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Volume XII, Number 147

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UK IPs: Beware Taking Fees on Trust… re: Insolvency Practitioners

At a time when insolvency practitioner’s (“IPs”) fees are being scrutinised more closely than ever, the case of Bell v. Birchall and others [2015] is a timely reminder to IPs to consider the necessity of the work they propose to undertake, particularly in respect of assets that do not form part of the insolvent estate. In this case, the court ruled that it had no jurisdiction to make a “Berkeley Applegate” order.

Insolvency legislation makes it clear that an IP can only seek to recover fees and expenses incurred from the realisations of assets within the insolvent estate.  An asset will not fall within the insolvency estate if it is owned by a third party, or a third party has a beneficial interest in that asset. Notwithstanding the legislative framework, case law has established that the court has discretion to allow an IP to recover fees for the work done in realising assets for the benefit of a third party from the relevant asset realisations (“a Berkeley Applegate order”) (Berkeley Applegate (Investment Consultants) Ltd (No2) [1988] 4 bcc 279).

In the case of the case of Bell v Birchall, the bankrupt had been practising as a solicitor. The practice held sums totalling about £250,000 in 12 separate client accounts, and possessed a large number of files that were largely related to non-current instructions. The Trustee in Bankruptcy accepted that the balances on client accounts were exclusively client monies – no sums were owing to the bankrupt’s practice and the funds were therefore of no obvious benefit to the bankruptcy estate.

The Trustee had been in correspondence with the Solicitors Regulation Authority (“SRA”), which had not conducted an intervention of the bankrupt’s practice, nor had it intimated that it would. It is worth noting here that unless and until the SRA formally intervenes in a solicitor’s practice, solicitors who have been made bankrupt continue to be subject to Solicitors Accounts Rules and it is the individual solicitor, not their appointed Trustee, who is responsible for dealing with client account monies.

In order to investigate potential recoveries for the bankrupt’s estate, the Trustee took custody of the bankrupt’s files and papers. The SRA grew increasingly concerned that the client account monies were under the control of the Trustee. The Trustee also indicated that he would be applying for an order that his costs for dealing with the accounts and files be paid out of client account balances.

The SRA eventually intervened on the basis that the obligation to account to clients was not being discharged. In response, the Trustee sought a Berkeley Applegate order.

The Trustee’s application was dismissed by the court. The court ruled that it had no jurisdiction to make a Berkeley Applegate order in relation to the costs incurred by the Trustee in attempting to reconcile the client accounts. In the Berkeley Applegate case, assistance was provided to the beneficiaries of the assets on the condition that the costs of such assistance were met from the assets being realised. In the case of Bell v Birchall however, the clients of the bankrupt solicitor had not come forward to request the assistance of the Trustee in returning their funds. Further, even if the clients sought to bring an action for the return of their monies, such action would be against the solicitor personally (prior to the intervention of the SRA), or the SRA – not the Trustee, who had no legal role or obligations in respect of client monies. Notwithstanding the fact that the court found that there was no jurisdiction to make the order, it would, in any event, be inappropriate to levy costs against client monies when the SRA could take steps to safeguard client monies and would not charge for this.

There is no jurisdiction for the court to make a Berkeley Applegate order in circumstances where an IP takes it upon himself to realise assets outside of the insolvent estate, without request or complaint from the beneficiaries to those assets. An IP should carefully consider whether assets fall within the estate over which he has been appointed. This will include a consideration of any appropriate professional rules. The judge in this case commented that the Trustee did not appear to have appreciated that the client monies were held by the bankrupt on trust for the beneficiaries, nor that it was the responsibility of either the bankrupt or the SRA—and not the Trustee—to distribute those funds.

If an IP has no duty to act and the court has no jurisdiction to order their remuneration, the creditors may be reluctant to approve any costs and expenses unless they have benefitted.

© Copyright 2022 Squire Patton Boggs (US) LLPNational Law Review, Volume V, Number 209
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About this Author

Devinder Singh, Squire Patton Boggs, Contentious Insolvency Lawyer, UK Attorney
Partner

Devinder leads the Restructuring & Insolvency Group based in our Birmingham office. Devinder's clients include the major clearing banks, asset based lenders, insolvency practitioners, corporates and creditors.

He advises on all aspects of corporate restructuring and insolvency, with a particular specialism in contentious work.

Squire Patton Boggs Restructuring and Insolvency Team is ranked in Tier 1 in the 2014 editions of Chambers UK and Legal 500 where Devinder is described as “commercial” and “a team...

44 121 222 3382
Associate

Gemma is a Lawyer in our Restructuring & Insolvency Group based in our Birmingham office. She provides contentious and non-contentious insolvency and business restructuring advice to insolvency practitioners, institutional lenders and major corporates.

44 121 222 3492
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