Bankruptcy annulment: what the Oraki v Dean & Dean case means for you
The outcome of Oraki v Dean & Dean has turned out to be quite an eye opener for bankrupts seeking to annul their bankruptcy, but still contains words of warning for Trustees in Bankruptcy.
You can find the full judgement of the case here, but here’s a summary…
The Appellants, Mr and Mrs Oraki, had been made bankrupt (in September 2005 and January 2006 respectively) as a result of a judgment in default for obtained by the firm (i.e. Dean & Dean) of their ‘solicitor’ for his fees in 2004.
It was subsequently discovered that the ‘solicitor’ in question was not a solicitor at all, and Mr and Mrs Oraki applied to have their bankruptcy Orders annulled on the basis that they should never have been made in the first place. Although their initial application was refused, they successfully appealed that decision in the High Court and their bankruptcy Orders were annulled in January 2013.
When making the annulment order, the High Court had to decide what to do about costs and, in particular, whether the Official Receiver and (separately) the Trustee in Bankruptcy should still be entitled to their costs and expenses incurred in the period between the bankruptcy Orders and the annulment, a period of some 7 years.
On the one hand, given that the Court agreed that the original bankruptcy Orders ought never to have been made, it would seem harsh to make the Orakis pay those costs. On the other hand, the Trustee in Bankruptcy had acted in good faith in carrying out his duties throughout that period and it seemed that Dean & Dean would not be able to meet those costs if Ordered to do so. For their part, the Orakis made various allegations regarding the conduct of their Trustee in Bankruptcy.
The High Court decided that (prior to the annulment becoming effective) the Orakis should pay the Trustee in Bankruptcy’s costs, including his costs of dealing with the various Court actions/Appeals, and that the Trustee was entitled to retain and realise sufficient assets from the bankruptcies to meet those costs.
The High Court made it clear by the terms of the Order that the Orakis could bring (by way of a new application) a challenge to both the conduct and (therefore) the amount of remuneration of their Trustee in Bankruptcy; and also to apply to the Court for an Order requiring Dean & Dean to re-imburse the costs and expenses for which the Orakis had been made liable.
The Orakis appealed the High Court’s decision regarding liability for their Trustee in Bankruptcy’s costs (only).
In its judgement, the Court of Appeal helpfully clarified the four categories of costs that will commonly need to be dealt when considering an annulment on the ground that a bankruptcy Order ought not to have been made in the first place. These are:
- The costs incurred in the original bankruptcy petition
- The costs incurred in the application for annulment
- The Official Receiver’s costs
- The costs and expenses of the Trustee in Bankruptcy
The latter of these being the only category for consideration by the Court of Appeal in this case.
In dismissing the Orakis’ Appeal against liability for their Trustee in Bankruptcy’s costs, the Court of Appeal considered it relevant in this particular case that the High Court had built into its Order facility for the Orakis to apply either for the Trustee in Bankruptcy’s remuneration to be reduced or for someone else to bear those costs.
The following further principles of general application in similar situations can be drawn from the Court of Appeal’s judgement:
- That it is completely within the Court’s discretion as to whether, and if so by whom, the costs of a Trustee in Bankruptcy should be paid. There is no presumption in favour of the Trustee being awarded his costs and expenses.
- It is, however, relevant to the exercise of that discretion that a Trustee in Bankruptcy is fulfilling a function for the Court and that Insolvency Practitioners may be reluctant to accept appointments if their fees and expenses were contingent upon a bankruptcy not being annulled. Normally, a Trustee in Bankruptcy who has conducted a bankruptcy properly can expect to have his costs and expenses paid or provided for before any annulment takes effect.
- While it would be more normal for the petitioning creditor (whose Bankruptcy Order has been annulled on the ground it ought never to have been made) to be ordered to bear a Trustee in Bankruptcy’s costs and expenses, there is no reason why others could not be instead if, for example, the petitioning creditor could not afford to pay them. When considering making the bankrupts bear the costs instead (as with Mr and Mrs Oraki), then the Court should consider the issue from the perspective of both the bankrupt and the Trustee in Bankruptcy.
What it means for bankrupts seeking annulment
If you’re thinking of seeking annulment of bankruptcy, you can do so on one of three grounds:
- The bankruptcy Order should never have been made (e.g. there was a material procedural error)
- You have made payment in full to the Trustee in Bankruptcy of all creditors’ claims, including all costs and expenses of the Trustee in Bankruptcy, or secured for all of those costs to the satisfaction of the Court
- You have the approval of your creditors to an Individual Voluntary Arrangement (IVA)
Oraki v Dean & Dean highlights that even where the bankruptcy Order ought not to have been made, there is a risk that you could be ordered to bear the costs of the bankruptcy. While this would be the norm anyway if grounds (2) or (3) above are relied upon, it is worth bearing in mind that the Court is far more likely to grant an annulment of bankruptcy on the grounds of a payment in full or approval of an IVA and the evidence required for such grounds may be much cheaper to prepare.
In practical terms, given the potential for liability for the Trustee in Bankruptcy’s fees, any application for annulment should be made as early as possible to avoid costs being incurred by the Trustee in Bankruptcy unnecessarily.
What it means for Trustees in Bankruptcy
While the Oraki decision was decidedly to the benefit of the Trustee in Bankruptcy in that case, the Court of Appeal’s reasoning should serve as a reminder for all Trustees in Bankruptcy that it is not a foregone conclusion that you will recover your costs and expenses on annulment.
The practical way to mitigate this risk is to ensure that you consider whether there is anything in the file or being said by the bankrupt that makes you question whether the Bankruptcy Order would be at risk to challenge by application for annulment on the ground that it ought not to have been made. If so, further investigation should be made and legal advice sought, and, if appropriate, the issue flagged to the bankrupt so that he or she has an opportunity to bring a timely application.
This kind of pro-active conduct in a bankruptcy not only benefits the bankrupt, but also increases the likelihood that the Court will make an Order that your costs and expenses be met by either the bankrupt or a third party.
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