustees' costs in relation to both the annulment application and their remuneration, costs and expenses of the bankruptcy itself.
The Trustees argued that the work they had carried out was necessary in order to comply with their statutory duties, noting that the bankruptcy had lasted several years. Accordingly, they sought an order that Ms Radeva and Mr Kooter should be jointly and severally liable to pay their costs totalling £32,508.96 (this figure already being a reduction of the Trustees actual time costs of approximately £52,000) relying on the fact that it was highly unlikely that Ms Radeva would comply with any order that she alone pay the costs.
In response, Mr Kooter relied on the fact that he had been successful in his annulment application and the general rules as to litigation costs, being that the successful party should have an order for costs in its favour and not be liable for the costs of other parties.
In making her judgment, the Judge acknowledged that this was a case where it was reasonable for the Trustees to expect to be paid for carrying out their statutory obligations, and that Mr Kooter had caused some additional expense for the Trustees. However, taking into account the specific facts and circumstances of the case, she held that the Trustees should have been more careful in what investigations or other work they carried out.
In particular, the Judge held that the Trustees’ involvement in the application should have been very limited because, effectively, this was a jurisdiction challenge with no real discretion to be exercised by the Court (rather, the Court will, if satisfied on the issue, simply annul the bankruptcy order and dismiss the petition / application).The Judge went on to say that the Trustees should have asked the Court at the earliest possible moment to have their attendance at hearings dispensed with and for their attendance and any representations to be confined to when the case has terminated and the issue of costs becomes live.It is worth pointing out that the Trustees did eventually seek such a direction, albeit at a later date rather than the first hearing – which shows that this kind of situation can be challenging for Trustees who need to balance their statutory duties with the expectation of the Court to take positive early steps in any litigation when appropriate.
The Judge went on to comment that the Trustees costs were extremely high in circumstances where the Trustees asserted from the start that they were adopting a neutral stance (despite the costs reduction already applied by the Trustees).
Striving to reach a fair and just outcome, the Judge ordered Mr Kooter to pay a modest proportion of the Trustees’ costs and remuneration, in the sum of £7,500 plus VAT (so around 23% of the total costs being sought by the Trustees).
Horton (as trustee in bankruptcy of Kraus) v Eurobeam Services Ltd and others EWHC 173 (Ch)
This case related to the costs of an application by the Trustee pursuant to Section 366 of the Act.
Under Section 366 of the Act the Court may, at any time after a bankruptcy order has been made, on the application of the trustee in bankruptcy, summon to appear before it any person appearing to the Court to be able to give information concerning the bankrupt or the bankrupt's dealings, affairs or property. The Court may require any such person to submit to the Court a witness statement verified by a statement of truth containing an account of his dealings with the bankrupt or to produce any documents in his possession or under his control relating to the bankrupt or the bankrupt's dealings, affairs or property.
Here, the Trustee issued a Section 366 application against Eurobeam Services Ltd (Eurobeam) and Bude Nathan Iwanier LLP (BNI) following repeated (and unsuccessful) attempts to obtain certain information in relation to various financial transactions between Eurobeam and the bankrupt, Mr Kraus.
As part of his application, the Trustee sought an order that an authorised partner or director of Eurobeam and BNI attend the Court to be examined in relation to all sums loaned by Eurobeam to Mr Kraus, the relationship between Eurobeam and Mr Kraus, as well as their dealings and all circumstances relating to the loans between them.
The application was served on Eurobeam and BNI on 23 December 2016, following which there was a protracted series of further hearings and directions over several years as Eurobeam and BNI (and later Mr Roth, a former director of Eurobeam who was joined as a respondent to the application on 9 October 2018) gradually provided certain information and documents in response to the Trustee's requests and questions.
Eventually, the Trustee took a commercial view on the information which had been provided and decided in April 2020 to discontinue his application and not seek a private examination of any of the respondents. A hearing was then listed to deal with the issue of costs.
The Trustee sought an order that Eurobeam and Mr Roth pay his costs of the application, on the basis that he was reasonably entitled to have concluded that there was a serious risk that the proposed examinees would not cooperate with him and attend an interview otherwise than under the compulsion of a Court order.
In response, Eurobeam and Mr Roth sought an order that the Trustee pay their costs of the application, arguing that because no order for private examination had been, the Trustee should be treated as the unsuccessful party.
In contrast to Kooter above, the Judge ordered that the Trustee was entitled to all of his costs of this application, and that these should be paid by Eurobeam and Mr Roth, failing which these costs would be costs in the bankruptcy.In particular, the Judge found that the Trustee's legitimate enquiries would not have been adequately addressed without the issue and continued pursuit of the application.Further, the approach adopted by Eurobeam and Mr Roth was obstructive and ambiguous from the outset and that even after issue of these proceedings, there were repeated failures to respond and / or properly to engage with the Trustee.
In this case, an application was made by a number of creditors pursuant to Section 303(1) of the Act for an order directing the Trustees to apply to be joined into, and to take certain other steps in relation to, eviction proceedings (the Eviction Proceedings) involving the bankrupts, Mr and Mrs Brake (the Brakes) and the third applicant, The Chedington Court Estate Limited (Cheddington).
Section 303(1) of the Act states that if a bankrupt or any of his creditors or any other person is dissatisfied by any act, omission or decision of a trustee of the bankrupt’s estate, they may apply to the Court; and on such an application the Court may confirm, reverse or modify any act or decision of the trustee, may give them directions or may make such other order as it thinks fit.
Here, Cheddington (and other creditors) had previously asked the Trustees to oppose an application in the Eviction Proceedings by the Brakes for possession of a property, and to instead make their own application for possession, not least because the Court of Appeal had indicated in the course of the Eviction Proceedings that such an application would be successful.
Despite being offered funding and indemnities for their costs by Cheddington, the Trustees declined to intervene and instead maintained their "neutral" position in the Eviction Proceedings, asserting their belief that the property had no value to the bankruptcy estate and that this would expose the Trustees and the estate to unreasonable risk and expense.
This led to the Section 303 application and, unfortunately for the Trustees, the Judge found that their decision to continue to resist intervention in the Eviction Proceedings was perverse, in the sense that no reasonable trustee in bankruptcy would have done so. The Judge also held that in so acting they did not act in the interests of the creditors but instead sought to be neutral as between the creditors and the bankrupt.
At the subsequent hearing to deal with the issue of costs, the Judge held that the Trustees should be liable for the costs of the applicants, despite the fact that the applicants did not succeed on everything they had asked for.Further, the Judge did not allow the Trustees to recoup their costs from the bankruptcy estates.
The outcome of these cases demonstrate the many ways in which the Court can exercise its wide discretion on litigation costs. It should not be presumed that an office holder will be entitled to recover their costs in the estate (even when adopting a neutral position in ancillary proceedings), or that the "loser" in any court application will automatically be ordered to pay the winning party's costs as is the general convention under the Civil Procedure Rules.
Whilst the Court traditionally has been reluctant to interfere in the professional commercial decisions of office holders, the conduct of the parties in litigation and the legal rationale / reasonableness of any decision making can taken into account by the Court when deciding where liability should lie, and thereafter the amount of any costs awards that are made. We recognise that this often can leave office holders in a difficult position, although where there is uncertainty (and time permits), the Act provides various powers for office holders to seek directions from the Court in relation to the performance of their statutory duties.
Patley also provides a useful reminder that office holders cannot assume that adopting a neutral position will be a safe panacea. Rather, the Court can make an adverse costs order against an office holder for failing to take positive action in response to an application, especially where it would be absurd not to do so.
Office holders therefore need to carefully consider their position and take the appropriate advice when making, and responding to, any applications in insolvency proceedings, not least because they should be prepared to justify the extent of any work that they duly carry out (or not, as the case may be).