England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
IN BANKRUPTCY
Mr Robert Ham QC sitting as a Deputy Judge
[2012] EWHC 2885 (Ch)

		Royal Courts of Justice Strand, London, WC2A 2LL
		18th December 2013

Lord Justice Floyd:

Introduction and background

1. The appellants, Dr and Mr Oraki ("the Orakis"), appeal an order of Mr Robert Ham QC, sitting as a deputy judge of the Chancery Division, dated 21 January 2013. Amongst other matters, Mr Ham had heard the Orakis' appeal from the decision of Deputy Registrar Cheryl Jones dated 9 April 2010 refusing to annul their bankruptcies on the ground set out in section 282(1)(a) of the Insolvency Act 1986 i.e. that the bankruptcy order should not have been made. Mr Ham permitted fresh evidence to be adduced, and decided in principle to allow the appeal and to annul the bankruptcies, subject to hearing the parties on the appropriate terms. The order makes the eventual annulment of the bankruptcies conditional on the payment by the Orakis of the costs of the second respondent, their trustee in bankruptcy. The present appeal concerns only the costs of the trustee in bankruptcy. Because of the length and complexity of the bankruptcy proceedings, those costs are now very substantial.
2. The conditional annulment of the Orakis' bankruptcies came at the end of a very long road, stretching back more than 10 years. In 2002 they had instructed the first respondent, Dean & Dean, to act for them as solicitors. The solicitor in the firm who dealt with their case was Dr Sharokh Mireshkandari. The Orakis were not satisfied with the service they received from Dean & Dean and Dr Mireshkandari and so declined to pay their unitemised bill. In due course they made complaints to the Law Society about the service they had received. On 16 February 2004 Dean & Dean obtained judgment against the Orakis for "damages to be assessed", for a payment on account of £5000 and costs of nearly £4000. By that judgment, Dean & Dean were directed to file a fully itemised bill, but they have never done so. Attempts by the Orakis to appeal the judgment were unsuccessful. In October 2004 Dean & Dean issued a statutory demand for some £20,000, based on the original judgment for the payment on account and further costs which had by then been ordered, and served it on the Orakis. Quite improperly, as the judge found, Dean & Dean refused to accept full payment unless the Orakis also withdrew their complaints to the Law Society about Dean & Dean's conduct. On 1 September 2005 and 10 January 2006 respectively, Mr Oraki and Dr Oraki were adjudicated bankrupt on the petition of Dean & Dean. They were both discharged about one year later.
3. The Orakis' assets have, it is said, always been more than sufficient to meet all possible claims against them. Their reluctance to pay Dean & Dean was based on principle, not inability. Unfortunately, the principle has taken a long time to be vindicated.
4. Despite the discharge of their bankruptcies, on 19 April 2007 Timothy James Bramston of Kingston Smith was appointed as the Orakis' trustee in bankruptcy. The current trustee, the second respondent, Mr Defty, is his successor in that office.
5. On 19 August 2008 there was a hearing before Mr Registrar Nicholls of an application by the trustee for possession of four properties belonging to the Orakis. According to the evidence at that date, the amount required to meet the debts and expenses in full was estimated at £163,000. There was, at that stage, some £150,000 held in the Insolvency Service Account. According to the trustee's representative, the trustee had previously been told that those sums were subject to a trust, but he had been told on that day that the beneficiaries were willing to consent to the sums being used to pay the debts and expenses. Mr Registrar Nicholls impressed on the trustee the need to exercise caution in allowing the costs to escalate by selling the four properties if it turned out that he needed only £163,000 to discharge all the debts and expenses, and bearing in mind also that the trustee had available to him the monies in the Insolvency Service Account.
6. However, Mr Nicholls of counsel, who appeared for the trustee, told us at the hearing of the appeal that disputes continued well after the hearing in August 2008 about the availability of the money in the Insolvency Service Account to discharge the debts and expenses of the bankruptcies.
7. The Orakis tried on a number of occasions to annul their bankruptcies and were unsuccessful. One such application, based on allegations of misconduct against Dr Mireshkandari, came before Deputy Registrar Cheryl Jones on 9 April 2010. She dismissed the application on the basis that it was premature. Although there were disciplinary proceedings pending before the Law Society against Dr Mireshkandari, they had not yet reached a conclusion.
8. An application for permission to appeal eventually came before Peter Smith J in the Chancery Division in June 2011. He noticed that, despite the numerous hearings which had occurred since the original judgment was pronounced, no one had appeared to question the regularity of the original judgment. It was, on the face of it, odd that a claim by solicitors for their fees should result in a judgment for damages to be assessed and a payment on account. He pointed out that there had been no properly itemised bill either before the judgment was entered or subsequently, pursuant to the direction in the judgment.
9. On 21 June 2012 the Solicitors Disciplinary Tribunal ordered that Dr Mireshkandari be struck off the roll of solicitors. Amongst the findings of serious misconduct made against him were dishonest representations as to his professional status, academic qualifications and experience on the basis of which he had gained admission to the roll. He had also not disclosed that he had been convicted of fraud in 1993 before he applied to the Law Society. He was ordered to pay costs of £1.4 million. Mr Ham QC admitted further evidence dealing with these findings on the appeal to him.

The judgment

10. The judge was prepared in principle to allow the appeal against Deputy Registrar Cheryl Jones' decision to refuse to annul the bankruptcies. He did so essentially on the ground that the fraud, collusion or miscarriage of justice which had occurred allowed the bankruptcy court to go behind the original judgment on which the bankruptcies were based. It was now plain, and open to the court to hold, that the debt did not properly exist. Dr Mireshkandari was not a properly qualified solicitor and was not entitled to charge the fees. It followed that the bankruptcy order should not have been made.
11. The judge addressed the issue of costs at the end of his judgment, although he received further submissions before making his order. He correctly identified that there are four categories of costs to be considered once a bankruptcy has been annulled, namely the costs of the original petition, the costs of the annulment application, the Official Receiver's costs and the trustee's costs and expenses. He accepted the trustee's submission based on London Borough of Redbridge v Mustafa [2010] EWHC 1105 (Ch) that the question of who should pay these costs was to be answered by means of a conventional exercise of discretion and not by applying any presumptions or starting points. He was not prepared to make an order directly against Dean & Dean without hearing from them. He recognised that it was unlikely that it would be possible to recover anything from them in any event.
12. Turning to the trustee's costs he noted that there were several disputes between the Orakis and the trustee in relation to the trustee's conduct. He then said this:

"Those matters are not before me and I can decide nothing about them. In my judgment they are not relevant to the question of costs".

13. Accordingly the judge decided that, without prejudice to any application against Dean & Dean and to any dispute about the trustee's remuneration and conduct raised by the Orakis, the costs of the trustee (and the Official Receiver) should be paid by the Orakis. He said that:

"So far as the Official Receiver and the trustee are concerned, the bankruptcy orders were regularly made, they have on the face of it no personal interest in the matter and there is no ground to mulct them of their costs unless and until the Orakis have established that they have acted improperly."

14. It is therefore clear that the judge was not persuaded at that stage that the trustee had acted in any way improperly.

The judge's order

15. The judge's order was arrived at after detailed further submissions of the parties. By paragraph 4 of his order, rather than annulling the bankruptcies forthwith, the judge adjourned the appeal from the Deputy Registrar with liberty to restore within 7 days of full compliance with the conditions in paragraph 8 of the order and provided that there were no outstanding applications or assessments under paragraphs 7, 8b and 9 of the order. I will call these requirements "the conditions". Paragraph 5 then provided that on any restored hearing of the appeal from the Deputy Registrar "the court shall make an order for the immediate annulment of the bankruptcy orders, provided that" the conditions are complied with.
16. Paragraph 7 allowed creditors who had proved in the bankruptcies (to whom notice was required to be sent under paragraph 6) a period to apply for other conditions to be imposed. Paragraph 8 is as follows:

"The appellant shall pay the following:

(a) The costs of the Official Receiver incurred in relation to the Appellants' bankruptcies;

(b) The costs of [the trustee] of and occasioned by the appeals and applications that are the subject of this order, which shall be subject to a detailed assessment on the indemnity basis; and

(c) The costs and expenses of the Appellants' bankruptcies, including, for the avoidance of doubt, the costs and expenses incurred by the [trustee] and his predecessor as trustees in bankruptcy of the estates of the Appellants (including for the avoidance of doubt those costs and expenses relating to the appeals and applications that are the subject of this order)."

Paragraph 9 made provision for applications by the Orakis to challenge the conduct of the trustee and to challenge his remuneration on the basis that it was excessive.

17. The order further provided (paragraph 10) that the trustee was to be entitled to retain and realise such of the assets as would be sufficient for the purposes of discharging the Orakis' liabilities under paragraph 8 and distributing monies to creditors who have submitted proofs (other than Dean & Dean). In default of agreement as to which assets were to be retained by the trustee, the parties could apply.
18. The order next dealt with Dean & Dean. Paragraph 11 ordered Dean & Dean to pay the Orakis' costs of the appeals and applications the subject of the order, their application to annul and a particular hearing. It further provided that Dean & Dean should not be entitled to recover the costs of the petitions as an expense of the bankruptcies. As Dean & Dean were not present, they were given permission to apply to set these orders aside. We were not told that they had done so.
19. Paragraph 18 of the order gave the parties permission to apply in general terms. Paragraph 19 explained one aspect of the general permission. It was to include an application by the Orakis for:

"an order against [Dean & Dean] that [Dean & Dean] should pay all or any of the costs for which the [Orakis] are liable under the terms of this Order provided that Dean & Dean is given reasonable notice of such an application and that any allegations of fraud are properly and fully particularised. For the avoidance of doubt:

(a) The making of any such application and any order upon it shall not alter the liability of the [Orakis] under the terms of this Order…".

20. Although the order made the Orakis liable for the trustee's costs, it thus expressly allowed them (for what that might be worth) to seek to recover those costs from Dean & Dean. The order also allowed the Orakis freedom to take proper objection to the trustee's conduct and the quantum of the trustee's costs. We were told that they have taken advantage of that permission.

The Appeal

21. There were originally five grounds of appeal, but only the first two grounds were pursued before us. Ground 1 is a challenge to the judge's decision to order the Orakis to pay the costs of the trustee when they were completely innocent in every aspect of the matter. It is contended that, before the court could make such an order, some culpability on the part of the bankrupt needs to be shown.
22. Ground 2 asserts that the judge wrongly directed himself by saying that conduct was not relevant to the exercise of the discretion as to who should pay the costs provided the bankruptcy orders were properly made at the time they were made.
23. In his oral argument before us, Mr Jonathan Crystal said that the judge should not have made an order for costs against the Orakis, as there was no reason in logic or fairness to do so. He submitted that the judge wrongly took account of the inability of Dean & Dean to pay. Alternatively he submitted that the judge should have adjourned the making of any such order. Alternatively he invited us to find that the trustee was not entitled to any costs as there was, at the time of his appointment, nothing for him to do. The trustee, he submitted, was appointed at a time when the estate was solvent. Finally he submitted that the judge should not have made the order conditional, but should have granted an immediate and unconditional order annulling the bankruptcy.
24. Mr Nicholls supported the judge's judgment. He submitted that in normal circumstances a trustee in bankruptcy who has acted reasonably can be expected to recover his costs and expenses. The judge's order properly allowed the Orakis to challenge the trustee's conduct and the amount of his remuneration. Given that the petitioning creditors, Dean & Dean, were unlikely to be able to pay, he submits that it is difficult to see what else the judge could have done.

Trustee's costs

25. The relevant background is provided by section 282 of the Insolvency Act 1986 and the provisions of the Insolvency Rules. Section 282 provides so far as material:

"(1)The court may annul a bankruptcy order if it at any time appears to the court—

(a) that, on any grounds existing at the time the order was made, the order ought not to have been made, …

(3) The court may annul a bankruptcy order whether or not the bankrupt has been discharged from the bankruptcy.

(4)Where the court annuls a bankruptcy order …

(a) any sale or other disposition of property, payment made or other thing duly done, under any provision in this Group of Parts, by or under the authority of the official receiver or a trustee of the bankrupt's estate or by the court is valid, but

(b) if any of the bankrupt's estate is then vested, under any such provision, in such a trustee, it shall vest in such person as the court may appoint or, in default of any such appointment, revert to the bankrupt on such terms (if any) as the court may direct;

and the court may include in its order such supplemental provisions as may be authorised by the rules."

26. By Rule 7.33 of the Insolvency Rules 1986 (now replaced by Rule 7.51A which is to the same effect), CPR Part 44 (dealing with costs) applies to insolvency proceedings except insofar as inconsistent with the provisions of Chapter 6 of Part 7 of those Rules. The provisions of CPR Part 44 are well known. They provide that the court has discretion as to whether costs are payable by one party to another and as to the amount of those costs. The general rule is that the unsuccessful party will pay the successful party's costs, but the court may make a different order. The conduct of the parties is relevant, as is the question of whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue.
27. In London Borough of Redbridge v Mustafa (supra), Sir Andrew Morritt Ch. concluded that the trustee's costs of the original petition and the annulment application were governed by the relevant costs provisions of the CPR, save insofar as they were inconsistent with the Insolvency Rules. He went on to say at [25]:

"No doubt the application of those parts of the Civil Procedure Rules to insolvency proceedings requires some moulding to make them fit the different nature of insolvency proceedings. For example it may not always be obvious who is the successful and unsuccessful party for the purposes of CPR Rule 44.3(2). In annulment proceedings under s.282, conduct may assume a greater importance than may normally be the case."

28. So far as the costs and expenses of the trustee are concerned, absent an annulment these are payable out of the estate in accordance with the priority laid down in the Insolvency Rules: see rules 6.138 and 6.224. On an annulment of a bankruptcy, provision may still be made for them. The court has an unfettered discretion as to whether the trustee should have his expenses paid and who is to pay them. There are many dicta to this effect in the cases. Thus in Butterworth v Soutter [2000] BPIR 582 at 585, an annulment case, Neuberger J (as he then was) said:

"The parties' arguments have all proceeded on the basis that I have unfettered discretion to decide who, if anybody, should pay the trustee's costs. To my mind that must be right. The bankruptcy is pursuant to a court order and the court is still seised of the matter. In my judgement the question of whether the trustee should have his costs, and the question as to who should pay the costs, are at large when the court makes an order annulling the bankruptcy."

Similar conclusions were reached by this court in Thornhill v Atherton [2004] EWCA Civ 1858 at [39], albeit in a case where the judge had directed that the perfection of the annulment order should be deferred. At [41] it was indicated by Lloyd J (with whom Jonathan Parker and Waller LJ agreed) that in the circumstances of that case to order the bankrupt to pay the costs of the trustee was "logical and sensible".

29. The basis of the jurisdiction to provide for the payment of the trustee's costs on an immediate annulment of a bankruptcy has been said to be either the inherent jurisdiction of the court or section 282(4) of the Insolvency Act 1986: see London Borough of Redbridge v Mustafa at [27]. The imposition of a condition as to payment of the trustee's costs upon making an annulment order falls plainly within the words of Section 282(4)(b). The bankrupt's estate is vested in the trustee. On an annulment it is open to the court to order the return of the estate on condition that the bankrupt pay the trustee's costs. There is also no difficulty about jurisdiction to provide for such costs where the court, as here and in Thornhill v Atherton, defers the making of the annulment order until the costs are paid. Whether in any given case the court should impose such a condition is another matter.
30. Immediately after the passage from Neuberger J's judgment in Butterworth v Soutter which I have cited, he went on:

"Prima facie it cannot be envisaged that a trustee in bankruptcy will work for nothing, and normally, when a bankruptcy order has been properly made, subject to questions of reasonableness and subject to special facts, the trustee will be paid out of the estate."

31. In London Borough of Redbridge v Mustafa that passage was argued to create a presumption in favour of awarding the trustee his costs. Sir Andrew Morritt pointed out at [33] that there was no presumption. I respectfully agree. A presumption is the antithesis of an unfettered discretion. However 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.
32. Thus in Mellor v Mellor [1992] 1 WLR 517 the issue concerned the application of the former RSC Order 30 rule 3 to the remuneration of a court appointed receiver. The receivership was later discharged because of non-disclosure on the part of the applicant for the order. There are obvious analogies with the position of a trustee where the bankruptcy is annulled. Michael Hart QC (later Hart J) said at 524G:

"A professional receiver cannot be expected to accept office except on the understanding that he is to be entitled, in principle, to remuneration."

33. Later, at 525C-D he said:

"I am myself unable to understand the basis on which it is said that the receiver's rights to remuneration in respect of services actually rendered by him during the currency of his appointment can depend in any way on whether the order appointing him would not have been made if the party applying for it made fuller disclosure to the court than it in fact did. Absent any evidence that the receiver was in some way complicit in the non-disclosure or other impropriety on behalf of the applicant in obtaining the order, the receiver is entitled to act and be remunerated for acting on the footing that his appointment is valid."

34. On the other hand, there may be circumstances where the trustee's conduct outweighs considerations such as this. In Ella v Ella [2008] EWHC (Ch) a bankruptcy order had been made on the application of a wife in acrimonious divorce proceedings to enforce costs orders against her wealthy husband. Sir Edward Evans-Lombe (sitting as a Judge of the High Court) considered that the bankruptcy proceedings were an abuse of the process of the court and annulled the bankruptcy under the provisions of section 282(1)(a). Although he allowed the costs of the Official Receiver to be taken from the estate he declined to make similar provision for the costs of the joint trustees. It is clear from the report that Sir Edward Evans-Lombe thought that the trustees might have other ways of obtaining their remuneration. He also said this at [26]:

"It seems to me that the trustees are not wholly blameless for their own position. They should have realised that this was highly likely to be the sort of bankruptcy proceedings which constitute an abuse of process."

Ground 1: wholly innocent bankrupts.

35. Ground 1 effectively asserts that there is a general rule that a wholly innocent bankrupt should not be saddled with the costs of his or her trustee in bankruptcy.
36. I think that the first point to make is that the expression "wholly innocent" is a potentially confusing one. I fully accept (subject to anything that Dean & Dean may subsequently say) that as between Dean & Dean and the Orakis, the Orakis have shown that they were wholly innocent. The alleged debt (if it ever was such) on which the statutory demand, the judgment and later the bankruptcies were based did not exist, and Dean & Dean were guilty of misleading the Orakis into thinking that they were being advised by a qualified solicitor. The bankruptcy proceedings should, it now appears, never have been brought. They were an abuse of the court's process and what transpired then and subsequently has been described as a miscarriage of justice. There is a stark disparity in the innocence of the Orakis and the apparent guilt of Dean & Dean.
37. The confusion occurs if one seeks to carry those considerations across to the costs position as between the trustee and the Orakis. There is no clear disparity, at least at this stage, between the "innocence" of the two parties. As the judge was aware, untested allegations in this case are made by both sides that the conduct of the other within the bankruptcy has been other than reasonable.
38. In Thornhill v Atherton (cited above) Mr Atherton successfully obtained the annulment of his bankruptcy on condition that he paid the trustee's costs incurred in the bankruptcy. He appealed to this court on the grounds that the annulment should have been unconditional and that he should not have had to pay the trustee's costs, as he was a wholly innocent party. Large costs had been incurred because an order made by the court prior to the bankruptcy had not been drawn to the court's attention in the bankruptcy. It was argued that it was wrong in principle to require a wholly innocent victim of what had been held to be an abuse of process to bear the costs of the trustee in bankruptcy. Lloyd J (as he then was) gave the leading judgment in the Court of Appeal. He proceeded on the assumption that Mr Atherton was not personally at fault (although it was not assumed that his solicitors were free of responsibility). He said this at [42] to [43]:

"[Counsel for Mr Atherton's] submission to us came down in the end to say that it was quite unacceptable and an entirely inappropriate, illegitimate exercise of the discretion to order Mr Atherton to pay the trustee's costs when the whole bankruptcy was the result of an abuse of process on the part of the petitioning creditor and no doubt also Mrs Atherton.

It seems to me that the gap in that argument is that it deals fairly with the position as between Mr Atherton, Mrs Atherton and maybe also the petitioning creditor, but it is entirely irrelevant to the position of the trustee in bankruptcy whose costs have been properly incurred, subject of course to being quantified in the appropriate amount, and is entitled, as in Mellor v Mellor, to have security for the discharge of his costs. Mr Burgess ultimately submitted that the order that the judge should have made and the order that we should make is an unconditional immediate annulment and an order that Mrs Atherton pay the trustee's costs, leaving the trustee to do what he can to enforce that order against her, her assets of course, such as they may be, being embroiled in the ancillary relief proceedings. That would leave the trustee without any security. It seems to me it would put him in a wholly invidious position which would be a wrong exercise of the court's discretion to invoke in the circumstances of this case, particularly when there is fault, maybe, as I say, not personal fault of Mr Atherton but fault of him or his advisers, which has led to the situation in which there are such large trustee's costs, so that the liability of the person ordered to pay and the question of security for her payment is a very real point. In those circumstances, it seems to me that the judge's order was well within the range of the legitimate exercise of his discretion. It seems to me that he did not misdirect himself in any respect, particularly not by touching (in the passage that I have mentioned) on the question of whether the fault lay with Mr Atherton or with his solicitors. Where, as between them, the fault lay it does not matter. Mr Atherton does have in this respect to answer for his solicitors' faults. He may have a remedy against them."

39. It is true that Thornhill is not on its facts an example of a case where an order was made for the trustee's costs to be paid by a party who is altogether without fault in relation to the costs. But Lloyd J's decision does not, as it seems to me, turn on the necessity of proving some fault against the bankrupt in all cases. The fault of the bankrupt's solicitors simply reinforced the view that the trustee should not normally go unpaid.
40. In my judgment, when considering whether to make an order that the bankrupt pay the trustee's costs in the light of an actual or anticipated annulment under section 282(1)(a), the court needs to be careful to examine the matter not only from the perspective of the bankrupt, but also from the perspective of the trustee. The court has an unfettered discretion to decide whether, and if so by whom, the trustee's costs should be paid. Normally, a trustee who has acted properly can expect to have his reasonable remuneration provided for. In my judgment, there is no general rule that the trustee's costs cannot be ordered to be paid by a party who has successfully applied to annul his bankruptcy when that party is entirely innocent vis a vis the petitioning creditor. I would therefore reject the first ground of appeal.
41. It is convenient to deal here with Mr Crystal's point that the judge wrongly took account of the inability of Dean & Dean to pay. In the present case, as the judge recognised, there were two candidates for the payment of the trustee's costs, on the assumption the trustee had acted reasonably and properly. These were Dean & Dean and the Orakis. As the judge also recognised however, Dean & Dean were unlikely to be able to pay. It was, in my judgment, perfectly proper for the judge to take that factor into account in exercising his discretion. In Thornhill v Atherton, in the passage I have cited above, Lloyd J took into account the difficulty that the trustee would encounter if he were left without security to recover against the wife whose assets were "embroiled in the ancillary relief proceedings". It would be surprising if there were a rule that a judge has to close his or her eyes to practical realities such as this. In my judgment there is no such rule.
42. The judge's order in this case provided the Orakis with the opportunity to apply for an indemnity against Dean & Dean, thus giving the Orakis the opportunity to seek to pass on their liability to Dean & Dean. I cannot fault the judge's exercise of discretion on this ground.

Ground 2: did the judge treat the trustee's conduct as irrelevant?

43. It is true that the judge said at one point in his judgment that the issues as to the trustee's conduct were not relevant to the question of costs. There was debate before us as to what the judge meant by that. To my mind it is not conceivable that he meant that, however bad the trustee's conduct, he could never be persuaded not to make an order depriving him of his costs altogether. Reading paragraph 20 of his judgment as a whole, it is clear to me that he was concluding that there were at least some costs of the trustee which the court would be bound to hold were reasonably and properly incurred and which should be borne by the Orakis. Nevertheless there were disputes which he could not resolve as to the trustee's conduct which might reduce the costs payable to him. He could not resolve those disputes, and to that extent they were irrelevant in that they did not require further analysis before him on that occasion.
44. That view of the correct reading of the judgment is fortified by the order which the judge made. This left the Orakis free to pursue the various challenges to the trustee's conduct, and to apply to the court for those findings to be taken into account to reduce their liability under the order. If the judge thought that the trustee's conduct was irrelevant, I cannot see why he would have allowed the Orakis a comprehensive right to challenge it.
45. Accordingly, I would reject Ground 2.

Should the judge have decided that the trustee should get nothing?

46. In his oral argument before us, Mr Crystal made a sustained attempt to persuade us that, on the facts, we should conclude that the trustee's conduct from a certain date was not reasonable or justifiable.
47. Thus he told us that the sum of £150,000 in the Insolvency Service Account had been there since December 2007. In January 2008 the estimated amount to clear the bankruptcy debts and expenses was, apparently, £155,397. He submitted that there was therefore more than enough to deal with the estate and return the surplus to the Orakis. Instead, what has happened is that costs have continued to be incurred so that the total estimated amount now required is around £400,000.
48. In my judgment this court should not embark on such a fact finding exercise for a number of reasons. Firstly, it seems to me that the right place for such arguments to be mounted is in the proceedings which the judge authorised and in which it is open to the Orakis to challenge the trustee's conduct either as a whole or from a particular date. Secondly, I was in any event satisfied by the submissions of Mr Nicholls that the position was not as plain as Mr Crystal maintained. It appears that the Orakis were maintaining at some stages that the money in the Insolvency Service account was subject to a trust and was not available for the payment of their creditors. Whether or not this is so is a matter that can be investigated in the proceedings authorised by the judge. Thirdly, it seems to me to be unlikely that the trustee will not be able to demonstrate that he is entitled to at least some costs.

Should the judge have adjourned the question of who was liable to pay the trustee's costs?

49. I have no doubt that one possible course open to the judge was to adjourn the question of who should pay the costs, and in particular whether a costs order should be made against the Orakis, until after the investigation into the trustee's conduct. This was not the course which the judge decided to adopt, however. He allowed the Orakis to challenge the trustee's conduct and to apply to him for an adjustment of his order if necessary. Given that the Orakis would thus have every opportunity to challenge the trustee's conduct I cannot see that the exercise of the judge's discretion can be faulted. If it transpires that, from the very moment of his appointment, the trustee has acted unreasonably then that will be reflected in the final order which the judge makes.

Should the judge have annulled the bankruptcies unconditionally?

50. The judge decided to impose conditions on the annulment of the bankruptcies. He plainly had jurisdiction to do so, either by making an immediate annulment order subject to conditions pursuant to section 282(4)(b) or by deciding to defer the making of the annulment order until conditions were satisfied (the course which he adopted in this case). In deciding to impose conditions he was exercising a discretion. This court does not normally interfere with the exercise of a judicial discretion if the judge has taken account of the relevant circumstances, not taken account of irrelevant circumstances and is not wrong.
51. In the present case the judge decided to impose as a condition the payment of such of the trustee's costs as are determined to be due after proper investigation. In so doing he made sure that the trustee had some security for his costs and expenses. I am wholly unable to see why the judge should not have so exercised his discretion.
52. I agree with Arden LJ, as explained in paragraphs [58] to [60] of her judgment, which I have seen in draft, that in other cases it may be possible to take a different course, so as to achieve a more expeditious annulment of the bankruptcy, but that the judge was justified in not taking that course here.
53. There was discussion before us as to whether, if the judge had granted an immediate unconditional annulment, the trustee would have retained some charge or lien over the property returned to the Orakis. Mr Hart QC in Mellor v Mellor considered that a receiver of a company would retain a lien over the property once the receivership was discharged and the property returned: see 527G. In written submissions which we invited, Mr Nicholls submitted that the trustee would not enjoy such a charge or lien once he returns the property. He submitted that the position of a trustee in bankruptcy differs from that of other officers in insolvency proceedings, because the estate of the bankrupt vests in the trustee upon the making of the bankruptcy order. There is therefore no need for any further security over the property in the estate.
54. I would, speaking for myself, prefer not to express a final view on this issue, which may arise in circumstances where it is of more central importance. It seems to me that the course which the judge took was plainly open to him and cannot be faulted as an exercise of his discretion.

Conclusion

55. For the reasons I have given, which are in agreement with those expressed by Arden LJ in paragraphs [62] to [69] of her judgment, this court would not be justified in interfering with the way in which the judge dealt with the trustee's costs and expenses. I would, for my part, dismiss this appeal.

Lord Justice Davis:

56. I agree with the judgment of Floyd LJ.

Lady Justice Arden:
 


57. This appeal raises two of the issues likely to be of most importance to a bankrupt who seeks the annulment of a bankruptcy order against him on the grounds that the bankruptcy order ought never to have been made. Those two issues are: (1) will the order come into force immediately? and (2) who will pay the expenses of the abortive bankruptcy? In this case, those two issues have become intertwined. I agree with Floyd LJ that the judge's order was a proper exercise of his discretion on both issues.
58. Bankruptcy still carries with it stigma. So it will be important to a bankrupt to obtain an annulment order to wipe that stigma away. The order cannot rewrite history: what has been done in the bankruptcy by way of realising property and paying debts will stand. However, the order brings benefits. He may be able to have records of the bankruptcy order in official registers removed. He will regain his property, unless it has been realised and distributed to creditors or is otherwise required for the purposes of the bankruptcy. Accordingly, the applicant for an annulment order will want any annulment order to come into effect as quickly as possible.
59. Can this be achieved while debts or expenses remain unpaid? In my view, it can in an appropriate case while still preserving the position of the creditors and the trustee. The court has power under section 282(4) of the Insolvency Act 1986 ("IA 86") to vest sufficient assets in the trustee, or a third party, or even, if appropriate, in the bankrupt to enable the process of paying the debts and expenses to take place after the annulment order has come into effect. The annulment order could provide for any surplus not required for this purpose to be paid to the applicant.
60. In this case, however, I am satisfied that the evidence about the Orakis' estates entitled the judge not to take that course and instead to defer the making of an annulment order for the following reasons:

The judge could not determine any disputes over the trustee's expenses on the evidence before him;

There were no grounds for holding that the trustee should not have any right to recover his proper expenses;

There was no evidence of any special prejudice to the Orakis caused by the deferment - they had been discharged from their bankruptcy some time earlier;

Even though it is said that the estates are solvent, there was insufficient cash to meet outstanding proved debts and the trustee's expenses, and it appeared that the trustee had incurred considerable expenses in meeting claims made by the Orakis for which he had not been reimbursed.

The trustee was likely to incur significant further expenses to complete the payment of debts and expenses.

61. The judge included a provision in his order giving liberty to apply. Thus, if there was a material change in the financial position, the parties might be able to apply to the court for some other order under section 282(4).
62. That brings me to the question of who should bear the expenses of the abortive bankruptcy when an annulment order is made on the grounds that the bankruptcy order ought not to have been made. The judge ordered that the trustee's expenses be paid by Mr and Mrs Oraki personally. I consider that the judge was entitled to make that order for the following reasons.
63. The guiding principle, in my judgment, is that the proper expenses of the trustee should normally be paid or provided for before the assets are removed from him by an annulment order. This guiding principle flows from the fact that, prior to the annulment, the trustee has a valuable right of property, namely the right to retain such sums as may be necessary to pay the expenses of the bankruptcy: see section 323 of the IA 86. It would be unusual for this court to take that right away without providing for the trustee's position to be adequately protected.
64. In my judgment, this court applied this guiding principle in Thornhill v Atherton [2004] EWCA Civ 1858: see per Lloyd J cited at paragraph 38 of the judgment of Floyd LJ above. If further authority is needed, it can be found in case law dealing with corporate insolvency. There is an analogy to be drawn between a stay of liquidation and an annulment in that both procedures lead to a determination of the insolvency process. The analogy must not be pressed too far, because as I have explained, an annulment order results in the wiping away of a bankruptcy whereas the stay of a liquidation merely brings the liquidation process to an end as of the date of the stay.
65. In Re Calgary and Edmonton Land Co Ltd [1975] 1 WLR 355, Megarry J had to consider the terms on which the court should order the stay of a voluntary liquidation. So far as the liquidator's costs were concerned, he held in clear and forthright terms that:

"By s 309 [of the Companies Act 1948], all costs, charges and expenses properly incurred in the winding-up, including the liquidator's remuneration, are made payable out of the assets of the company in priority to all other claims. Where a liquidator has accepted office on this footing, I cannot see that in normal circumstances it would be right to stay the winding-up unless his special position had been fully safeguarded, either by paying him the proper amount for his expenses or by sufficiently securing payment. A liquidator who loses control of the assets by reason of a stay ought normally to be properly safeguarded in relation to his expenses."

66. Usually, when the court makes an annulment order on the ground that the bankruptcy order ought never to have been made, it will go on to order that the petitioning creditor should pay the costs of the trustee. Assuming that the petitioning creditor can pay these costs, this order will have the effect that the burden of the expenses is transferred from the innocent estate to the culpable party.
67. In the present case, however:

i) the petitioning creditor could not pay those costs;

ii) the trustee had not (on the evidence before the judge) done anything that would deprive him of any right to his costs;

iii) the costs could if disputed be quantified on a separate application to the court before payment; and

iv) if the trustee did not obtain an order against the Orakis, and their estates turned out to be insufficient to pay his expenses, the burden of non-payment of those expenses would fall on the trustee since those expenses would not be paid.

68. In those circumstances, the judge was in my judgment entitled to make the order he did. The effect was to transfer the risk of non-payment of the expenses from the trustee to the Orakis. As between the Orakis and the trustee, the judge was entitled, in the light of the guiding principle described above, to take the view that this was the appropriate place for that risk to lie.
69. There may be cases where, for example, the trustee is implicated in some improper conduct by the petitioning creditor. In those circumstances the court may order that he should not receive some or all of his expenses from anyone.
70. Accordingly, I would too make the order proposed by Floyd LJ.