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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Cooke v Dunbar Assets Plc [2016] EWHC 1888 (Ch) (29 July 2016) URL: https://www.bailii.org/ew/cases/EWHC/Ch/2016/1888.html Cite as: [2016] Bus LR 960, [2016] WLR(D) 444, [2016] EWHC 1888 (Ch) |
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ON APPEAL FROM
DEPUTY DISTRICT JUDGE BUCKLEY-CLARKE (No: 168 of 2014)
CHANCERY DIVISION
IN BANKRUPTCY
IN THE MATTER OF BRIAN HERBERT COOKE
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
LONDON EC4A 1NL |
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B e f o r e :
SITTING AS A DEPUTY JUDGE OF THE CHANCERY DIVISION
____________________
BRIAN HERBERT COOKE |
Appellant |
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- and - |
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DUNBAR ASSETS PLC |
Respondent |
____________________
Mr Joseph Curl (instructed by Messrs DLA Piper UK LLP, of 3, Noble Street, LONDON EC2V 7EE) for the Respondent
Hearing date: Wednesday 6th April 2016
____________________
Crown Copyright ©
MR JEREMY COUSINS QC:
The issues
(i) As a cost and expense of the bankruptcy, and thus falling to be dealt with in accordance with the order of priority set out in rule 6.224(1) of the Insolvency Rules 1986 ("the 1986 Rules").
(ii) As a provable debt in the bankruptcy.
(iii) As a liability outside of the bankruptcy, that is to say, as costs ordered against Mr Cooke personally.
(For convenience I shall refer to these respectively as Categories 1, 2, or 3.)
Miss McErlean's oral submission was that the costs must be dealt with as Category 1, but, alternatively, they should be ordered to be dealt with under Category 2. Mr Curl's submission as the hearing was that the costs should be ordered against Mr Cooke personally under Category 3. Counsel agreed further that it was a matter of law into which of these three categories that the costs liability should fall, and not a matter of discretion for the court.
THE LEGISLATIVE BACKGROUND
Appeals in insolvency proceedings
"An appeal from a decision made in the exercise of jurisdiction for the purposes of those Parts by [the county court] or by a registrar in bankruptcy of the High Court lies to a single judge of the High Court; and an appeal from a decision of that judge on such an appeal lies [...] to the Court of Appeal."
"(1) In bankruptcy proceedings, an appeal lies at the instance of the Secretary of State from any order of the court made on an application for the rescission or annulment of a bankruptcy order, or for a bankrupt's discharge."
The bankrupt's estate – definition and vesting
"(1) Subject as follows, a bankrupt's estate for the purposes of any of this Group of Parts comprises—
(a) all property belonging to or vested in the bankrupt at the commencement of the bankruptcy, and
(b) any property which by virtue of any of the following provisions of this Part is comprised in that estate or is treated as falling within the preceding paragraph."
Bankruptcy debt
(a) any debt or liability to which he is subject at the commencement of the bankruptcy,
(b) any debt or liability to which he may become subject after the commencement of the bankruptcy (including after his discharge from bankruptcy) by reason of any obligation incurred before the commencement of the bankruptcy,
(c) any amount specified in pursuance of section 39(3)(c) of the Powers of Criminal Courts Act 1973 in any criminal bankruptcy order made against him before the commencement of the bankruptcy, and
(d) any interest provable as mentioned in section 322(2) in Chapter IV of Part IX.
(2) In determining for the purposes of any provision in this Group of Parts whether any liability in tort is a bankruptcy debt, the bankrupt is deemed to become subject to that liability by reason of an obligation incurred at the time when the cause of action accrued.
(3) For the purposes of references in this Group of Parts to a debt or liability, it is immaterial whether the debt or liability is present or future, whether it is certain or contingent or whether its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion; and references in this Group of Parts to owing a debt are to be read accordingly.
(4) In this Group of Parts, except in so far as the context otherwise requires, "liability" means (subject to subsection (3) above) a liability to pay money or money's worth, including any liability under an enactment, any liability for breach of trust, any liability in contract, tort or bailment and any liability arising out of an obligation to make restitution."
Priority of debts and expenses upon bankruptcy
"(1) In the distribution of the bankrupt's estate, his preferential debts shall be paid in priority to other debts.
(1A) Ordinary preferential debts rank equally among themselves after the expenses of the bankruptcy and shall be paid in full, unless the bankrupt's estate is insufficient to meet them, in which case they abate in equal proportions between themselves.
(1B) Secondary preferential debts rank equally among themselves after the ordinary preferential debts and shall be paid in full, unless the bankrupt's estate is insufficient to meet them, in which case they abate in equal proportions between themselves."
(Emphasis added)
Costs in insolvency proceedings
"Where the amount of costs is decided by detailed assessment under an order of the court directing that those costs are to be paid otherwise than out of the insolvent estate, the costs officer shall note on the final costs certificate by whom, or the manner in which, the costs are to be paid."
Rules 7.39, 7.40, 7.41 and 7.42 deal respectively with costs against an official receiver, applications for costs, costs of witnesses, and final costs certificates.
"(1) The provisions of the CPR in the first column of the table in this Rule (including any related practice direction) apply to insolvency proceedings by virtue of the provisions of these Rules set out in the second column with any necessary modifications, except so far as inconsistent with these Rules.
[The table here provides by the first column, inter alia, for the application of CPR Parts 44 and 47, by virtue of Chapter 6 of Part 7 of the 1986 Rules.]
(2) Subject to paragraph (3), the provisions of the CPR (including any related practice direction) not referred to in the table apply to proceedings under the Act and Rules with any necessary modifications, except so far as inconsistent with these Rules."
"(1) All fees, costs, charges and other expenses incurred in the course of winding up, administration or bankruptcy proceedings are to be regarded as expenses of the winding up or the administration or, as the case may be, of the bankruptcy.
(2) The costs associated with the prescribed part shall be paid out of the prescribed part."
THE SUBMISSIONS FOR MR COOKE
Rule 12.2 of the 1986 Rules
Three propositions derived from Re Nortel
"88 In a number of cases, it has been held that, where an order for costs was made against a person after an insolvency process had been instituted against him, his liability for costs did not arise from an obligation which had arisen before issue of the bankruptcy proceedings, even though the costs order was made in proceedings which had been started before that insolvency process had begun: see for instance In re Bluck; Ex p Bluck (1887) 57 LT 419, In re British Gold Fields of West Africa [1899] 2 Ch 7 , In re A Debtor (No 68 of 1911) [1911] 2 KB 652, and In re Pitchford [1924] 2 Ch 260.
89. In my view, by becoming a party to legal proceedings in this jurisdiction, a person is brought within a system governed by rules of court, which carry with them the potential for being rendered legally liable for costs, subject of course to the discretion of the court. An order for costs made against a company in liquidation, made in proceedings begun before it went into liquidation, is therefore provable as a contingent liability under rule 13.12(1)(b), as the liability for those costs will have arisen by reason of the obligation which the company incurred when it became party to the proceedings.
90. I have little concern about overruling those earlier decisions, although they are long-standing. ..."
Similarly she relied upon para 136, where Lord Sumption (with whom Lords Mance and Clarke agreed) held that many costs cases concerned with contingent liabilities had been wrongly decided. He said:
"There are a number of problems about these cases. One of them, as it seems to me, is the absence of any real attempt to analyse the effect of the statutory scheme in creating an obligation to meet a liability contingently on some specified event. In the earlier cases, this can perhaps be regarded as the legacy of the older principle which admitted only contractual debts to proof. But that consideration cannot explain the more recent decisions. In my view they were wrongly decided. In the costs cases, I consider that those who engage in litigation whether as claimant or defendant, submit themselves to a statutory scheme which gives rise to a relationship between them governed by rules of court. They are liable under those rules to be made to pay costs contingently on the outcome and on the exercise of the court's discretion. An order for costs made in proceedings which were begun before the judgment debtor went into liquidation is in my view provable as a contingent liability, as indeed it has been held to be in the case of arbitration proceedings: In re Smith; Ex p Edwards (1886) 3 Morr 179. In both cases, the order for costs is made against someone who is subject to a scheme of rules under which that is a contingent outcome. The fact that in one case the submission is contractual while in the other it is not, cannot make any difference under the modern scheme of insolvency law under which all liabilities arising from the state of affairs which obtains at the time when the company went into liquidation are in principle provable. Of course, an order for costs like many other contingencies to which a debt or liability may arise, depends on the exercise of a discretion and may never be made. But that does not make it special. It is not a condition of the right to prove for a debt or liability which is contingent at the date when the company went into liquidation that the contingency should be bound to occur or that its occurrence should be determined by absolute rather than discretionary factors."
"115 If I had taken a different view on the provable debt issue, an alternative argument to that just discussed was that the court has the power to direct the administrator of a target company to accord to the potential liability under the FSD regime a higher ranking than it would be given under the 1986 Act and the Insolvency Rules . In other words, that the court could order the administrator to treat the potential FSD liability as a provable debt (category 5 in para 39 above) even though the effect of the legislation is that it should rank lower (namely category 7).
116 At any rate at first sight, it would be extraordinary if a court, which had decided that a liability did not fall within the definition of provable debts in rule 13.12, could none the less go on to decide that it was to be so treated, in the absence of any specific statutory power to do so. Such a course would appear to be wrong in principle, because it would involve a judge effectively overruling the lawful provisions of a statute or statutory instrument. It would also be highly problematic in practice because it would throw many liquidations and administrations into confusion: the law would be uncertain, and many creditors who felt that the statutory ranking caused them unfair prejudice would make applications to the court.
117 If further reasons were required for this conclusion, they may be found in rule 2.67 and in In re Toshoku Finance. Rule 2.67(2)(3) , referred to in para 42 above, show that, where the Insolvency Rules wish to give the court the ability to change the priority rules, they say so. In the course of his speech in In re Toshoku Finance [2002] 1 WLR 671, para 38, Lord Hoffmann referred to the proposition "whether debts should count as expenses of the liquidation is a matter for the discretion of the court" and held that there was no such discretion and disapproved Sir Donald Nicholls V-C's comments in In re Kentish Homes Ltd [1993] BCLC 1375. As Lord Hoffmann made clear in para 41, how a particular liability was to be ranked depended solely on the proper interpretation of the Insolvency Rules."
93 The notion that all possible liabilities within reason should be provable helps achieve equal justice to all creditors and potential creditors in any insolvency, and, in bankruptcy proceedings, helps ensure that the former bankrupt can in due course start afresh. Indeed, that seems to have been the approach of the courts in the 19th century before the somewhat aberrant decisions referred to in para 88 above. Thus, in Ex p Llynvi Coal and Iron Co; In re Hide (1871) LR 7 Ch App 28 , 32, James LJ described one of the main aims of the bankruptcy regime as to enable the bankrupt to be "a freed man— freed not only from debts, but from contracts, liabilities, engagements and contingencies of every kind". If that was true in 1871, it is all the more true following the passing of the 1986 and 2002 Acts, and as illustrated by the amendment to rule 13.12(2) effected following the decision in In re T & N Ltd [2006] 1 WLR 1728, so as to extend the rights of potential tort claimants to prove."
Absence of prejudice
Mr Cooke's suggested categorisation of the appeal costs
THE SUBMISSIONS FOR DUNBAR
The general costs discretion
Rule 12.2 of the 1986 Rules
Costs in annulment cases
"25 I turn now to the three issues of principle to which I referred earlier. The first is, what are the basic principles to be applied in determining who should pay these costs. This issue arises because of the various components of costs incidental to an annulment of a bankruptcy order. There are, as it seems to me, four, namely: (1) the cost of the original petition; (2) the costs of the annulment application; (3) the costs of the Official Receiver arising on or after the making of the original bankruptcy order and; (4) the costs and expenses of the Trustee in Bankruptcy in acting as such from the time of his appointment to the order for annulment. For my part, I cannot see that there is any real doubt in relation to the first two. Insolvency Rule 7.33 provides as follows:
"Subject to provision to inconsistent effect made as follows in this chapter, CPR 43 , the scope of costs rules and definitions; Part 44 of the General Rules about Costs; Part 45 of Fixed Costs; Part 47 Procedure for detailed assessment of costs in default provisions and; Part 48 costs for special cases, shall apply to insolvency proceedings with any necessary modifications."
No doubt the detailed applications of those parts of the CPR to insolvency proceedings requires some moulding to make them fit the different nature of insolvency proceedings. For example, it may not always be obvious who is the successful and the unsuccessful party for the purposes of Civil Procedure Rule 44.3(2). In annulment proceedings under s.282, conduct may assume a greater importance than may normally be the case. Insolvency proceedings are defined in Insolvency Rule 13.7 as any proceedings under the Act or the Rules. Plainly therefore, costs in the first two categories I have mentioned should be dealt with in accordance with the relevant parts of the CPR .
26 Contrary to my initial views, I accept the submissions of both counsel that the costs and expenses of the Official Receiver and the Trustee in Bankruptcy have to be determined under a different regime. They are payable out of the bankrupt's estate in accordance with the priority laid down by Insolvency Rule 6.224, but on annulment of a bankruptcy order provision has to be made for them, otherwise than as part of the costs of the insolvency proceedings. In Butterworth v. Soutter [2000] BPIR 582 at 586 when faced with a similar problem, Neuberger J, as he then was, said this:
"The parties can point to no statutory provision or a decision of the court dealing with who should pay the trustee's costs when a bankruptcy is annulled. The parties' arguments have all proceeded on the basis that I have unfettered jurisdiction to decide who, if anybody, should pay the trustee's costs. To my mind that must be right. If the bankruptcy is pursuant to a court order the court is still seized of the matter. In my judgment the question of whether the trustee should have his costs, and the question as to who should pay the costs, are at large when the court makes an order annulling a bankruptcy. Prima facie, it cannot be envisaged that the trustee in bankruptcy will work for nothing, and normally, when a bankruptcy order has been properly made, subject to questions of reasonableness and subject to special facts, the trustee will be paid out of the estate."
…"
Costs in other bankruptcy disputes
Costs in winding up appeals
"66 [Counsel] submitted, by reference to two Victorian authorities, that there is a general rule, where a limited company appeals from a winding-up order, that it will be ordered to give security for costs: see In Re Diamond Fuel Company (1879) 13 ChD 400 (CA) at 412, per James LJ, and In Re Photographic Artists' Co-operative Supply Association (1883) 23 ChD 370 (CA) at 372, per Cotton LJ. In the second of those cases, Cotton LJ said:
"But when we have an opportunity we ought to order security to be given, for it is not just that any costs occasioned by an unsuccessful appeal from a winding-up order should be thrown upon the assets to the prejudice of the creditors when we have the means of preventing it. It is our opinion that where an order has been made for winding-up a company on the ground that it cannot pay its debts, and the company alone appeals, there as a general rule security for costs ought to be ordered."
67 I do not doubt the relevance of the considerations referred to by Cotton LJ when an order for security is sought against a limited company which has been wound up, but in my judgment the "general rule" which he laid down has long since been overtaken by statutory provisions and rules of court which make it clear that the court has an unfettered discretion in the matter.
…"
Mr Curl emphasised that Henderson J still recognised the underlying mischief which was the subject of the considerations in the earlier decisions, despite the abrogation of any general rule as to the provision of security.
Other considerations
DISCUSSION
Rule 12.2 of the 1986 Rules
(1) Neither a bankrupt, nor some other party whose interests are aligned with his, or who has his own reasons for wishing to litigate in the bankruptcy, should be afforded the opportunity to do so without being at risk as to costs. The risk of an adverse costs award acts as a deterrent against the advancing of cases that are without merit.
(2) A person in the position of Mr Cooke, who appeals against the making of a bankruptcy order, does so of his own volition. As the provisions to which I have referred above demonstrate, a bankrupt actively needs to pursue permission to appeal; an appeal is a distinct process initiated by the appellant. It is not something which flows inexorably from being caught up in the initial bankruptcy proceedings.
(3) The bankruptcy estate should be protected, where possible, from the need to fend off unmeritorious disputes which will dissipate the estate to the prejudice of creditors.
Nortel
The costs in winding up appeals cases
"The winding up order was made upon the petition of the respondent to the appeal, the present applicant for security, who is a contributory of the company. The company has substantial assets and it is not suggested that if the appeal were dismissed with costs the company would not be able to satisfy the costs. As I have indicated, the petition on which the winding up order was made was a contributory petition about which I think it is unnecessary to say more than this, that it was based upon allegations against those conducting the affairs of the company which the court found required investigation.
Because the company is solvent, it follows that if it loses the appeal and is ordered to pay the petitioner's costs and it does so out of assets that payment will operate to reduce the assets distributable among the contributories, of whom the petitioner is one, so that the successful petitioner will be bearing a part of the costs which have been ordered to be paid to him proportionate to his share of the assets as a contributory. In my judgment nothing could be more absurd.
In In re Consolidated South Rand Mines Deep Ltd. [1909] W.N. 66 where the Court of Appeal was confronted with a not dissimilar situation, Cozens- Hardy M.R. expressed the view:
"… though the company had a right to appeal, it ought only to be allowed to do so upon the terms of finding, not from the company's fund but from some outside source — the directors or shareholders who were at the back of the appeal — security, and not merely nominal security, but indemnifying security against the costs of the appeal."
Buckley L.J. put it thus:
"… that such an order therefore ought to be made in this case that if the appeal failed, the company, which in that event would be represented by the official receiver and liquidator, should have their costs from the persons who really promoted the appeal and standing behind the company, as a corporation, asserted a right in the corporation to discharge the compulsory winding-up order."
In my judgment that is what ought to be done in this case."
"That the company do on or before March 6, 1972, procure some sufficient person on their behalf to give security (to the satisfaction of the registrar of the Companies Court in case the parties differ) in the sum of £1,500 conditioned to answer costs in case any shall be awarded to be paid by the company to the petitioner upon the said appeal. And in default of the company so procuring such security by the time aforesaid it is ordered that upon the solicitors for the petitioner certifying such fact in writing to the appeal clerk the said appeal be thereupon struck out without further order. And thereupon it is ordered that the company do pay to the petitioner his costs occasioned by the said appeal including his costs of this motion down to and including this order and consequent hereon such costs to be taxed by the taxing master…."
DISPOSAL