Permission to challenge a Trustee in bankruptcy’s remuneration.

Applications under Rule 18.35 of the Insolvency (England and Wales) Rules 2016: Permission to Challenge a Trustee in Bankruptcy’s remuneration.

The recent of case of Singh v Hicken (Trustee in Bankruptcy of Singh) [2018] EWHC 3277 (Ch), [2018] All ER (D) 28 (Dec) provides guidance on applications for permission to challenge a Trustee in Bankruptcy’s remuneration, how the permission stage should be approached and where the burden of proof lies on such an application.

Mr Singh was declared bankrupt in 2009 on the petition of London Borough of Luton. At the date of the bankruptcy order he owned three properties, two of which had equity. Mr Singh’s liabilities amounted to £16,632.00 plus statutory interest.

Bankruptcy proceedings

Had the bankruptcy proceedings proceeded without challenge, then there may have been sufficient equity in the properties to discharge all of the bankruptcy debts, fees and expenses in full. However, the bankruptcy proceedings were protracted and at times acrimonious. The proceedings had been plagued by opposition from the debtor and at one stage, claims by the debtor’s mother that she had an interest in one of the properties. A Payment in Full calculation produced by the Trustee in December 2017 estimated that the amount required to discharge all of the bankruptcy debts, fees and expenses was £285,089.00. 

Mr Singh sought to challenge the Trustee’s remuneration and expenses on the basis that he felt they were excessive. In order to do so, he required the permission of the Court under Rule 18.35 of the Insolvency (England and Wales) Rules 2016 (“IR2016”).

Under Rule 18.35(4) IR2016, the Court must not give permission unless the bankrupt can show that there is a surplus in the bankrupt’s estate, or there would be, if it were not for the Trustee’s costs and expenses. Rule 18.35(5) IR2016 then provides that Rule 18.35(4) IR2016 is without prejudice to the generality of the matters which the Court can take into account. The terms of Rule 18.35(5) therefore make it clear that the mere fact that the condition in Rule 18.35(4) has been satisfied does not mean that permission should be granted.

Detailed account of expenses

The evidence at first instance consisted of payment in full calculations, time and fee print outs from the Trustee and his solicitors and a detailed narrative statement, which contained a chronology of events and a detailed account of how and why the costs and expenses had been incurred. Mr Singh’s solicitors had provided some detailed comment on the time costs and expenses and had attempted to persuade the Court that the amount required to discharge the liabilities and costs was considerably less than the amounts stipulated by the Trustee.

The County Court Judge, DDJ Lewis, was referred to the cases of Mattu v Toone [2015] EWHC 3506 (Ch) and Brook v Reed [2011] EWCA Civ 331, who noted in his Judgment that he was entitled to take into account the following factors:

1. The duration of the bankruptcy
2. The fact that it had been acrimonious
3. The number of steps taken to realise the properties; and
4. The time records produced by the Trustee and his solicitor

He also said that he was helped by the observation in Brook v Reed:

“that I should avoid falling into the simplistic error of simply saying, “How can it be that collecting a debt of £11,000 incurs costs more than 20 times the principal sum?” I accept that that was my original reaction and one from which Mr Davies was careful to steer me away.”

DDJ Lewis refused permission on the basis that reductions of the order required to produce a surplus were not likely given the circumstances of the case and history of events that were detailed in Counsel’s skeleton argument and the evidence of the Trustee.

Permission to appeal 

Mr Singh was granted permission to appeal relying on four grounds. The majority of the submissions concerned one ground, being that once the threshold under Rule 18.35(4) was satisfied, the onus switched to the Trustee who then had to provide sufficient information taking into account the guiding principles of Part Six of the Practice Direction to justify his claim for remuneration.

During the course of respective Counsels’ submissions, there was common ground as to the structure of Rule 18.35 as follows:

1. There are two distinct questions in an application for permission under Rule 18.35. The first is whether the requirements of Rule 18.35(4) are satisfied. This is a threshold question and is a matter for the bankrupt to show. It requires a comparison between the assets remaining in the estate and the liabilities and costs to be paid out of the estate, leaving out of account the remuneration and expenses that are challenged by the bankrupt. It does not require the Court to form a view as to the prospect of the challenge being successful but instead requires the Court to form a view on what the assets are and what the unchallenged liabilities and costs are to see if there would be a surplus of assets if the challenge were to be successful. In this case the threshold condition was satisfied.
2. If the threshold condition is satisfied, there is then a second question. This is whether the Court should grant permission and is a discretionary question. The real question under this ground of the appeal was whether DDJ Lewis’ exercise of his discretion could be overturned.

Mr Singh’s legal representatives argued that once the bankrupt had satisfied the condition in Rule 18.35(4), the onus switched to the Trustee to evidence his remuneration and expenses and that the Court then had to apply the guiding principles laid down in the Insolvency Practice Direction. Mr Singh also relied on the case of Mattu v Toone which concerned an appeal where the Court has been presented with statements without supporting evidence or analysis.

Mr Justice Nugee did not accept that this case was comparable with Mattu v Toone, saying that Mr Hicken had provided a complete breakdown of the Trustee’s costs and expenses, including legal costs. Further, Mr Justice Nugee confirmed that what cannot be derived from Mattu is support for the assertion that the permission application should be determined by applying the guiding principles in the Insolvency Practice Directions. That is because a permission application is not a remuneration application and the suggestion was impractical because it would require a Trustee to prepare for a permission hearing as if it were a substantive hearing.

Burden of proof

The Court also rejected the proposition that the test which should be applied is “real prospect of success” as in the case of an application for permission to appeal. Rule 18.35 does not provide any such test and instead Rule 18.35(5) refers to the “generality of the matters which the Court may take into account” such that a broader discretion should be applied, and permission should be granted if it were appropriate in all of the circumstances. There was not, however, a burden of proof on the Trustee. The burden was one of persuasion and it rested with the applicant throughout.

The above being the relevant principles, Mr Justice Nugee did not find that there was anything flawed in the way that DDJ Lewis had exercised his discretion. He was entitled and obliged to do a high-level or broad-brush survey of the history of the case and the conclusion that “reductions of that order, in a case with this history and circumstance, do not seem likely to me” was open to him and in reaching that conclusion, there was nothing wrong in refusing permission under Rule 18.35.

The other grounds of appeal were dealt with more swiftly and it is noteworthy that the Court found that it was right to work off the most up-to-date payment in full calculation because if permission were to be granted, then all of the Trustee’s remuneration and expenses would be relevant and not just that which had been incurred prior to the application being issued.

Conclusion

Caroline Benfield, instructing James Davies of 3 Paper Buildings, representing Mr Hicken at the first instance hearing and the appeal says:

“This case provides useful guidance for Trustees when responding to these types of applications.

On a practical level, the Trustee was advised to prepare a detailed witness statement detailing the history of the bankruptcy and it was because of that statement that the Deputy District Judge was entitled to conclude that it was not realistically likely that there would be a sufficient reduction in order to generate a surplus.

In the case of Mattu v Toone permission was given because there was a shortage of evidence as to what happened, which was not the case here because of the high level of detail and chronological information that was incorporated into the Trustee’s evidence.

In applications of this nature it is advisable and important to demonstrate to the court in evidence the steps that have been taken by the Trustee and his legal advisors and how they have impacted upon the costs incurred.”