UK: Can A Trustee In Bankruptcy Be Liable For Costs Following Assignment Of A Cause Of Action To A Third Party?

Last Updated: 29 November 2011
Article by Helen Matthews

TiBs frequently assign the right to recover debts due to the bankrupt's estate. The advantage to the TiB is that he receives a lump sum or a share of the proceeds of a successful claim for the benefit of the bankrupt's creditors without having to fund and pursue litigation himself. In most cases, once a TiB has assigned the right to recover the debt that will be the end of the matter; he just has to wait for the litigation to be concluded when payment of the agreed share will be made. A recent Court of Appeal decision means that this will not always be the case.
In Hunt v Harb and another [2011] EWCA Civ 1239 (27 October 2011), the Court of Appeal has confirmed that if a TiB assigns a cause of action to a third party in return for a share of the proceeds of any future litigation the TiB can be found liable for the costs of the parties to the litigation.

The court has a wide discretion regarding costs orders and may, if it considers it appropriate, order that someone who is not a party to the litigation should pay some of the costs incurred by one or more of the parties in the course of the proceedings.

Under the Insolvency Act 1986, on the appointment of a TiB, the assets of a bankrupt generally vest in the TiB. These assets are known as the bankrupt's estate. Included within that estate are most rights of action held by the bankrupt; a bankrupt cannot himself pursue a claim that vests in his TiB.

If a TiB chooses to litigate one of the bankrupt's rights of action that vest in him, he must bring the claim in his own name. As in any litigation, the TiB has potential liability for the costs of any other party to the litigation; if he loses he can expect to pay. Generally, he can indemnify himself against this from the assets in the bankrupt's estate, but this may be of little worth if the estate does not have sufficient assets to meet those costs. By assigning causes of action to third parties, in return for a lump sum payment or a share of the proceeds from the litigation this can generally be avoided.

It has however been held previously in Hamilton v Official Receiver [1998] BPIR 602 that where a TiB has assigned a cause of action in return for a share of the ultimate proceeds of the litigation, it may be appropriate to make a nonparty costs order against the TiB if the claim fails. In Hamilton the court held that the risk of a third party costs award justified a TiB's decision not to assign a claim.

A TiB cannot however be subjected to a non party costs order where he has assigned a cause of action in return for a single lump sum payment.

In the Harb case, Mrs Harb was a bankrupt claiming to be the ex-wife of the King of Saudi Arabia and also claimed that the King's son had agreed to transfer to her a sum of money and two high value London properties. As this apparent agreement had vested in her TiB following her bankruptcy he issued proceedings so that the claim would not become time-barred under the Limitation Act 1980. In due course the TiB discontinued the proceedings as there were insufficient funds in the estate to continue funding them.

Mrs Harb obtained an order from the High Court setting aside the TiB's notice of discontinuance on the basis that, before discontinuing, he should have tried to assign the cause of action. A timetable was set for the TiB to offer an assignment of the claim and, if an acceptable offer could not be found, for the TiB then to discontinue the claim. The order expressly allowed the TiB to reject any offer giving the TiB a share of the proceeds of the litigation. The TiB sought this specifically so that he would not be obliged to assign the claim on the basis that he might face a non-party costs order in due course. Mrs Harb appealed against that provision in the order.

In the Court of Appeal, Mrs Harb argued that Hamilton was wrongly decided and that, once a TiB assigned a cause of action, he could not be liable for the costs of any of the parties to the litigation. She argued that there was no reason why there should be any difference between an assignment of a cause of action in return for a lump sum payment, from which the TiB was exonerated from any future costs liability, and an assignment in return for a share of the litigation proceeds. Mrs Harb also argued that the order risked stifling a legitimate claim, contrary to the settled policy of the courts that such claims should not be prevented from coming to court simply because of the bankruptcy of the claimant.

Whilst the Court of Appeal did not accept Mrs Harb's arguments it deleted the provision in the High Court about which she complained. It was held that the court's discretion to order costs against a non-party to litigation was wide; it was inappropriate to limit that discretion in all cases involving bankruptcy. The decision of the High Court in Hamilton was therefore upheld; the TiB stood to benefit from the outcome of the litigation and this was a consideration which could justify a non-party costs order.

Importantly, the Court of Appeal did not however rule out the possibility that, in appropriate cases, a court might make an order exonerating the TiB from any future costs liability. It did not consider that there were such grounds in this case as the TiB had not yet reached an agreement on the terms of an assignment. The High Court was therefore wrong to grant express permission to reject an offer to take an assignment on the basis that a non-party costs order was possible in due course.

What can a TiB do to protect himself when assigning a cause of action? Following Harb, he could seek an order exonerating him from any potential non-party costs liability early in the litigation. Alternatively, he could seek an indemnity against the third party taking the assignment, or from the bankrupt's creditors who stand to benefit from the litigation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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