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

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...