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28th October 2011

The Prince and the Pauper: Trustee in Bankruptcy costs exposure on assignment of vested claims to third parties examined by Court of Appeal


28th October 2011

The Prince and the Pauper: Trustee in Bankruptcy costs exposure on assignment of vested claims to third parties examined by Court of Appeal

NOTE: This post was updated on 1st November 2011 to reflect new information.

On 27 October 2011 the Court of Appeal handed down its judgment in the case of Stephen Hunt v Mrs Janan Harb and HRH Prince Abdul Aziz Bin Fahd Abdul Aziz [2011] EWCA Civ 1239.

The case was significant for a number of reasons, but particularly to trustees in bankruptcy who are looking to assign, or otherwise being asked to consider assigning, rights of action which vest in them as trustees of a bankrupt estate, and of course to third parties looking to procure such assignments or defend claims from assignees.

The facts concern a claim whereby the bankrupt (and appellant), Mrs Harb, claimed to have secretly married HRH the King of Saudi Arabia in 1968, on which grounds she brought a court action in 2003 under s27 Matrimonial Causes Act 1973. She further claimed that within a matter of weeks, in settlement of that action, she reached an oral financial settlement with HRH Prince Abdul Aziz Bin Fahd Bin Abdul Aziz which involved both cash and the transfer of valuable property, which consideration she never received. Mrs Harb was bankrupted on her own petition in 2008 owing debts of some £3.5 million. Her first trustee in bankruptcy investigated the strength of the claims against the Prince and received legal advice that the claim had merit but later discovered he had a conflict. A week before the claim would otherwise have become statute barred, Stephen Hunt was approached to replace the original trustee in bankruptcy. He took the appointment and instructed the (inherited) solicitors to issue and serve proceedings against the Prince, in the face of the approaching limitation date. When he later discovered an omission by the solicitors to secure ATE insurance despite instructions that they should do so before service, and was told that solicitors and Counsel were not prepared to act on a CFA basis, Mr Hunt had to decide between funding the case in some other way or withdrawing the proceedings. He purported to discontinue the claim. Mrs Harb objected and intervened in the proceedings. The High Court set aside Mr Hunt’s notice of discontinuance and directed him to invite offers to take an assignment of the right of action from creditors and from the Prince, during which time the underlying claim would be adjourned and discontinued later if no offers were received.

Interestingly, the High Court then went on to give directions that Mr Hunt would be entitled to reject any offer under which he would receive a share in the proceeds of the assigned action, owing to the fact that the assignee on such terms would be a mere nominee or delegate of the trustee so there would be an inherent costs risk to the trustee personally were he to assign on such terms. Mrs Harb appealed this particular direction on the basis there would in fact be no risk to Mr Hunt if he were to assign to her on such terms and she were to pursue the Prince in Mr Hunt’s name and fail. The Court of Appeal were not prepared to accept this as a general proposition, holding that such a risk did exist on the authorities, and that each case would depend on its merits, for example in another case the trustee might be offered a substantial indemnity from a prospective assignee which would reduce the risk.

The Court of Appeal went on to strike that part of the High Court order which would have entitled Mr Hunt automatically to reject an offer in which he would receive a share of the proceeds on the basis that the Judge did not have before him evidence of what offers were available, or were likely to be made, leaving open the question of whether in an appropriate case, if all offers were already in, it might be right for the Court to make such an order in the future.

The main implications of this judgment in our view are:

  1. it serves as a reminder that a trustee in bankruptcy is at particular risk on costs if he assigns a cause of action, more so than a liquidator or administrator would be for example;
  2. it offers some helpful guidance as to how trustees in bankruptcy should approach such questions.

It has long been best practice for trustees in bankruptcy to invite offers in cases where reasonable causes of action might be assigned, and it would seem that provided the trustee has made proper attempts to invite such offers, he is unlikely to be compelled to accept an offer which does not provide adequate and real security in terms of his own exposure as to costs. In most cases, therefore, a lump sum payment for an assignment will continue to be more attractive in principle to a trustee of a bankruptcy estate, although each case must be examined carefully on its facts.

As a separate observation, although at the time of writing the writer did not have sight of the judgment in the Court below, we are given to understand that Mr Hunt’s notice of discontinuance was set aside at least in part on the basis that this was beyond his powers, in that it was a decision which the Court felt required separate sanction (from the creditors or the Court). If that is right, and this point was not before the Court of Appeal, this is a matter for debate. It seems to the writer and to specialist insolvency Counsel canvassed on the point that discontinuing would fall within the ambit of a trustee’s powers exercisable without sanction (see for example Insolvency Act 1986, Schedule 5, Part II, para 9B if the discontinuance was on agreed terms) and/or that sanction to commence proceedings should have implied within it sanction to discontinue them if the progress of the cases suggests this is the appropriate course. Were this not so, a trustee in bankruptcy might commence proceedings with the benefit of sanction and be prevented or at least delayed, by the refusal of further sanction from the creditors, from extricating himself from continuing costs exposure on a claim in which he would have personal liability for costs. Of course, the Court has an overarching power to direct the actions of its officers, including trustees in bankruptcy, but the insolvency industry as a whole has a genuine interest in achieving clarity as to what its office holders are and are not permitted to do in the context of ongoing litigation, particularly where, as in the case of bankruptcy, personal costs liability is at stake. It cannot be in the long term interests of creditors if insolvency practitioners are put off from litigating proper causes of action in the first place owing to genuine fears about incurring uncontrollable levels of personal liability.

For more information on this case or about bankruptcy generally, please contact Mike Pavitt, our specialist insolvency Partner.

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