When litigation goes wrong, the consequences are rarely confined to the parties named in the claim.
One of the more complex and often overlooked questions is the position on adverse costs.
Our Insolvency Lawyers explore the general principles governing adverse costs orders against office-holders, the circumstances in which personal liability might arise, when costs can be recouped from the insolvent estate, the effect of discontinuance on costs, where adverse costs rank in the order of priorities and in what circumstances the court can order security for costs.
A clear grasp of these issues is vital to navigating insolvency litigation with confidence.
The General Position
If an office-holder commences proceedings in their own name (for example, a preference claim under section 239 of the Insolvency Act 1986 (the Insolvency Act)), they do so at their own risk as to costs.
Unfortunately, if a costs order is made against them, they will be personally liable, and they cannot limit that liability to the amount of available assets in the insolvent estate.
They will, however, unless the court orders otherwise, have a right to recoup the amount of such adverse costs from the insolvent estate, provided, of course, there are assets in the estate.
By contrast, if the office-holder is a defendant, then the position depends on whether the proceedings are insolvency proceedings (i.e. proceedings to which the Insolvency (England and Wales) Rules 2016 (the Insolvency Rules) apply).
If the office-holder is a defendant in insolvency proceedings, then Rule 12.47 of the Insolvency Rules provides that the starting point is that the office-holder is not to be personally liable for costs.
However, if an office-holder is a defendant to a claim or application brought in, say, the Commercial Court, then the office-holder will be treated like any other litigant, and if they lose, a costs order against them personally is likely to follow.
However, they will, unless the court orders otherwise, have the same right of recoupment from the estate as is described above.
The Right of Recoupment from the Insolvent Estate
Even if made personally liable, office-holders will have a right of indemnity from the estate unless the court orders otherwise.
This right does not arise from statute but has been established by case law, most recently in the case of Re MC Bacon Ltd where Judge Millett stated that:
“A liquidator’s right to recoup out of the assets of the company expenditure properly incurred by him, including costs of unsuccessful proceedings properly brought by him, has been recognised for over 100 years”.
Rule 7.108 of the Insolvency Rules lists the expenses of a winding up and holds that they are payable out of the assets of the company available for payment of general creditors and, subject to Rules 7.111 to 7.116, out of assets subject to a floating charge.
These expenses include expenses properly chargeable or incurred by a liquidator in conducting legal proceedings.
However, it was held by the court in the case of Re MT Realisations Ltd that the costs of unsuccessful litigation do not fall within the scope of Rule 7.108 at all, so that although they can be paid out of the assets of the company by reason of the liquidator’s right to recoup, the court cannot use its power under section 156 of the Insolvency Act to afford them a lower priority.
Indeed, they rank above the expenses entirely: costs to be paid by a company in liquidation to a successful defendant are payable out of the net assets in the hands of the liquidator, in priority to other claims, including that of the liquidator for their own costs.
All assets in the estate can be used to meet expenses, assuming the court does not deprive the office-holder of the right to recoup, although assets that are not subject to a floating charge are to be used first.
In general, liquidation expenses are payable out of the assets subject to a floating charge if the company’s other assets are insufficient.
However, there is an exception for the costs of certain legal proceedings (including misfeasance proceedings), so that before a liquidator can use floating charge assets for payment of litigation expenses of misfeasance proceedings, they must obtain approval or authorisation from creditors with an interest in the property, or from the court in particular circumstances.
Discontinuance
Civil Procedure Rule 38.6 provides that unless the court orders otherwise, a claimant who discontinues a claim is liable for the costs which the defendant incurred on or before the date on which the notice of discontinuance was served on the defendant.
A claimant who seeks to persuade the court to depart from the normal position (as set out above) will need to provide cogent reasons for doing so and is unlikely to satisfy that requirement save in unusual circumstances.
In RBG Resources plc v Rastogi the liquidators had discontinued a claim in respect of an alleged fraud for lack of funds.
The court did not find that this was a reason to depart from the normal rule that any costs order to be paid by the claimant would have to be funded out of monies already paid or set aside for the liquidators’ remuneration.
In reaching this conclusion, the court held that the liquidators knew of the defendant's poor financial position and that the liquidators would, in all likelihood, be unable to fund the prosecution of the claim to judgment.
Furthermore, the maintenance of the claim against the defendant did not make commercial sense in view of the likely vast expense and complication of the proceedings and the unlikelihood of any recovery.
The lessons to be learned from this case are therefore:
- Liquidators should think very carefully about bringing or continuing expensive proceedings for damages against impecunious defendants, most particularly when they involve serious allegations such as fraud; and
- If it is the liquidator’s view that a defendant is acting unreasonably in refusing to agree to the terms of settlement, the sensible course of action would be for the liquidator to apply to the court for permission to discontinue and leave it to the court to decide what terms should be imposed, if any.
Priority of an Adverse Costs Order
Adverse costs against an office-holder are not a category of expense that is specifically mentioned in the Insolvency Rules.
In the case of Norglen Ltd (In Liquidation) v Reeds Rains Prudential Ltd, the court expressed the view that costs to be paid by a company in liquidation to a successful defendant are payable out of the net assets in the hands of the liquidator, in priority to other claims, including that of the liquidator’s own costs.
The same principle should apply in relation to unsuccessful litigation conducted by a trustee in bankruptcy.
In Re Movitex Ltd, the High Court considered a case where proceedings that had been commenced by a company were continued by the liquidator following the company entering liquidation.
The proceedings failed, and costs were ordered against the company.
The defendants argued that they were entitled to payment of their costs to the extent of the assets available in the winding-up, in priority to all other costs, including the costs of realising the assets and the liquidators’ own remuneration.
The liquidators contended that their expenses incurred in realising the assets ought to be allowed, but, subject to that, accepted that the defendants’ costs should be paid in priority to the other costs of the winding-up.
The court agreed with the liquidators.
Personal Liability for an Office-Holder for Adverse Costs
Rule 12.47 of the Insolvency Rules provides that where an office-holder, the adjudicator or the Official Receiver (OR) (where the OR is not acting as an office-holder) is made a party to any proceedings on the application of another party to the proceedings, the office-holder, adjudicator or OR is not to be personally liable for the costs unless the court otherwise directs.
Rule 12.49 of the Insolvency Rules also provides that:
- The OR is not personally liable for costs incurred by any person in respect of an application to appeal against their decision on a proof of debt; and
- Any office-holder other than the OR is not personally liable for costs incurred by any person in respect of an application to appeal against their decision on a proof of debt unless the court orders otherwise. The court will not “otherwise direct” unless there is a good reason to do so.
Security for Costs
Civil Procedure Rule 25.27 sets out the conditions to be satisfied before the court will grant an order for security for costs.
The court may grant an order against a claimant company if, having regard to all the circumstances of the case, it is just to do so and there is reason to believe that the company will be unable to pay the defendant’s costs if ordered to do so.
Where the claimant is in liquidation, there is generally a strong presumption in favour of ordering security for the defendant’s costs.
However, liquidation of itself does not mean that security for costs would inevitably be given. Furthermore, a liquidator or receiver pursuing proceedings on behalf of an insolvent company is not obliged to secure funds to satisfy any adverse costs order.
The court will not grant an application for security for costs where the effect of such an order would be to stifle a genuine claim by the company in liquidation, and the courts are reluctant to compel liquidators themselves to give security on behalf of claimant companies.
Furthermore, security for costs would only be ordered against a trustee in bankruptcy in an exceptional case.
In the case of Kireeva v Bedzhamov, security for costs was ordered because the Russian trustee in bankruptcy was funded by a commercial funder who exercised control over the proceedings and provided no assurance that it would meet an adverse costs order.
Furthermore, there was a real risk of non-enforcement in Russia.
Contact Our Insolvency & Restructuring Team
Our Insolvency & Restructuring team has significant experience in insolvency litigation. We act for both office-holders who bring claims and individuals who face such claims.
Please contact us today if you need assistance.
0161 941 4000
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Vicky Biggs
Legal Director
Vicky is a Legal Director in the Insolvency and Restructuring team at Myerson and has been with the firm since 2012. Utilising her commercial litigation experience, Vicky now specialises in contentious insolvency matters, advising insolvency practitioners, directors and individuals in relation to both corporate and personal insolvency issues.
Vicky advises on a wide range of insolvency matters, including claims made by administrators, liquidators and trustees in bankruptcy, director disqualification proceedings, remuneration approval applications, retention of title claims, validation orders, bankruptcy annulment applications and winding-up and bankruptcy petitions.
About Vicky Biggs