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Bankruptcy – Guideline Court of Appeal Ruling on Meaning of ‘Property’

Bankruptcy – Guideline Court of Appeal Ruling on Meaning of ‘Property’

When people are declared bankrupt, all of their ‘property’ passes automatically to a trustee so that it can be used to pay off their creditors. In a guideline case of great interest to insolvency practitioners, the Court of Appeal has ruled that that word embraces fees that were due to a barrister on the date of his bankruptcy.

Barristers are unique amongst professionals in that they were for centuries forbidden to enter into contracts for their services and thus could not sue for their fees. That ban was lifted by the Courts and Legal Services Act 1990, but only since 2013 has it become the norm for barristers to decline to accept work unless their clients enter into standard contracts, the terms of which are set by the Bar Council.

The case concerned a barrister who was adjudged bankrupt in 2012. His trustee in bankruptcy argued that fees that were then due to him from his clients in respect of past work were his property within the meaning of Section 436 of the Insolvency Act 1986. On that basis, it was submitted that the outstanding fees vested in the trustee in bankruptcy.

That argument was, however, rejected by a judge on grounds that the fees were not due under a contract, but purely on an honorarium basis. Although solicitors who used the barrister’s services were honour-bound to pay his fees, they were not contractually obliged to do so and he could not sue them if they did not.

In upholding the trustee’s challenge to that ruling, the Court noted that the barrister had more than a merely moral claim to his outstanding fees and more than just a hope of eventually receiving them. The reality was that solicitors almost always paid barristers’ fees, although sometimes belatedly, and there was evidence that the incidence of bad debt at the Bar was no higher than in other professions.

A solicitor’s failure to pay a barrister’s fees could potentially amount to professional misconduct, and the Bar Council had a scheme in place for the withdrawal of credit from non-paying solicitors. The barrister had an expectation that he would in time receive the outstanding fees and, regardless of whether they were contractually due, they were capable of realisation. In the circumstances, they fell into his bankrupt estate and vested in the trustee.