The Supreme Court has ruled that a trustee of a bankrupt businessman should be free to pursue a costs appeal free from the liability of previous proceedings.

In effect, the decision - unanimously agreed by five judges - gives a trustee the chance to overturn a costs order made in favour of a negligent law firm, which could significantly increase potential recoveries by out-of-pocket creditors.

The claimant, named as Mr Hughes-Holland, was appointed as trustee for Richard Gabriel in March 2014.

Gabriel had been involved in a long-running dispute with commercial firm BPE Solicitors after it advised him on a £200,000 loan to another company.

BPE was found to be negligent in its handling of the transaction and the trial judge awarded Gabriel the full amount he would have recovered under the loan agreement.

But that decision was overruled by the Court of Appeal in 2013, with damages reduced to a nominal £2 and Gabriel ordered to pay BPE’s costs.

The question of an appeal against that costs ruling was placed in doubt by Gabriel’s bankruptcy.

Hughes-Holland argued that he should not be personally at risk by virtue of having adopted the appeal as trustee in the bankruptcy proceedings.

The Supreme Court agreed to resolve the matter before the appeal itself to clarify where the parties stood. Judges heard that the trustee was unlikely to pursue any appeal were he to be liable for BPE’s costs.

This, the court heard, could have significant implications for unsecured creditors owed money by Gabriel. If the costs order appeal were successful, they could expect to recover between 23p and 25p in the pound. Without any challenge, dividends would be no higher than 5p in the pound.

Lord Sumption noted the principle that a trustee in bankruptcy is personally liable to legal proceedings which he has adopted. They can opt out of an action upon appointment, leaving any potential action stayed or dismissed.

But he said the mere fact that the trustee had adopted an appeal ‘could not possibly’ justify him adopting costs ordered to be paid previously by Gabriel.

‘The trustee is entitled to adopt the appeal to this court without adopting the distinct proceedings below,’ he said.

He added that in the event that the trustee adopts the appeal to the Supreme Court he will not be held personally liable for any costs incurred by Gabriel in relation to the action up to and including November 2013.