This application for directions by Andrew Appleyard, the trustee in bankruptcy of Chithra Melani Wewelwala, raises a curious and perhaps surprising lacuna in bankruptcy law. The question is: what can or should the court do to make provision for the payment of a trustee’s expenses where, some considerable time after his appointment, the bankruptcy order from which he derives his title to the bankrupt’s estate is successfully overturned on an appeal by the bankrupt, on an application of which he was not notified, at a hearing which he did not attend, and by an order which made no provision for his release from office?

Mrs Wewelwala was made bankrupt by an Order of District Judge Lambert in the Central London County Court on 20 April 2011, on the petition of Davenham Trust Limited, in respect of a statutory demand based upon a judgment debt of some £18,000 odd, the existence of which was not in dispute. Mrs Wewelwala (who has been self-represented throughout) told me that she resisted the bankruptcy proceedings on the ground that Davenham had unreasonably refused to accept her offer to make payment of the debt by instalments.

Mrs Wewelwala sought to appeal the bankruptcy order, initially by making a written application for permission to appeal. She notified the Official Receiver, and co-operated with his request for inspection of documents relevant to the nature and whereabouts of her estate. The Official Receiver appears to have decided to defer appointing a trustee pending the outcome of Mrs Wewelwala’s application.

Mrs Wewelwala’s written application for permission to appeal was refused on paper by Floyd J on 8 July, on the ground that it appeared to have no reasonable prospect of success. On learning of that refusal, the Official Receiver appointed Mr Appleyard as Mrs Wewelwala’s trustee in bankruptcy by notice dated 15 July, with effect from 20 July. Thereafter Mr Appleyard began discharging his duties as trustee and incurring expense in that connection, initially (so far as I can see) in seeking to ascertain the nature and whereabouts of Mrs Wewelwala’s estate, the identity of her creditors and the amounts claimed.

Mrs Wewelwala sought to pursue an oral application for permission to appeal. She notified Mr Appleyard through his solicitors of the appointed hearing date of 20 October and, in the meantime, co-operated fully with his requests for information about her affairs. Mr Appleyard was not required to attend on 20 October, nor would he probably have recovered his costs if he had done so. It was purely a renewed oral application for permission to appeal.

On 20 October Floyd J adjourned Mrs Wewelwala’s application to a further hearing at which Davenham were directed to attend. The order did not state that, if she obtained permission at the adjourned hearing, the appeal would immediately follow, nor did it direct Mrs Wewelwala to notify Mr Appleyard of the adjourned hearing. In fact, it is now common ground that she did not do so.

The adjourned hearing took place on 14 December. Mrs Wewelwala appeared in person and Davenham appeared by counsel. Floyd J’s order makes no reference to Mrs Wewelwala being granted permission to appeal, but provided simply that the appeal be allowed, that the bankruptcy order be set aside and removed from the Bankruptcy Register, that the hearing of the bankruptcy petition be adjourned for twelve months on Mrs Wewelwala’s undertaking to make instalment payments to Davenham at the rate of £500 per month for six months, with the balance being paid by 14 December 2012, and gave permission (presumably to Davenham) to restore the bankruptcy petition in the event of non-payment. Mr Appleyard neither knew of nor, therefore, attended that hearing, nor learned about the setting aside of the Bankruptcy Order until Mrs Wewelwala telephoned to tell him so in January 2012. The order made no provision for Mr Appleyard’s release from office, or for payment of his expenses. It is not even clear whether Floyd J was made aware that a trustee had been appointed, still less that he had incurred significant expense in discharging his duties.

By this time, or at least by 27 March 2012 (a date for which there is written evidence), Mr Appleyard claims to have incurred some £6,509.50 in the discharge of his duties as trustee. He had identified that Mrs Wewelwala had other creditors in the sum of some £70,000 odd, interests in three properties, one of which appeared to have some net equity in it, and a joint bank account with her husband with the sum of £10,000 in it. Although the beneficial interest in Mrs Wewelwala’s share in all those assets had until December 2011 been vested in Mr Appleyard by virtue of the bankruptcy order and his appointment as trustee, he had taken no steps to secure actual control of them, beyond persuading Mr and Mrs Wewelwala’s bankers to treat the account as frozen.

Mr Appleyard issued the present application for directions on 30 May 2012. He joined Mrs Wewelwala to it as the sole respondent. On 6 August 2012 Mann J gave case management directions on a review of the papers, requiring the application be dealt with by a judge, and giving directions and time limits for the exchange of evidence. In his written reasons, he said that by imposing a not before date of 14 October 2012 this would give time for a transcript of Floyd J’s judgment allowing the appeal to be made available. Mr Appleyard was directed to notify both Mrs Wewelwala and Davenham of the application.

Most unfortunately Mrs Wewelwala was required shortly thereafter to undergo hospitalisation and serious surgery, which disabled her from complying with the time limits for evidence. Miss Bowmaker for Mr Appleyard said (on instructions) that the written reasons for Mann J’s order were not communicated to Mr Appleyard or his solicitors. No transcript of Floyd J’s judgment was obtained. Davenham was notified of the application but not joined as a party and has taken no active part in it. It was, by August 2012, in administration.

Mrs Wewelwala did manage to obtain the assistance of Mr Louis Doyle, experienced insolvency counsel, in preparing a skeleton argument on her behalf, although her resources did not permit her to brief him for the hearing. She sought to rely upon a statement served only one day before the hearing on Mr Appleyard. Having looked at it de bene esse, it appeared to me to consist of a mixture of submissions and assertions of fact. Miss Bowmaker submitted that, being wholly out of time, it should not be admitted. I took the view that it could not be admitted as evidence of fact without giving Mr Appleyard time to respond, with a consequential adjournment. I also offered Miss Bowmaker the opportunity, over an adjournment, of obtaining a transcript of Floyd J’s 2011 judgment. Both sides, sensibly in my view in the light of the modest sum at stake and the risk of incurring costs in excess of it in protracted proceedings, declined any adjournment and invited me to decide the matter on the materials as they stood but, necessarily, (due to the absence of any opportunity to Mr Appleyard to reply) without recourse to evidential matters in Mrs Wewelwala’s late statement.

The court is thus largely in the dark about why Mrs Wewelwala’s appeal succeeded before Floyd J. The best I can do is to say that her debt to Davenham appears to have been admitted throughout and Floyd J concluded that her offer to repay it in instalments of £500 per month ought to have been accepted both by Davenham, and by the District Judge, as a good reason for declining to make her bankrupt in April 2011.

It is, happily, common ground that Mr Appleyard should be released from office forthwith. This should have been provided for last December. It is most unfortunate, to say the least, that he has incurred further expenditure as trustee thereafter.

The first question, in the light of Mr Doyle’s helpful skeleton argument, is whether I have any jurisdiction to direct payment of Mr Appleyard’s expenses by anyone. Miss Bowmaker relied upon jurisdiction under section 375(1) of the Insolvency Act 1986, and upon the court’s inherent jurisdiction.

Section 375(1) provides that:

Miss Bowmaker submitted that Floyd J’s December 2011 Order was an exercise of jurisdiction under section 375(2), which was part of the jurisdiction existing for the purposes of the bankruptcy parts of the Insolvency Act, so that his order was liable to review under section 375(1). I disagree. In my judgment section 375(1) contemplates review, at first instance, of the exercise of jurisdiction at first instance. It would be surprising if it contemplated review, at first instance, of the exercise of appellate jurisdiction since, on its language, it would then permit a Bankruptcy Registrar (for example) to review the decision of a High Court Judge on appeal. I anticipate that one of the reasons why Mann J directed that this application be heard by a judge was to anticipate this possible difficulty.

By contrast I am satisfied that the court has inherent jurisdiction to deal with this application. I do not regard it as a question of reviewing Floyd J’s order at all. His order made no provision of any kind about Mr Appleyard’s expenses. It cannot possibly be construed as containing a decision, by implication, that Mr Appleyard should not recover his expenses since, as I have said, Mr Appleyard had not even been notified of the hearing. It is not even clear that Floyd J was told that a trustee had been appointed.

In my judgment the correct analysis is that dealing with Mr Appleyard’s expenses is a necessary consequence of Floyd J’s order, and that the court has inherent jurisdiction to do so. I regard this as plain from the combined effect of Butterworth vSoutter [2000] BPIR 582 and Thornhill v Atherton [2004] EWCA Civ 1858, in particular per Lloyd J (sitting as an additional judge of the Court of Appeal) at paragraph 39. The same conclusion is to be found in London Borough of Redbridge v Mustafa[2010] EWHC 1105 (Ch) per the Chancellor at paragraph 27.

I consider that the jurisdiction confers a discretion on the court as to the twin questions: (1) whether the Trustee should have his expenses paid and (2) by whom, or out of what fund. That discretion is to be exercised having regard to all relevant matters, but in accordance with such principles for its exercise as are to be gleaned from available authority.

It is true that all those cases concerned the payment of a trustee’s costs after the annulment of a bankruptcy order, rather than its setting aside on appeal. Nonetheless, I can see no reason why that jurisdiction should not extend to cases where the bankruptcy order is set aside on appeal, in particular because one ground for annulment, under section 282(1)(a) of the Act, is that the bankruptcy order ought not to have been made in the first place. That is a ground for annulment closely analogous to grounds of appeal, and I can envisage no reason why jurisdiction to deal with the trustee’s costs upon annulment should not extend equally to the case of an appeal. Both processes have the effect of divesting the Trustee of the property of the estate which vested in him upon his appointment, and which would, prima facie, be available to him for the purpose of discharging his proper expenses.

As to the first question, namely whether the Trustee’s expenses should be paid, I can see no reason in principle why they should not, at least to the extent that they were incurred prior to the date in January 2012 when Mr Appleyard was notified of the setting aside of the bankruptcy order. He was, until then, simply doing his duty as Trustee to identify the bankrupt estate and the number and size of creditors’ claims, on an understanding that Mrs Wewelwala had been refused her written application for permission to appeal, and in the absence of any application, let alone order, that, pending any further attempt to appeal, the progress of the bankruptcy should be stayed or subjected to some minimum expense regime. While Mr Appleyard was told that Mrs Wewelwala was to make an oral application for permission to appeal, he was not informed as to its outcome, still less that permission had been granted, a stage which, I infer, occurred as part and parcel of the hearing in December at which her appeal was upheld.

There are amply sufficient dicta in the three authorities to which I have already referred to the effect that a trustee who acts properly and innocently of any wrongdoing can expect to obtain payment of his reasonable expenses, and is not to be expected to act gratuitously, or to discharge expenses out of his own pocket. It is also I think clear that the Trustee’s remedy is not limited to the exercise of a lien or equitable charge over assets in his name or under his control. In Mellor v Mellor [1992] 1WLR 517 court appointed receivers were held to be entitled to the recovery of their expenses out of the assets subject to the receivership (where the receivership order was subsequently set aside) regardless whether those assets remained in their possession, so that the assets should if necessary be subjected to a charge for that purpose. That analysis was applied in the Thornhill v Atherton case to a trustee in bankruptcy’s expenses, after annulment of the bankruptcy order: see Lloyd J at paragraph 33. The approach taken in Mellor v Mellor was based upon a conclusion that the court nonetheless had no jurisdiction to make a personal order against the defendants that they pay the receivers’ costs. Whether that is so in relation to the costs of a trustee in bankruptcy is by no means clear, but it would reflect the general perception among insolvency practitioners that a trustee is at risk as to recovery of his costs if the bankrupt estate is insufficient for that purpose.

In the present case Mr Appleyard’s evidence (based upon his enquiries while trustee) suggests that there is sufficient property beneficially owned by Mrs Wewelwala, which devolved upon him as her trustee, to fund the recovery of his expenses, even though her share of the amount in the frozen bank account may on its own not prove to be quite sufficient. Her share in one of the three jointly owned properties may be of greater value, but of much lower liquidity.

The much more difficult question is from whom (or at whose ultimate cost) those expenses ought to be paid. Miss Bowmaker professed neutrality on her client’s part as to the incidence of that burden as between Mrs Wewelwala and Davenham. Nonetheless Mr Appleyard did not join Davenham as a party to this application (albeit that it was notified pursuant to Mann J’s direction). She submitted that the correct approach was that, as between Mr Appleyard and Mrs Wewelwala, she should bear the burden, and that it was a matter between Mrs Wewelwala and Davenham whether it ought to be shared or transferred to Davenham as, in the event, the unsuccessful petitioning creditor.

The analysis of Neuberger J in the Butterworth v Soutter case appeared, at least at first sight, to suggest otherwise. He drew a distinction between annulment under section 282(1)(a) where the order ought not to have been made and 282(1)(b) where it is justified by subsequent payment or securing of the bankruptcy debts to the satisfaction of the court. He continued:

In the present case, the setting aside of the Bankruptcy Order on appeal is closely analogous with annulment under section 282(1)(a) because, unless Floyd J thought that the bankruptcy order ought not to have been made, it is difficult to see how the appeal could have been allowed.

Thornhill v Atherton was, like the present, a case of annulment under section 282(1)(a), specifically on the ground that, after matters had been investigated during a lengthy period following the bankruptcy order, it finally emerged that the petitioning creditor had no debt upon the basis of which it could properly have petitioned. It was therefore a much stronger case for placing liability for the trustee’s expenses on the petitioning creditor as opposed to the bankrupt, than is the present case, where there was an admitted judgment debt, coupled with non payment by Mrs Wewelwala. The application for annulment was made by the bankrupt without joining the petitioning creditor, and the judge (HHJ Raynor QC) fully considered the consequences of annulment upon the position of the trustee, who had by then incurred substantial expense in relation to the bankruptcy pursuant to an apparently regular bankruptcy order. He ordered that the annulment should be conditional upon payment in full of the trustee’s expenses, with the consequence that the trustee would not be divested of the bankruptcy estate until those expenses had been paid.

The bankrupt appealed against the imposition of that condition, on the ground that he had not in any way been at fault in connection with the circumstances leading to the making of the bankruptcy order and the incurring by the trustee of substantial expenses, relying for that purpose heavily upon Butterworth v Soutter. The view of the Court of Appeal was that the attribution of fault or blame, as between the bankrupt and the petitioning creditor, was irrelevant to the position as between the bankrupt and his trustee, on an application by the bankrupt by way of annulment to recover his estate from the trustee. Their reasoning is encapsulated in the following passage from paragraphs 42 and 43 of the judgment of Lloyd J:

If that reasoning had been applied at the time of Mrs Wewelwala’s successful appeal against her bankruptcy order in December 2011, I consider that the outcome would have been as follows. Mrs Wewelwala would have obtained a setting aside of the bankruptcy order on appeal, but only upon condition that Mr Appleyard’s expenses were first paid out of the bankrupt’s estate. That would have preserved the trustee’s ordinary right of recourse to the trust property for the discharge of his expenses, before it re-vested in Mrs Wewelwala. Secondly, since she had joined Davenham, it would have been possible for Floyd J to have provided, in addition, that Mrs Wewelwala should be compensated by Davenham for any diminution in value of her estate when re-vested in her upon the setting aside of the bankruptcy order, by reference to the amount necessary to satisfy Mr Appleyard’s expenses. The extent (if at all) to which he would have made such an order for compensation would have lain entirely within his discretion, and would have depended upon his own perception of the distribution of blame or fault for the coming about of the bankruptcy proceedings, and the appointment of Mr Appleyard, as between Mrs Wewelwala and Davenham.

Had Mr Appleyard been notified of the appeal hearing in December 2011, he could have attended, armed if necessary with information about the amount of his expenses and the relevant authorities, to ensure that this took place. In fact he was not notified and there is no evidence that Floyd J knew that a trustee had even been appointed, let alone that he had incurred expense. The result was that Mr Appleyard was, forthwith, divested of Mrs Wewelwala’s estate, without any payment of his expenses and has, unjustly in my view, been left out in the cold. In the meantime Davenham has gone into administration, and has not in any event been joined in the present application, albeit that it has been notified of it. Furthermore, Mr Appleyard has incurred some £3,000 further expenses (largely, so I was told, in making statutory reports to creditors) since becoming aware of the setting aside of the bankruptcy order, and before making this application.

It might have been an easy solution to the conundrum to conclude that the blame for this unfortunate state of affairs lies with Mrs Wewelwala, for failing to notify Mr Appleyard of the impending hearing date of her appeal, but Miss Bowmaker was unable to point to any provision in the Act, the Insolvency Rules or in the CPR (which may be applicable where there is a lacuna in the Insolvency Rules) which required Mrs Wewelwala to notify her trustee of an appeal against the bankruptcy order. Thus, although it might be said to have been in the highest degree preferable for her to have notified Mr Appleyard of the December hearing, so as to transfer any question of fault to his shoulders if he chose not to attend it, it cannot be said that she was in any way procedurally in default by not doing so. She attended the appeal hearing in person and, although a solicitor, may readily be excused for not having understood that it was relevant to tell Floyd J about the appointment of Mr Appleyard, or the fact that he had in all probability started to incur expense as her trustee.

What is to be done? In my judgment the combined effect of the authorities to which I have referred, and in particular Thornhill v Atherton, is that Mr Appleyard’s right as trustee to recover his expenses, having acted entirely properly and innocently at least until January 2012, must prevail over Mrs Wewelwala’s right to enjoy to the full her estate upon its re-vesting in her as a result of the setting aside of the bankruptcy order. This is so even if, as between her and Davenham, it may be Davenham which was largely to blame for the circumstances leading to those expenses being innocently incurred. In the absence of a transcript of Floyd J’s reasons for allowing the appeal, I make no finding about the apportionment of blame as between Mrs Wewelwala and Davenham, but as Lloyd J said in the Thornhill v Atherton case, it is ultimately irrelevant to the justice of the matter as between Mrs Wewelwala and Mr Appleyard.

That is sufficient in my judgment to lead to a conclusion that I ought to require Mrs Wewelwala to bear the burden of compensating Mr Appleyard for his reasonable expenses incurred until, in January 2012, he learned of the setting aside of the bankruptcy order. I do not think that it would be right to make an order against her personally, since this is more than Mr Appleyard would have been entitled to, had he remained her trustee. Nonetheless I should direct that her property, that is her beneficial interest in the land, and her half interest in the bank accounts, stand charged with payment of Mr Appleyard’s reasonable expenses down to January 2012, leaving him to obtain execution in that respect in such manner as he should think fit, in the absence of agreement with Mrs Wewelwala.

I have reached the opposite conclusion in relation to Mr Appleyard’s additional expenses incurred after being notified of the setting aside of the bankruptcy order. Whatever may be the formal position, it seems to me that he should have incurred no further expense without first applying to the court for directions. That application would have protected him against any consequences of failing to make a report to creditors in the meantime.

Finally, I would not close off the possibility of Mrs Wewelwala seeking to challenge the reasonableness of the £6,509.50 expenses which Mr Appleyard says that he had incurred by March 2012, or an analysis whether any of that amount was in fact incurred after he was notified of the setting aside of the bankruptcy order in January. But the amounts in question are small by comparison with the costs of litigation about them, even if significant to Mrs Wewelwala herself, and I would propose therefore to leave that matter open, in the hope that it can in the meantime be agreed.

There must therefore be a charge over all that property of Mrs Wewelwala which re-vested in her as a result of the setting aside of the Bankruptcy Order as security for the recovery by Mr Appleyard of his reasonable expenses. Mrs Wewelwala remains at liberty to pursue a claim for compensation in that respect against Davenham, although its presently insolvent status may mean that this is unlikely to be of any assistance to her.

By way of postscript, it is most unfortunate that it was not appreciated by either of the parties to Mrs Wewelwala’s appeal last December that Mr Appleyard’s expenses need to be addressed. A trustee in bankruptcy’s expenses are as important a matter to be dealt with on an appeal against a bankruptcy order heard after his appointment, as they are in any application for rescission or for annulment. To the extent that the Insolvency Rules fail to make this clear, consideration should be given to their amendment, or to the issue of an appropriate practice direction. In any event, it is to be hoped that the reporting of this judgment may draw this aspect of bankruptcy practice and procedure to the attention of litigants and their professional advisors.