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Are Trustees Personally Liable in Bankruptcy?

BPE Solicitors and another v Gabriel [2015] UKSC 39

The general rule is that a trustee in bankruptcy is treated as party to any legal proceedings which he commences or adopts, and is personally liable for any costs which may be awarded to the other side, subject to a right of indemnity against the insolvent estate to the full extent of the assets.

A trustee is not obliged to adopt and continue an action already started by or against the bankrupt. If the bankrupt was the claimant and the trustee does not adopt it, the action cannot proceed and will be stayed. If the bankrupt is the defendant, an action which the trustee does not adopt is liable to be stayed. If, however, the trustee does adopt the action, he becomes the relevant party in place of the bankrupt, whether there is a formal substitution or not.

Previously, the Court of Appeal considered the position where a claimant commenced proceedings, which succeeded, against individuals who later became bankrupt. The Court of Appeal extended the personal liability of the trustee to cover costs incurred by the claimant before the trustee adopted the proceedings.

In this case, Mr Gabriel won nominal damages in negligence from his solicitors (BPE) in proceedings that went to the Court of Appeal. Costs of approximately £470,000 were however awarded against him. Mr Gabriel petitioned for his own bankruptcy. The trustee in bankruptcy was considering an appeal but asked the court to rule whether, if the trustee appealed and lost, the costs that might be ordered against him personally, by virtue of his adoption of the litigation, would include the £470,000 costs awarded against Mr Gabriel prior to the bankruptcy.

The court held there was no longer any absolute rule that, simply by adopting an action, a trustee should become liable to pay the other side's costs incurred at a time when he was not a party to the action and the action was being conducted by the bankrupt for his own account. The court distinguished from the previous case law on the basis that at the time in question there was not any provision to order costs against a non-party. This has now changed. The court came to the conclusion that the trial and successive appeals were each separate legal proceedings for the purposes of costs and declared that if the trustee pursued the appeal, he would not be personally liable for costs incurred by BPE in relation to the earlier stages of the proceedings.

The decision in this case clearly frees up a Trustee in Bankruptcy to either advance/defend litigation brought by or against a bankrupt if it will be for the benefit of the creditors without the risk of facing personal adverse financial penalties for the previous litigation conduct.

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