Please note that the Insolvency Rules 1986 as quoted in this article reflect the law as it stood prior to 6 April 2017 and the introduction of the new insolvency rules.
The case concerned an appeal against the rejection of a proof of debt by a liquidator and who should be liable for the appellants’ costs of the appeal.
The appellants, Mr and Mrs Fielding, submitted a proof of debt (claiming £1.3m) in the liquidation of The Burnden Group Limited (“BGL”), a company which they effectively ran and controlled.
The liquidator of BGL, Stephen Hunt (“the Liquidator”) rejected that proof. The Fieldings’ successfully appealed the rejection but the question of costs was the subject of great debate; the Fieldings claimed the Liquidator should be personally liable for their costs of around £290,000.
The question of the costs of the Fieldings appeal was the subject of a costs judgment separate from that handed down in respect of the actual appeal itself.
Underlying the rejection of the proof, the Fieldings alleged, was the Liquidator’s strong desire to bring misfeasance claims against both the Fieldings and the former administrators of BGL, who had paid a dividend of £1.3m to the Fieldings. If the Fieldings’ proof were valid then BGL would have suffered no loss and the misfeasance claims would fall away.
It is noteworthy that there were no funds in the liquidation estate to enable the Fieldings to receive a dividend if their proof were valid, nor to enable their costs to be paid, unless the Liquidator were held personally liable for those costs.
Counsel for the Fieldings contended that the Liquidator fiercely defended the appeal against his decision to reject because it was necessary for his rejection to stand so that the proposed misfeasance proceedings could get off the ground.
As a consequence of the motives alleged for Liquidator’s stance, the Fieldings argued there should be a personal costs order against him, or at least the costs should be an expense of the liquidation. Counsel for the Liquidator argued that there should be no order as to costs at all.
Insolvency Rules 1986 rule 4.83 applies to appeals concerning the rejection of a proof of debt. This rule is separate from that at rule 4.73 concerning how the costs of proving will be met.
Rule 4.83 (6) states: “The official receiver is not personally liable for costs incurred by any person in respect of an application under this Rule; and the liquidator (if other than the official receiver) is not so liable unless the court makes an order to that effect.”
There was no case law on all fours with the facts in this case, however, several cases were examined:
In the case of Re Arthur Williams & Co (1913), whilst the facts were not analogous to this case, the Court of Appeal held that the official receiver should be personally liable for the costs of the case since in bringing the case he was acting not in discharge of his statutory duty but in the exercise of his power.
The court held in Re Mordant (a bankrupt) (1995) that only with good reason to do so and, not otherwise than in a special case, should the court depart from usual rule that personal costs orders are not made against officeholders.
The notable points can be summarised as follows:
- A question for HHJ Davies was therefore the difference between the performance of a duty and the exercise of a power; the former being something which a liquidator was obliged to do, the latter something within his powers which a liquidator elected to do. Admitting or rejecting a proof is a duty, but the decision to defend an appeal against a rejection is an exercise of a power. However, simply because a power is exercised by an officeholder, in this case unsuccessfully, does not mean that officeholder should be subject to a personal costs order. After all, a liquidator must be entitled to defend himself without risk of costs against him (Re Wilson Lovatt & Sons Limited (1977)).
- Counsel for the Fieldings argued that his clients’ costs should be those incurred in providing their debt as a whole, not limited to just those of the appeal. HHJ Davies considered that because separate provision for costs had been made at r. 4.83(6), the general principle at r.4.73 (1) did not apply and the costs in question were limited to those of the appeal, and not those of submitting the proof additionally.
- Suggestions that the Liquidator had been acting for personal advantage (and in order to shore up his misfeasance claims) were rejected and there was no criticism of his conduct with regard to the proof of debt.
- The court held that the Fieldings costs were an expense of the liquidation because they had succeeded in their appeal against rejection of their proof. Although the parties had exchanged information concerning the rejection of the proof, this had taken place after formal rejection of the proof had been communicated and it is worth noting that the Judge decided that the parties must share the blame for not resolving the dispute before it came before him. Notwithstanding that comment, the Judge went on to apply a reduction of 20% to the costs claimed by the Fieldings in recognition of their poor conduct which had led to a more lengthy process.
- A further interesting point is that the parties were not prepared to argue, in the event of the Fieldings costs being an expense of the liquidation, where those costs would rank as against the Liquidator’s costs of the liquidation. Given the apparent lack of funds in the liquidation estate, this may well be a moot point.
The Insolvency (England and Wales) Rules 2016 (“the 2016 Rules”) came into force on 6 April 2016. The provisions in the 2016 Rules that correspond to those mentioned in this article are:
- Rule 14.5 – Costs of proving
- Rule 14.8 -Appeal against decision on proof
- Rule 14.9 – Office-holder not liable for costs under rule 14.8
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Posted on May 16, 2017