Salliss v Hunt & Ors

This is a regrettable case of litigation over the fees and expenses claimed by a trustee in bankruptcy where the bankruptcy was discharged long ago and the few creditors have either been paid or decided not to prove and the realisable property is very limited. Substantial amounts have been incurred in litigating about the amount of the trustee’s fees and expenses, and the fate of an annulment application which is related to that dispute. This could and should have been avoided.

This is an appeal from the order of Deputy Registrar Garwood dated 25 March 2013 by which, among other things, (1) he dismissed the application of the appellant, Michael David Salliss (“Mr Salliss”), for the annulment of his bankruptcy (“the Annulment Application”), (2) he granted the application of the respondent, Stephen John Hunt (“Mr Hunt”), who is Mr Salliss’ trustee in bankruptcy, that he and Martin Freeman (“Mr Freeman”), Mr Hunt’s predecessor as trustee, be remunerated by reference to the time properly given by them and their staff in attending to matters arising in the bankruptcy (“the Remuneration Application”), and (3) he granted Mr Hunt’s application (“the Pensions Application”) for an order that Mr Salliss sign relevant documents and for other directions to enable Mr Hunt to deal with and realise Mr Salliss’ interest in two pension policies, namely Salliss Construction Limited (1976) Executive Retirement Pension Plan (policy no. Z8123A/003) and Salliss Construction Limited (1978) Executive Benefit Plan (policy no. Z3565A) (“the Pension Plans”).

There are set out in the Appendix to this judgment the most significant of the provisions of the Insolvency Act 1986 (“the Act”) and the Insolvency Rules 1986 (“the Rules”) to which I refer below. Where appropriate, the relevant Rules are those which were in force at the time of Mr Salliss’ bankruptcy.

A bankruptcy order was made against Mr Salliss on 20 December 1993 on the creditor’s petition of Barclays Bank plc (“Barclays”). Barclays’ debt arose from liabilities incurred by Mr Salliss as the guarantor of two companies controlled by him. The Official Receiver recorded an estimated debt to Barclays of £2,432,166. Barclays has never submitted a proof of debt. Aside from Barclays there were claims from four other unsecured creditors amounting in aggregate to approximately £14,000. They each submitted a proof of debt.

On 27 February 1996 Mr Freeman was appointed Mr Salliss’ bankruptcy trustee with effect from 1 March 1996. The first meeting of creditors was held on 20 May 1996. The meeting was chaired by Mr Hunt, who was at that time managing the bankruptcy on behalf of Mr Freeman. At the meeting the creditors agreed the trustee’s fees “at the First Two Thousand Pounds realised and thereafter laid down by the Official Receiver’s Scale of Fees”. In other words, after the first £2,000 of realisations, the fee was fixed on the basis of a percentage of the assets realised and distributed.

The only assets of the bankruptcy available to meet the claims of creditors were the Pension Plans. There was, however, no transfer to Mr Freeman of them or any benefit under them. Pension Plans could not be drawn down until Mr Salliss reached the age of 60 in May 2002. Prior to then Mr Sallis was automatically discharged from bankruptcy in December 1996. The creditors therefore remained unpaid at that time.

Mr Salliss subsequently deferred taking his benefits under the Pension Plans until he reached 65 years of age in May 2007.

Mr Hunt replaced Mr Freeman as Mr Salliss’ bankruptcy trustee by an order made on 9 November 2007.

Having reached 65 Mr Salliss wished to take the benefits under the Pension Plans. In order to do so it was necessary to have his bankruptcy annulled. Mr Salliss paid the four creditors who had submitted proofs of debt (one of them being paid less than the amount of the proof). They have all indicated that there is nothing further due to them. He did not pay Barclays.

Mr Hunt sent an email to Steven Hopkins of Barclays on 4 February 2011, in which he said:

“Mr Sallis has approached me to annul his bankruptcy to purchase his pension rights in the estate. He has cleared the other creditors but he has not provided me with evidence that he has settled any Barclays claims and Barclays never submitted a proof of debt in the bankruptcy for the guarantee debt … I attach all the documents that I hold in relation to the claim. I need to establish who the bankrupt might speak to at Barclays to come to an arrangement or to confirm that you have already settled with him. If a deal can be struck then I can agree to his request.”

On 19 April 2011 Chris Tracey, the assistant manager of the corporate insolvency department of Barclays, wrote to Mr Hunt as follows:

“Further to your previous discussions with Steve Hopkins relating to the above customer, I can confirm that the matter has been referred to the Bank’s Legal team and the Head of Corporate Insolvency. Notwithstanding that the Bank has a guarantee from Mr Salliss in respect of his former companies’ liabilities to the Bank it has been decided that due to the age of the case Barclays will not be making a claim in the bankruptcy estate.”

On 27 April 2011 Mr Hunt wrote to Mr Salliss a letter in which he said:

“[the Bank] have now confirmed that they will withdraw their right to claim in the bankruptcy. As a result of this I am now satisfied that all the debts of the bankruptcy have been dealt with …”

On 3 December 2011 Mr Salliss issued the Annulment Application in the Croydon County Court for the following relief:

“1.

The court annul the bankruptcy order made against Michael David Salliss on 20/12/1993 under section 282(1)(b) of the Insolvency Act 1986 [on the ground that] that the bankruptcy debts and the expenses of the bankruptcy have all, since the making of the order, been either paid or secured to the satisfaction of the court.

2.

Determine the reasonable costs of the Trustee in Bankruptcy and associated expenses to conclude this process. To date these costs have been unreasonably inflated including an error in the sum of £51,016.20 and additional work required to rectify the situation. No break-down of these costs has been provided. The above has resulted in unnecessary delay and unjustified increases in costs preventing a desired commercial settlement being reached.”

The return date was 27 March 2012.

Mr Hunt filed in court a report dated 6 March 2012 (“the Trustee Report”) as required by r.6.207 where an annulment application is made under s.282(1)(b). The Trustee Report stated, among other things, that the estimated tax free lump sums under the Pension Plans amounted in total to £56,492.30. It also stated that trustee time costs incurred amounted to £39,259.18 excluding VAT. Mr Hunt said in the Trustee Report that he considered it appropriate to base his fees on time costs, for the purpose of annulment, since there had been no realisations to date and that he did not consider it appropriate for him to incur the cost of convening a meeting of creditors for the purpose of resolving that he be remunerated on that basis rather than on the percentage basis agreed at the meeting on 20 May 1996. He mentioned that the fees of a pension specialist amounting to £4,500 had been incurred as well as legal fees and expenses totalling £19,088.10. There were other disbursements totalling £1,080.40. He said that the trustee’s fees and expenses, agent’s fees and legal fees and expenses amounting in total to £63,672.09 (including VAT) remained unpaid. The Trustee Report stated that Mr Salliss had made three offers in full and final settlement of the outstanding fees, the largest being £25,000, but they were rejected as too low and Mr Hunt therefore intended to realise his interest in the Pension Plans in order to settle the outstanding fees and expenses.

On 13 March 2012 Mr Hunt issued the Pensions Application, also returnable on 27 March 2012, for an order pursuant to s.363(2) that Mr Salliss be ordered to sign the relevant forms in order that Mr Hunt could deal with and realise Mr Hunt’s interest in the Pensions Plans and such further or other relief and directions as the court might consider appropriate. Mr Hunt filed a witness statement dated 13 March 2012 mostly dealing with the work done by him and Mr Freeman since their appointment as Mr Salliss’ bankruptcy trustee, their remuneration on a time basis and the expenses incurred by them.

Mr Salliss made a witness statement dated 21 March 2012. I only need to refer to the following parts for the purpose of this judgment. He acknowledged that Mr Hunt was entitled to a reasonable fee for work done but said that the fees claimed were “distorted and … racked up”. He said that the lump sum payable under the Pension Plans was £56,000. He described the negotiations in respect of the amount and payment of fees and expenses of the bankruptcy.

The hearing due to take place on 27 March 2012 did not take place because it was agreed that the proceedings should be transferred to the High Court.

An accountant, Kay Linnell FCA, produced a lengthy report dated 13 April 2012, in which it was stated that strictly Mr Hunt was “not entitled to any remuneration at all as there were no realisations and no dividends paid”. The report went on to say that Mr Salliss nevertheless wished to provide a fair value for the time spent by Mr Hunt and his staff. The report concluded that the remuneration should be £13,582 (excluding VAT).

The Annulment Application and the Pensions Application came before Deputy Registrar Schaffer on 1 August 2012. Mr Sallis’ position at that hearing was that he was no longer prepared to proceed on the basis that the trustee’s remuneration should be fixed by reference to time properly spent. From that time until the hearing before Deputy Registrar Garwood on 13 February 2013 Mr Salliss’ position was that Mr Hunt was not entitled to any further remuneration either on the percentage basis or the time basis. Deputy Registrar Schaffer ordered, among other things, that Mr Hunt issue an application under r.6.141 (change of basis of remuneration).

The Remuneration Application was issued by Mr Hunt on 8 August 2012 pursuant to r.6.141(1) to change the basis of the trustee’s remuneration from the percentage basis to that specified in r.6.138(2)(b), namely by reference to the time properly given by the trustee and his staff in attending to matters arising in the bankruptcy. A further witness statement was made by Mr Hunt dated 8 August 2012 in support of that application.

There followed a lengthy witness statement of Mr Salliss dated 7 September 2012. In it, among many other things, he said that it was not until he saw Mr Hunt’s witness statement of 8 August 2012 that he appreciated that Mr Hunt was only entitled to be paid on the Official Receiver’s Scale and that was why he had negotiated the trustee’s fees on a time basis. He referred to and exhibited Ms Linnell’s report.

Mr Hunt made a witness statement dated 11 October 2012 in reply. It is 40 pages and 101 paragraphs.

Mr Salliss made a further witness statement dated 7 November 2012. He explained that, by way of security for payment of Mr Hunt’s costs and expenses, he could raise £25,000 with his wife’s help and that could be supplemented with money from the tax free lump sum. In other words, he had some £80,000 available by way of security.

Mr Hunt served yet another witness statement dated 19 December 2012. In it he confirmed that the tax free lump sums under the Pension Plans available in 2010, on the figures given to Mr Salliss, amounted in total to £56,244.76. He stated that as at the date of his second witness statement (11 October 2012) the costs and expenses of the bankruptcy were £78,989, broken down as follows: (1) trustee’s time costs (up to 13 September 2012) £55,347.47; (2) pensions’ expert £4,565.03; (3) legal fees and expenses (up to 13 December 2011) £19,076.50. He further confirmed that, since that date, the costs and expenses of the bankruptcy had risen to over £150,000 (excluding VAT). It is clear that the increase was in substance entirely due to the costs and expenses associated with the litigation over the costs and expenses.

Mr Hunt stated that, on the basis of figures supplied by the insurance company on 24 January 2013, as at that date the transfer value of one Pension Plan was £209,413.45 and the transfer value of the other was £14,847.26. Their aggregate transfer value as at that date, therefore, was £224,260.71.

The Annulment Application, the Pensions Application and the Remuneration Application came before Deputy Registrar Garwood on 13 and 14 February 2013. He handed down a lengthy and detailed written judgment on 25 March 2013.

On the Annulment Application, he referred to the preconditions for annulment in s.282(1)(b) and r.6.211(2) and (3).

The Deputy Registrar said that he was satisfied that debts of the four unsecured creditors which had been proved for in the bankruptcy of Mr Salliss had been fully paid since the making of the bankruptcy order and none of them weighed against the exercise of the discretion to annul.

He then referred to the decision of Mann J in Gill v Quinn [2004] EWHC 883 (Ch), [2005] BPIR 129, as authority relevant to the treatment of Barclays’ debt, namely a debt which was provable but had not been proved.

The Deputy Registrar speculated that the likely reason that Barclays had not initially submitted a proof was because administrative receivers appointed by Barclays in respect of Mr Salliss’ companies had not completed their tasks at the commencement of the bankruptcy and so any proof lodged at that stage would almost certainly turn out to have been incorrect. He also speculated that Barclays did not submit a proof, following the appointment of Mr Freeman as trustee, when the administrative receivers had finished their task because the stage had not then been reached of the trustee giving notice of an intended dividend.

The Deputy Registrar said that, when contacted by Mr Hunt for the purpose of establishing whether or not it wished to prove in the bankruptcy and for what amount, the substance of the response was that Barclays was now no longer able to trace any records of the matter and therefore, although Barclays was still entitled to prove for a very substantial amount, it could not in practice do so.

He said that the fact that Barclays appeared to be owed more than £2m weighed against the exercise of any discretion to annul for the reasons given in Gill v Quinn.

The Deputy Registrar then addressed at length the amount of the bankruptcy expenses and, since none of them had been paid, whether the security offered in respect of them was sufficient to satisfy the precondition in s.282(1)(b). He said that two expenses mentioned in the Trustee Report were challenged by Mr Salliss. The Deputy Registrar accepted that it was open to him to treat the challenge as if an application had been made under s.303(1) in respect of them. He said that Mr Salliss would, however, have to provide adequate security for the future payment of whatever on assessment was found to be payable, potentially the full amount. He said that the security would also have to be sufficient to cover any potential liability for the costs of the assessment process. He further observed that very considerable further costs had been incurred by Mr Hunt in relation to the Annulment Application, the Remuneration Application and the Pensions Application and security had to be given for their full amount, the costs of future resolution of any issue as to the amount payable and, potentially, interest on outstanding legal fees. He said that there was before him a statement of Mr Hunt’s legal costs of the three applications in the sum of £54,603.24. He said that the security which Mr Salliss would have to provide for payment of the bankruptcy expenses would, on any view, vastly exceed the £25,000 which was being held in Mr Salliss’ solicitors’ client account as available as security for payment of the bankruptcy expenses.

The Deputy Registrar then said that, in addition to expenses, there was the question of the remuneration to which the trustee was entitled under r.6.138. He referred to the creditors’ resolution as to the trustee’s remuneration, and said that there had been no realisations and no distributions and, if the bankruptcy order was annulled, there never would be. He said that, up to the point of the hearing before him, Mr Salliss had adopted the position, by reference to the resolution of the creditors or otherwise, that Mr Hunt should have no remuneration at all. He rejected the arguments on behalf of Mr Salliss that he had no power to change the basis on which Mr Hunt should be remunerated to that provided for in r.6.138(2)(b). He said that he was satisfied that it should be changed. His reasons were shortly stated in paragraphs [56] and [57] as follows:

“56.

I am satisfied that it should be because if the bankruptcy was annulled and there would therefore be no realisations there is no other basis on which the remuneration properly payable to Mr Hunt could be fixed and if the bankruptcy was not annulled it is, in my view, the only proper basis in all the circumstances to arrive at remuneration which would be appropriate.

57.

It would, in my view, be the only appropriate basis even if there should be future realisations because even though the bankruptcy commenced more than 19 years ago there is still uncertainty as to what might be realised and when if it continues and in any event the extent of the time necessarily and unavoidably spent by Mr Hunt and his staff already is such that a percentage basis of any kind could not, in my view, result in appropriate remuneration, especially as yet further time would have to be spent the amount of which cannot be anticipated.”

The Deputy Registrar then referred to a submission on behalf of Mr Salliss that, in considering the amount of the security available as security for debts and expenses for the purposes of the Annulment Application, the Deputy Registrar should take account of the tax free lump sum of just over £56,000 that would be become payable under the Pension Plans if the bankruptcy was annulled. If added to the £25,000 in Mr Salliss’ solicitors’ client account, that would produce a sum of just over £81,000 available by way of security. The Deputy Registrar said that such a sum would, on any view, be less than the level of security required for the payment of the expenses of the bankruptcy, with or without including the remuneration of Mr Hunt.

The Deputy Judge concluded that the Annulment Application had, therefore, been wholly misconceived since it had never been possible for Mr Salliss to pay or give security for payment of the expenses of his bankruptcy.

The Deputy Registrar went on to say that, even if he had been satisfied that the preconditions of the bankruptcy had been satisfied, it would not have been appropriate to exercise his discretion to annul for the reasons given by Mann J in Gill v Quinn.

I am satisfied that, despite the care and consciensciousness of the Deputy Registrar’s judgment, he erred in principle in the following respects.

In the first place, Barclays’ debt was irrelevant to the decision whether or not to annul. Gill v Quinn is clearly distinguishable. In that case Mr Gill, who had been adjudicated bankrupt in 1992, was automatically discharged in 1995. The statement of affairs prepared by Mr Gill at the time of his bankruptcy listed some 20 or 21 unsecured creditors, totalling £76,870, none of whom was paid in the bankruptcy. With a view to obtaining an annulment of his bankruptcy, he sent a standard form letter in July 2003 to all the creditors appearing in his statement of affairs inviting them to prove their debts, giving them notice of his intended application for an order for annulment, and giving them notice of their right to claim interest in the bankruptcy under certain conditions. One creditor waived its debt and two others were paid. In respect of all the rest, whose debts were in various amounts up to £4,500.00, there was either no response or, in two cases, the letter came back “gone away”. Mr Gill’s annulment application under s.282(1)(b) came before Mann J on appeal some 12 years after the bankruptcy began. Mann J proceeded on the assumption that, since it could not be shown that any debts had been proved, the realistic approach was that none of them had been. He said (at [20]) that, if an annulment order was made in that case, it would be in the face of evidence that a significant body of creditors had not in fact been paid through no fault of their own; the reason that they had not been paid was because the bankrupt did not pay them originally and a long time had elapsed since the bankruptcy. He said that the annulment would, in the circumstances, have the effect of undoing the bankruptcy while leaving the creditors unpaid and, in effect it might be viewed as a cheap way of getting out of the bankruptcy. He concluded (at [24]):

“in the circumstances, and because creditors are unpaid and will remain unpaid and the security proposals will not enhance their prospects of being paid, and in the light of the number and the amount of the creditors involved and the length of time it has elapsed since the bankruptcy and the loss of the records that has given rise to, which creates the present difficulties or some of them, I am afraid I refuse the application… It is basically because I think this application is made too late with too many untraceable and untraced creditors and that I think it would not be right to grant the annulment sought in this case.”

In the present case, Barclays is the only unpaid creditor. The Deputy Registrar speculated as to why no proof had been submitted by Barclays before Mr Hunt made his enquiry, but I cannot see that such speculation carries any weight. Barclays, fully aware of the intended annulment application, told Mr Hunt clearly and unequivocally that it did not intend to prove for its debt. The Deputy Registrar in his judgment stated that the substance of Barclays’ response was that Barclays was no longer able to trace any records and its reason for not proving was because it was therefore unable to quantify its debt or to substantiate any specified amount for which it lodged a proof. I asked counsel appearing on the appeal what material there was to support that account of the Deputy Registrar, which is not borne out by the wording of Barclays’ letter to Mr Hunt dated 19 April 2011. They did not refer me to any other material. Accordingly, the evidence shows no more than that Barclays, after fully investigating the matter and considering the legal position, took an informed policy decision that it would not then or in the future lodge a proof in respect of any debt in Mr Salliss’ bankruptcy. I cannot see any reason in principle why the court should in those circumstances take any account of any debt due to Barclays when considering whether or not to grant the Annulment Application.

A more useful comparison with the present case than Gill v Quinn can be found in the facts and decision in Official Receiver v McKay [2009] EWCA Civ. 467, [2010] Ch 303. In that case the court was concerned with an application to annul a bankruptcy order pursuant to s.282(1)(b) where the petitioning creditor had taken a commercial decision not to pursue the recovery of the amount owing to it any further and withdrew its proof of debt that had been lodged in the bankruptcy and agreed to pay the trustee’s costs and disbursements. There was no other creditor. Lloyd LJ, giving the lead judgment, with which the other two members of the Court of Appeal agreed, said (at [40]) that he could see no reason why the requirement to pay in full all proved debts should be understood as requiring the payment in full of a debt which had once been proved but the proof had been either withdrawn by agreement between the creditor and the trustee under r.6.106 or expunged by the court for whatever reason under r.6.107. By analogy, I can see no reason in policy or principle for interpreting the statute or the rules to require payment of the Barclays’ debt in the present case, as a precondition of an order for annulment, where Barclays was always aware of the bankruptcy but never submitted a proof and, on being specifically asked about its intention, made an informed commercial decision not to lodge a proof now or in the future.

Secondly, the Deputy Registrar’s approach to the Remuneration Application was flawed. The principles to be applied on an application to the court as to the proper basis or amount of the remuneration of a bankruptcy trustee were comprehensively reviewed by the Court of Appeal in Brook v Reed, Practice Note, [2011] EWCA Civ. 331, [2012] 1 WLR 419. The leading judgment was given by David Richards J, with whom the other two members of the court agreed. He addressed the relevant provisions in the Act and the Rules in relation to different types of office holder: administrator, liquidator and trustee in bankruptcy. He said (at [11]) that the substantial change to the pre-1986 law was to permit remuneration to be determined on a time basis as an alternative to a percentage basis. He referred to the relevant case law, including Mirror Group Newspapers plc v Maxwell (No. 2) [1998] 1 BCLC 638, Re Carton Limited (1923) 39 TLR 194, Re Independent Insurance Co Limited (No. 2) [2003] EWHC 51 (Ch), [2003] 1 BCLC 640, and Re Cabletel Installations Ltd [2005] BPIR 28. He also quoted from the report on Insolvency Law and Practice (1982) Cmnd. 8558 (the Cork Committee Report) and the working party on the remuneration of office holders chaired by Ferris J (the Ferris Report) published by the Lord Chancellor in July 1998. Many of the passages cited by David Richards J were to the effect that the court, in fixing the remuneration, rewards the value of the services rendered by the office holder, which does not necessarily equate to the time spent.

David Richards J then referred to The Practice Statement: The Fixing and Approval of the Remuneration of Appointees (2004) issued on 15 July 2004 by Chief Registrar Baister. The relevant provisions of that Practice Direction are now contained in Part Five of the 2012 Practice Direction on Insolvency Proceedings [2012] Bus L.R. 643 (and also to be found at 3E-20 of Volume 2 of the White Book 2013) (“the Practice Direction”). Paragraph 20.1.1 of the Practice Direction provides that Part Five applies to “any remuneration application made under the Act or the Insolvency Rules”. There is no doubt that it applies to an application to change the basis of the remuneration of a bankruptcy trustee pursuant to r.6.141. Paragraph 20.2.1 of Part Five provides that the objective is to ensure that the remuneration of an appointee which is to be fixed and approved by the court is fair, reasonable and commensurate with the nature and extent of the work properly undertaken by the appointee in any given case and is fixed and approved by a process which is consistent and predictable. It sets out what are described in paragraph 20.2.2 as the guiding principles “by reference to which remuneration applications are to be considered both by applicants, in the preparation and presentation of their application, and by the court determining such applications”. It then sets out the guiding principles in paragraph 20.2.3 under the following heads: (1) Justification; (2) The benefit of the doubt; (3) Professional Integrity; (4) The value of the service rendered; (5) Fair and reasonable; (6) Proportionality; (7) Professional Guidance; (8) Timing of Application.

Paragraph 20.4.1 of the Practice Direction provides that, when considering a remuneration application, a court shall have regard to the objective, the guiding principles and all relevant circumstances including the matters referred to in paragraph 20.4.2 and where appropriate in paragraph 20.4.3, each of which should be addressed in the evidence placed before the court. Paragraph 20.4.2 sets out the evidence to be placed before the court by the appointee. Paragraph 20.4.3 provides for certain additional evidence to be provided when some or all of the remuneration of the appointee is to be fixed and approved on a basis other than time properly spent.

In paragraph [44] of Brook v Reed, David Richards J stated that the Practice Statement of itself cannot make law on substantive issues or require courts to apply the guiding principles stated in it; the Practice Direction is not an attempt to create a new set of principles, but a convenient means of gathering together in one place the principles to be derived from the Rules and authority. He said at [48] the following:

“I consider that the stage has been reached where a court hearing an application to fix or to challenge the remuneration of an office-holder should proceed on the basis that the practice statement is to be applied except in so far as in the circumstances of the particular case the party objecting to its application shows that it would be wrong in principle to do so. In my judgment the statement of guiding principles in the practice statement is a correct statement of the principles generally applicable to issues relating to the remuneration of office-holders, although the particular circumstances of a case might call for the formulation of a further principle.”

The Deputy Registrar did not mention in his judgment Brook v Reed or the provisions which are now in Part Five of the Practice Direction. In his subsequent decision, on an oral application on behalf of Mr Salliss for permission to appeal, the Deputy Registrar rejected the criticism that he had not referred to the Practice Direction on the ground that the Remuneration Application was to change the basis of the remuneration and not to have it fixed by the court. That distinction is not, however, a sound one since, as I have said, it is perfectly clear that Part Five of the Practice Direction applies to any remuneration application made under the Act or the Rules, including an application to change the basis of the remuneration of a bankruptcy trustee pursuant to r.6.141.

On any such application to the court the judge should consider in turn each of the guiding principles mentioned in the Practice Direction in the light of the evidence. Mr Beswetherick, counsel for Mr Hunt, said that, even though that had not been done by the Deputy Registrar in the present case, the Deputy Registrar in substance did consider the guiding principles relevant to the Remuneration Application. I cannot agree. There are certainly four that were not addressed or not adequately addressed by the Deputy Registrar.

The fourth guiding principle (the value of the service rendered) is that the remuneration of an appointee should reflect the value of the service rendered by the appointee, and not simply reimburse the appointee in respect of time expended and cost incurred. The fifth guiding principle (fair and reasonable) is that the amount of the appointee’s remuneration should represent fair and reasonable remuneration for the work properly undertaken or to be undertaken. The sixth guiding principle (proportionality) is, so far as relevant to this appeal, that the amount of remuneration should be proportionate to the nature, complexity and extent of the work to be completed or that has been completed by the appointee and the value and nature of the assets and/or potential assets and the liabilities and/or potential liabilities with which the appointee will have to deal or has had to deal.

The Deputy Registrar’s reasoning in paragraphs [56] and [57] of his judgment was that (1) if the bankruptcy was annulled, there would be no realisations and therefore no basis for Mr Hunt to be remunerated other than on a time basis, and (2) if the bankruptcy was not annulled, the time basis would still be the appropriate basis both because of the uncertainty as to future realisations and also because of the extent of the time necessarily and unavoidably already spent by Mr Hunt and his staff and the uncertainty of further time to be spent by them.

That reasoning does not adequately reflect the guiding principles. The proper approach, in a case where the trustee applies to the court to change the basis of remuneration resolved by the creditors on the ground that it has ceased to be appropriate, is to begin by asking what has changed and was not foreseen and could not have been foreseen when the creditors made their decision. In the present case, it was always known that the assets in the bankrupt estate were limited. According to Mr Hunt’s second witness statement, Mr Freeman took on the trusteeship at a time when the only asset was believed to be a life policy “allied” to a pension scheme with an unknown surrender value and which may have lapsed. It was subsequently discovered that the only assets in the bankruptcy were the two Pension Plans. Notwithstanding the limited assets the creditors resolved that the trustee be paid on the percentage basis. Mr Freeman did not challenge that resolution and continued to act as trustee on that basis. Mr Hunt, who had chaired the meeting at which the creditors resolved on the percentage basis of remuneration, took over the trusteeship on the same basis.

At the date of the Trustee Report, it was known that the Pension Plans were assets of the bankrupt’s estate, with an aggregate value of some £230,000 and that an aggregate tax free cash sum of over £56,000 was payable under the Pension Plans. On the basis of remuneration fixed by the creditors the tax free sum alone would generate some £8,000 in remuneration. The face value of the Pension Plans would generate considerably more. An important question, therefore, was not only whether the proper value of the work carried out by Mr Freeman and Mr Hunt prior to the date of Trustee Report exceeded the amount of remuneration recoverable in respect of realisation of the Pension Plans but whether the proper value of the work so far exceeded it as to make it an inappropriate basis for remuneration. As I have said, the considerable increase in the bankruptcy fees and expenses after that date were in substance due to the time, cost and expense of litigating over the costs, expenses and remuneration at the date of the Trustee’s Report.

The eighth guiding principle (timing of the application) is that the court will take into account whether the application should have been made earlier and if so the reasons for any delay in making it. This issue was not addressed by the Deputy Registrar. The Remuneration Application was not made until August 2012 but it is intended to reflect the time spent by Mr Freeman and Mr Hunt since early 1996. I was not referred to any evidence explaining the reason for the delay in applying for the change in the basis of remuneration. The usual and proper course should be for the trustee to apply to the court for a change in the basis of remuneration as soon as it becomes clear that an application will be necessary in order to make the remuneration (in the words of the Practice Direction) fair, reasonable and commensurate with the nature and extent of the work properly to be undertaken by the appointee. In other words, the application should, so far as practicable, be prospective and not retrospective. Unless there is some good and proper reason to do otherwise, it is not appropriate for the trustee to wait until all the work is done and then apply to the court as a “fait accompli” for a retrospective change in the remuneration resolved by the creditors.

In the light of those matters, the decision of the Deputy Registrar on the Annulment Application and the Remuneration Application must be set aside and determined afresh. For the reasons below I do not consider that I can determine those applications on this appeal. They will have to be remitted.

The Annulment Application cannot succeed unless all the bankruptcy debts and all the expenses of the bankruptcy which have been or will be properly incurred are paid or secured to the satisfaction of the court. For the reasons I have given earlier, there are no outstanding bankruptcy debts. The only issue is as to the expenses, including the trustee’s remuneration, properly incurred or to be incurred. It is therefore appropriate to consider, first, the Remuneration Application.

The remuneration of Mr Freeman and Mr Hunt falls into two broad periods: (1) the period up to the issue and service of the Annulment Application and the Trustee Report consequential on it and (2) the period since then. So far as concerns the first period, there was insufficient time on the hearing of the appeal to consider whether the proper value of the work carried out by Mr Freeman and Mr Hunt prior to the date of the Trustee Report would so far exceed the amount of remuneration recoverable on a percentage basis as to make it an inappropriate basis for remuneration in the light of the guiding principles in Part Five of the Practice Direction and all the circumstances, including the fact that Mr Freeman accepted the percentage basis resolved by the creditors and Mr Hunt took on the trusteeship with knowledge of the basis of remuneration. Mr Salliss now concedes that some £21,600 (£18,000 plus VAT) is payable on a percentage basis, taking the face value of the Pension Plans. Mr Hunt claims remuneration on a time basis of £39,259.l8 (excluding VAT). In any event, it seems to me that such an exercise is more appropriately carried out by a bankruptcy registrar rather than myself on an appeal. Furthermore, Mr Beswetherick said that Mr Hunt would probably wish to put in further evidence on this matter. As I have said, there is currently no evidence as to the reasons for the delay in making the Remuneration Application.

So far as concerns the remuneration of Mr Hunt since the Trustee Report, much will turn on the appropriateness of the time spent by him and his staff in litigating the Annulment Application, the Remuneration Application and the Pensions Application. There can be no real doubt that Mr Hunt had to make the Remuneration Application and the Pensions Application. From at least the hearing before Deputy Registrar Schaffer on 1 August 2012 until the hearing before the Deputy Registrar Garwood on 13 February 2013 Mr Salliss’ formal position was that Mr Hunt was not entitled to any remuneration because there had been no realisations. That extreme position was only qualified when, at the hearing before Deputy Registrar Garwood, Mr Salliss conceded that Mr Hunt was entitled to £8,000 based on the value of the aggregate tax free cash sum payable under the Pension Plans. It was not until the hearing of this appeal that it was conceded that Mr Hunt is entitled to some £18,000 (net of VAT) on the basis of the face value of the Pension Plans. On the other hand, the Registrar to whom the matter is remitted, may take the view, bearing in mind the matters I have mentioned earlier, that Mr Hunt was wrong to press for a fully retrospective change of basis for remuneration back to 1996. In that case, not all the time of himself and his staff will have been properly spent on the Remuneration Application.

So far as concerns a fair, reasonable and proportionate method of remunerating Mr Hunt for the time of himself and his staff in opposing the Annulment Application, a critical consideration will be the reasonableness of the stance taken by himself and Mr Salliss respectively at each stage. By way of example, at the stage of the Trustee Report Mr Hunt was concerned with the payment of, or security for, the fees of the pensions specialist (£4,500), legal fees and expenses (£19,088.20) and other disbursements (£1,080.24) amounting to £24,668.60 (including VAT). In addition he was entitled to remuneration either on a percentage basis or a time basis. The Pension Plans were an asset available to meet those expenses or to provide security in respect of them. It seems that the cash free lump sum amounting to over £56,000 could have been made available within a short space of time. If that would have been sufficient to meet all those costs and expenses an annulment order could have been made, for example, conditionally on the costs and expenses being paid or an amount equal to them being paid into court or in an unconditional form but on the footing that the order would not be perfected until evidence was provided that all the costs and expenses had all been paid or their full amount had been paid into court: see Engel v Peri [2002] EWHC 799 (Ch), [2002] BPIR 961. If that is correct, then it would call into question the reasonableness of the time spent by Mr Hunt and his staff in opposing the Annulment Application.

There can be no doubt that Mr Hunt was justified in bringing the Pensions Application. It was not suggested by Mr Collings on the hearing of the appeal that the benefit of the Pensions Plans was not an asset of the bankrupt estate or that there was any proper basis for Mr Salliss to have failed to co-operate in the transfer of their benefit to Mr Hunt. It seems unlikely that any significant expense was necessitated by the Pensions Application.

Mr Salliss has made an application under r.6.207A and a deemed application under s.303 challenging the propriety of certain expenses incurred by Mr Freeman or Mr Hunt before the Trustee Report. It is convenient that those are considered at the same time as the Annulment Application. So far as concerns the propriety of costs and expenses incurred after the Trustee Report, which I assume consist essentially of legal fees in relation to the Annulment Application, the Remuneration Application and the Pensions Application, their propriety and the right of Mr Hunt to an indemnity in respect of them out of the bankrupt estate will no doubt to a large extent follow the conclusions on the reasonableness of the stance taken by Mr Hunt in opposing or pursuing them.

Deputy Registrar Garwood had a difficult task in trying to provide a sensible answer to the Annulment Application and the Remuneration Application in view of their rather complex background, the overlap between them and the somewhat uncompromising position taken at one time or another by the parties. His judgment was, as I have said, both detailed and conscientious. I nevertheless consider that it would be right, in the interests of fairness, to remit those Applications to be determined afresh by another Registrar.

For those reasons, I dismiss the appeal so far as concerns the Deputy Registrar’s order granting the Pensions Application and his consequential orders as to costs and expenses in relation to that Application. I set aside the rest of his order and remit the Annulment Application and the Remuneration Application, those Applications to be determined by a Registrar other than Deputy Registrar Garwood. I order that the Annulment Application be determined after the Remuneration Application.

It is regrettable that so much time and money has been devoted to arguments about the fees and expenses of this bankruptcy, in which there are only two assets and there were only ever four relatively modest unsecured creditors who proved for debts, all of whom have now been paid, and one other creditor which has decided not to prove. It seems obvious that, more so than ever, it is in the interests of both parties that agreement is reached which would avoid yet more time and substantial costs being expended in another round of litigation.

The applicable sections of the Act

“282 Court’s power to annul bankruptcy order

(1)

The court may annul a bankruptcy order if it at any time appears to the court –

(a)

that, on the ground existing at the time the order was made, the order ought not to have been made, or

(b)

that, to the extent required by the rules, the bankruptcy debts and the expenses of the bankruptcy have all, since the making of the order, been either paid or secured for to the satisfaction of the court.

…..

(3)

The court may annul a bankruptcy order whether or not the bankrupt has been discharged from the bankruptcy.

(4)

Where the court annuls a bankruptcy order … -

(a)

any sale or other disposition of property, payment made or other thing duly done, under any provision in this Group of Parts, by or under the authority of the official receiver or a trustee of the bankrupt’s estate or by the court is valid, but

(b)

if any of the bankrupt’s estate is then vested, under any such provision, in such a trust it shall vest in such person as the court may appoint or, in default of any such appointment revert to the bankrupt on such terms (if any) as the court may direct:

And the court may include in its order such supplemental provisions as may be authorised by the rules.”

“303 General control of trustee by the court

(1)

If a bankrupt or any of his creditors or any other person is dissatisfied by any act, omission or decision of a trustee of the bankrupt’s estate, he may apply to the court and on such an application the court may confirm, reverse or modify any act or decision of the trustee, may give him directions or may make such other order as it thinks”

“363 General control of court

(1)

Every bankruptcy is under the general control of the court and, subject to the provisions in this Group of Parts, the court has full power to decide all questions of priorities and all other questions, whether of law or fact, arising in any bankruptcy.”

The applicable Rules

“Fixing of remuneration (as unamended)

6.138

– (1) The trustee is entitled to receive remuneration for his services as such.

(2)

the remuneration shall be fixed either –

(a)

as a percentage of the value of the assets in the bankrupt’s estate which are realised or distributed, or of the one value and the other in combination, or

(b)

by reference to the time properly given by the insolvency practitioner (as trustee) and his staff in attending to matters arising in the bankruptcy.

Where the trustee is other than the official receiver, it is for the creditors’ committee (if there is one) to determine whether his remuneration is to be fixed under paragraph (2)(a) or (b) and, if under paragraph 2(a), to determine any percentage to be applied as there mentioned.

(4)

In arriving at that determination, the committee shall have regard to the following matters-

(a)

the complexity (or otherwise) of the case,

(b)

any respects in which, in connection with the administration of the estate, there falls on the insolcency practitioner (as trustee) any responsibility of an exceptional kind or degree,

(c)

the effectiveness with which the insolvency practitioner appears to be carrying out, or to have carried out, his duties as trustee, and

(d)

the value and nature of the assets in the estate with which the trustee has to deal.

(5)

If there is no creditors’ committee, or the committee does not make the requisite determination, the trustee’s remuneration may be fixed (in accordance with paragraph (2)) by a resolution of a meeting of creditors; and paragraph (4) applies to them as it does to the creditors’ committee.

(6)

If not fixed as above, the trustee’s remuneration shall be on the scale laid down for the official receiver by general regulations.”

Recourse to the court (as unamended)

6.141

– (1) If the trustee considers that the remuneration fixed for him by the creditors’ committee, or by resolution of the creditors, or as under Rule 6.138(6), is insufficient, he may apply to the court for an order increasing its amount or rate.”

“6.207A Applicant’s claim that remuneration is or expenses are excessive

(1)

Where the trustee is other than the official receiver and application for annulment is made under section 282(1)(b), the applicant may also apply to the court for one or more of the orders paragraph (4) on the ground that the remuneration charged or expenses incurred by the trustee is or are, in all the circumstances, excessive.

……

(4)

If the court annuls the bankruptcy order under section

282(1)(b) and considers the application under paragraph (1) to be well founded, it must also make one or more of the following orders-

(a)

an order reducing the amount of remuneration which the trustee was entitled to charge;

(b)

an order that some or all of the remuneration or expenses in question be treated as not being bankruptcy expenses;

(c)

an order that the trustee or the trustee’s personal representative pay to the applicant the amount of the excess of remuneration or expenses or such part of the excess as the court may specify;

and may make any other order that it thinks just.”

“6.211

Matters to be proved under s282(1)(b)

(1)

This rule applies with regard to the matters which-

(a)] must, in an application under section 282(1)(b), be proved to the satisfaction of the court and

(b)

may be taken into account by the court on hearing such an application.

(2)

Subject to the following paragraph, all bankruptcy debts which have been proved must have been-

(a)

paid in full, or

(b)

secured in full to the satisfaction of the court.”