Oraki & Anor v Dean & Dean (A Firm) & Ors

Factual and Procedural Background

The appellants, referred to as Plaintiff and Defendant, appealed an order made by Judge Ham QC, sitting as a deputy judge of the Chancery Division, concerning the refusal to annul their bankruptcies. The bankruptcy orders were originally based on a judgment obtained by Company A, their former solicitors, for fees which the Plaintiffs disputed due to dissatisfaction with the service and allegations of misconduct against the solicitor involved. The Plaintiffs were adjudicated bankrupt following Company A's petition, but their bankruptcies were later discharged. Despite discharge, trustees in bankruptcy were appointed to manage their estates, and disputes arose concerning the costs and conduct of these trustees.

The Plaintiffs sought annulment of the bankruptcies on the basis that the bankruptcy orders should not have been made, supported by findings of serious misconduct and dishonesty by the solicitor from Company A, including being struck off the roll of solicitors. The deputy judge initially refused annulment, but Judge Ham allowed fresh evidence and decided in principle to allow the appeal and annul the bankruptcies, subject to conditions including payment of trustee costs. The present appeal concerns only the issue of who should bear the costs of the trustee in bankruptcy, which were substantial due to the length and complexity of the proceedings.

The procedural history includes multiple applications by the Plaintiffs to annul the bankruptcies, several hearings, and the intervention of the Solicitors Disciplinary Tribunal. The judge’s order deferred immediate annulment pending compliance with conditions, including payment of costs, and allowed the Plaintiffs to challenge the trustee’s conduct and remuneration.

Legal Issues Presented

1. Whether the Plaintiffs, who were wholly innocent of any wrongdoing, should be ordered to pay the trustee in bankruptcy's costs.
2. Whether the judge erred in treating the trustee’s conduct as irrelevant to the exercise of discretion concerning costs.
3. Whether the judge should have adjourned the question of liability for trustee’s costs pending investigation of the trustee’s conduct.
4. Whether the bankruptcy annulments should have been granted unconditionally rather than subject to conditions including payment of costs.

Arguments of the Parties

Appellant's Arguments

• The Plaintiffs contended that as wholly innocent bankrupts, they should not be liable for the trustee’s costs without some culpability on their part.
• The judge wrongly disregarded the relevance of the trustee’s conduct in deciding costs liability.
• The judge should have adjourned the costs decision until after the trustee’s conduct had been fully investigated.
• The trustee was appointed when the estate was solvent and had nothing to do, so should not be entitled to costs.
• The order should have granted immediate and unconditional annulment of the bankruptcies without conditions for costs payment.

Respondent's Arguments

• The trustee, supported by counsel, submitted that a trustee who acts reasonably is normally entitled to recover costs and expenses.
• The judge’s order preserved the Plaintiffs’ right to challenge the trustee’s conduct and remuneration.
• Given the petitioning creditor’s inability to pay, it was appropriate for the Plaintiffs to bear the trustee’s costs.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
London Borough of Redbridge v Mustafa [2010] EWHC 1105 (Ch)	Discretion in awarding costs in insolvency proceedings; no presumptions; costs governed by CPR and Insolvency Rules.	Supported the exercise of unfettered discretion regarding trustee’s costs; confirmed jurisdiction under s.282(4) IA 1986 to impose conditions on annulment orders.
Butterworth v Soutter [2000] BPIR 582	Unfettered discretion of court to decide trustee’s costs on annulment; trustee entitled to remuneration if acting properly.	Confirmed that trustee’s costs and payment are at large when bankruptcy is annulled; trustee normally entitled to costs.
Thornhill v Atherton [2004] EWCA Civ 1858	Ordering bankrupt to pay trustee’s costs even if bankrupt is innocent; discretion exercised in light of practicalities.	Held that no general rule exempts wholly innocent bankrupt from paying trustee’s costs; fault of bankrupt’s solicitors relevant but not determinative.
Mellor v Mellor [1992] 1 WLR 517	Entitlement of court-appointed receiver to remuneration despite annulment of appointment due to non-disclosure.	Analogous to trustee’s position; trustee entitled to remuneration unless implicated in misconduct.
Ella v Ella [2008] EWHC (Ch)	Trustee’s conduct may affect entitlement to costs; abuse of process may justify denying trustee costs.	Held that trustees may be denied costs if implicated in abuse of process; trustee’s conduct relevant to costs liability.
Re Calgary and Edmonton Land Co Ltd [1975] 1 WLR 355	Liquidator’s costs must be safeguarded on stay of liquidation; analogy to trustee’s costs on annulment.	Supported principle that trustee’s proper expenses should be provided for before assets are returned on annulment.

Court's Reasoning and Analysis

The court acknowledged the long and complex history of the bankruptcy proceedings and the misconduct by the petitioning creditor’s solicitor, which rendered the original bankruptcy orders wrongful. However, the court emphasized that the discretion to award costs, including those of the trustee, is unfettered and must consider the position of all parties, including the trustee who performs a court function.

The court rejected the appellants’ argument that wholly innocent bankrupts should not be liable for trustee costs, noting there is no general rule exempting them. The court relied on precedent that trustees who act properly are normally entitled to remuneration, and the absence of fault by the bankrupt does not automatically relieve them of liability for those costs.

The judge’s decision to consider the practical realities, including the petitioning creditor’s inability to pay and the need to provide security for the trustee’s costs, was held to be a proper exercise of discretion. The court also clarified that the judge’s statement that trustee conduct was irrelevant referred only to the inability to resolve those disputes at that stage, not to a blanket irrelevance. The Plaintiffs retained the right to challenge the trustee’s conduct and remuneration in subsequent proceedings.

The court declined to make its own findings on the trustee’s conduct or the sufficiency of funds held, considering that such factual determinations were more appropriately addressed in the ongoing proceedings authorized by the judge.

Regarding the conditional nature of the annulment, the court found that the judge was entitled to impose conditions, including payment of costs, to protect the trustee’s position and ensure proper administration of the bankruptcy estates. The court noted that immediate unconditional annulment without safeguarding the trustee’s costs could unfairly prejudice the trustee.

Holding and Implications

The court DISMISSED the appeal, upholding the judge’s order that the Plaintiffs must pay the trustee’s costs as a condition of the annulment of their bankruptcies.

The direct effect of this decision is that even wholly innocent bankrupts may be ordered to bear the costs of the trustee in bankruptcy, particularly where the petitioning creditor is unable to pay and the trustee has acted properly. The court confirmed the broad discretion of the bankruptcy court in allocating costs and the propriety of imposing conditions on annulment orders to secure payment of trustee expenses. No new legal precedent was established beyond affirming existing principles and their application to the facts of this case.