England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
IN BANKRUPTCY
(MISS B DOHMANN QC - sitting as a Deputy High Court Judge)

		Royal Courts of Justice Strand London WC2
		21 April 1999

LADY JUSTICE BUTLER-SLOSS: I will ask Mummery LJ to give the first judgment.

LORD JUSTICE MUMMERY:

INTRODUCTION

The question in this case is: does a person against whom a costs order may be made have, before an order is actually made, a "contingent liability" for such costs within Section 382 of the Insolvency Act 1986 (the 1986 Act)? This question arises in the context of an application to set aside a statutory demand.

On 26 March 1998 Mr Deputy Registrar Jacques refused to set aside a statutory demand for £16,531.35 dated 3 December 1997 made by Miss Margaret Rowe on Mr Graham Glenister and he authorised the presentation of a Bankruptcy Petition.

On an appeal heard by Miss Barbara Dohmann QC (sitting as a Deputy High Court Judge) on 10 June 1998 the order of the Deputy Registrar was discharged and the statutory demand was set aside.

This is an appeal, with the leave of the judge, by Mrs Margaret Rowe against that order.

FACTUAL BACKGROUND

The dates of the relevant events are uncontroversial and crucial:-

(1) On 4 June 1985 Miss Rowe began proceedings against her solicitor, Mr Glenister, for alleged negligence and breach of trust.

(2) On 5 October 1990 Mr Glenister unsuccessfully applied to the Chief Master to strike out the proceedings against him for want of prosecution. He appealed to the Judge in chambers.

(3) On 20 June 1991 Millett J discharged the Master's order and struck out the proceedings against Mr Glenister, ordering Mrs Rowe to pay the costs.

(4) On 29 July 1991 Mrs Rowe lodged an appeal against that order.

(5) On 24 June 1992 Mr Glenister was made bankrupt.

(6) On 11 May 1994 Mrs Rowe was given leave pursuant to Section 285 of the 1986 Act to proceed with her appeal to the Court of Appeal. (The necessity for leave has been questioned in argument, but nothing turns on that point in the appeal.)

(7) The appeal was heard on 22 and 23 June 1995. Judgment was reserved. Mr Glenister attended the hearing and his trustee in bankruptcy was heard on the appeal with his consent.

(8) On 24 June 1995 Mr Glenister was discharged from his bankruptcy.

(9) On 25 July 1995 the Court of Appeal allowed Mrs Rowe's appeal and ordered her costs to be paid by Mr Glenister up to 8 June 1992, such costs to be taxed if not agreed. Costs for the later period were ordered to be paid by the trustee.

(10) On 5 September 1996 the costs of the appeal awarded to Mrs Rowe were taxed in the sum of £15,026.29.

(11) On 3 December 1997 the statutory demand was issued by Mrs Rowe's solicitors for that sum and interest. On 22 December 1997 Mr Glenister issued an application to set aside the demand.

THE JUDGMENT

The crucial question is whether the costs, which were the subject of the order made by the Court of Appeal on 25 July 1995, were a "contingent liability" of Mr Glenister at the date of his bankruptcy on 24 June 1992? It is common ground that, if they were a contingent liability, that was a "bankruptcy debt" within Section 281 of the 1986 Act and the discharge of Mr Glenister from his bankruptcy released Mr Glenister from that debt. It could not therefore be the subject of a valid statutory demand, though that did not affect the right of Mrs Rowe to prove for that debt in the bankruptcy.

The Deputy Judge set aside the statutory demand for the following reasons:-

(1) The court was only concerned with the costs order made by the Court of Appeal. That was the sum in the statutory demand.

(2) That sum was a "contingent liability" within Section 382(1)(a) and (3) of the 1986 Act to which Mr Glenister was subject at the commencement of his bankruptcy.

(3) The Deputy Judge analysed the legal position as follows:-

"What was the position as at 24th June 1992, the date when the appellant was made bankrupt? As at that date he had launched a strike out application which had failed before the Master, succeeded before the Judge, and was the subject of an appeal. If that appeal was prosecuted, succeeded, and if the Court of Appeal in the exercise of its discretion made a costs order against him, a series of events would have occurred which would bring the liability to pay costs into being. All the relevant costs had been incurred by the respondent plaintiff in the action before the bankruptcy, and before the bankruptcy the appellant defendant faced the position that if the three events I have listed occurred, such costs liability would necessarily arise."

(4) His discharge released him from that liability which, as a bankruptcy debt, fell to be met out of the bankrupt's estate, and no statutory demand for that sum could be made on Mr Glenister for it.

(5) An argument based on Section 382(1)(b) was rejected by the Deputy Judge on the ground that the costs liability did not constitute a debt or liability to which Mr Glenister had 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.

THE STATUTORY PROVISIONS

1. Costs

Although this appeal turns on the definition of "bankruptcy debt" in Section 382 of the 1986 Act, it is necessary to consider first the statutory provisions and rules of court relating to costs.

Section 51 of the Supreme Court Act 1981, as substituted by Section 4 of the Courts and Legal Services Act 1990, provides that -

"(1) Subject to the provisions of this or any other enactment and to rules of court, the costs of and incidental to all proceedings in -

(a) the civil division of the Court of Appeal;

(b) the High Court, and

(c) any county court,

shall be in the discretion of the court.

(2).....

(3) The court shall have full power to determine by whom and to what extent the costs are to be paid."

Order 62 of the Rules of the Supreme Court provides -

"(1).....

(2) No party to any proceedings shall be entitled to recover any of the costs of those proceedings from any other party to those proceedings except under an order of the court."

2. The 1986 Act

Section 282 provides -

"(1) "Bankruptcy debt", in relation to a bankrupt, means (subject to the next subsection) any of the following-

(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.

(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."

By Section 383(1) "Creditor" means

"(a) in relation to a bankrupt ... a person to whom any of the bankruptcy debts is owed, and

(b) in relation to an individual to whom a bankruptcy petition relates, ... a person who would be a creditor in the bankruptcy if a bankruptcy order were made on that petition."

The Authorities

Although the expressions "contingent debt" and "contingent liability" are not defined in the 1986 Act, they are the subject of judicial decision and discussion in authorities on the 1986 Act and on the earlier insolvency legislation. Some of the cases are concerned specifically with the nature of a claim for costs in legal proceedings. Others concern a different subject matter. A review of the authorities is necessary in the light of the wide ranging scope of rival submissions.

3. Pre-1986 cases on costs.

In the earliest cases, which preceded the Bankruptcy Act 1914, it was held that a claim for costs was not a contingent liability.

In Re British Gold Fields of West Africa [1899] 2 Ch 7 at 11 Lord Lindley MR said-

"But if an unsuccessful action is brought by a man who becomes bankrupt, then, if he is ordered to pay the costs, or if a verdict is given against him before he becomes bankrupt, they are provable: Ex parte Peacock. On the other hand, if no verdict is given against him and no order is made for payment of costs until after he becomes bankrupt, they are not provable. In such a case there is no provable debt to which the costs are incident, and there is no liability to pay them by reason of any obligation incurred by the bankrupt before bankruptcy; nor are they a contingent liability to which he can be said to be subject at the date of his bankruptcy. This was the case of Vint v Hudspith."

This was followed by the Court of Appeal in Re a Debtor [1911] 2 KB 652. The same approach was taken on the similarly worded provisions of the 1914 Act in the case of Re Pitchford [1924] 2 Ch 260. At 270 Lawrence J, having stated at 269 that he did not "propose to determine whether, generally speaking, costs of an action on a contract are a contingent liability", referred to the judgment of Buckley LJ in Re a Debtor (supra) as tending to support the view that

"...unless and until an order for payment of costs is made, there can be no liability giving rise to a provable debt."

4. The post-1986 cases on costs

In Re Wisepark [1994] BCC 221 at 224 Evans-Lombe J felt driven to the conclusion, in the context of whether a claim for costs was a debt within a voluntary arrangement, that

"a claim for costs is not a truly contingent claim and that it is a claim which comes into existence when the court makes it order for costs."

That view was applied by the District Judge in the case of Re Eileen Davis [1997] BIPR 619 when refusing, on the grant of leave to commence proceedings against a bankrupt, to impose a condition that no costs order should be enforceable against the bankrupt. Mr Eben Hamilton QC (sitting as a deputy High Court judge) dismissed the appeal against that refusal.

5. Other cases on contingent liabilities.

Mr Riley, on behalf of Mrs Rowe, cited several other cases in support of a general submission that a contingent liability must arise out of an existing or underlying obligation suspended upon the occurrence of a future event which may or may not occur. He contended that a claim for costs at the date of the bankruptcy could not be a contingent liability at that date as there was no existing or underlying obligation to pay costs in the absence of a costs order at that date. The obligation or liability to pay costs only arose in this case when the costs order was made by the Court of Appeal after Mr Glenister's discharge from his bankruptcy. Before that order was made there was only a chance, a risk, a possibility that such an order would in fact be made. At the date of his bankruptcy there was nothing in the nature of an existing obligation which could crystallise or ripen into a mature legal liability to pay costs upon the happening of an event.

Mr Riley relied on Re William Hockley Ltd [1962] 1 WLR 555 at 558 when Pennycuick J said -

"The expression `contingent creditor' is not defined in the Companies Act, but must, I think, denote a person towards whom under an existing obligation, the company may or will become subject to a present liability upon the happening of some future event or at some future date."

This was followed in the High Court of Australia in Community Development Pty Ltd v Engwirda Construction Company [1966] 120 CLR 455 at 459 per Kitto J and in the Supreme Court of Victoria in Federal Commissioner of Taxation v Gosstray [1986] VR 876 at 878 where Tadgell J referred to the "notion that a contingent debt must be founded on an existing obligation.."

Mr Arnold, on behalf of Mr Glenister, challenged the correctness of these cases on the ground that they were decided per incuriam: Re Sutherland [1963] AC 235, a decision of the House of Lords, was not cited in any of them. It is not surprising that the potential significance of that case has escaped courts and insolvency practitioners: it is a tax case and it is not concerned with the construction of the term "contingent liabilities" in insolvency legislation.

In that case Lord Hodson (at 257-258) was of the view, shared by Lord Tucker (at 252), that

"There can be no true contingent liability unless there is an existing legal obligation under which a payment will become due on the happening of a future unascertained event or events. There must always be an underlying obligation. It does not matter whether one regards the obligation as suspended pending the arising of the contingency or whether one regards the performance of the obligation as suspended. The result to my mind is the same."

He explained that the distinction between a future liability and a contingent liability is that the former is bound to mature whereas the latter is uncertain as to maturity.

Those views were, however, in the minority. At 249 Lord Reid described a contingent liability as

..."a liability which, by reason of something done by the person bound, will necessarily arise or come into being if one or more of certain events occur or do not occur."

He relied on the distinction in Scots Law (but thought that there was no difference in substance from English law) between

(1) a case where the liability is for a sum immediately payable; (2) a case where the liability is to pay a sum at a future date or event which must occur; and (3) the case of "contingent liabilities"

"... which must mean sums payment of which will only become payable if certain things happen and which otherwise will never become payable."

He rejected the argument that there must be an existing obligation, because, in his view, that would exclude at the very least all Scottish conditional obligations.

At 262 Lord Guest agreed, saying -

"I should define.....a contingent liability as a liability which depends for its existence upon an event which may or may not happen."

See also Lord Birkett at 253. He thought that the argument that an existing legal liability was essential to the creation of a contingent liability was too narrow a view of the meaning of contingent liability.

CONCLUSION

This court has had the benefit of more extensive argument and citation of authority than the deputy judge had. I have reached the conclusion that the claim for costs by Mrs Rowe was not a contingent liability of Mr Glenister at the date of his bankruptcy; that Mrs Rowe was entitled to make the statutory demand for the taxed costs of her successful appeal; that the statutory demand should not be set aside as it cannot be disputed on substantial grounds; and that this appeal should accordingly be allowed.

The reasons for this result are as follows:-

(1) Costs of legal proceedings are in the discretion of the court. Until an order for payment of costs is made there is no obligation or liability to pay them and there is no right to recover them.

(2) Once legal proceedings have been commenced there is always a possibility or a risk that an order for costs may be made against a party and, in certain circumstances, even against a non-party or the representative of a party. I would accept that an order for costs is a "contingency" which may or may not happen at some stage during or at the conclusion of the proceedings.

(3) The fact that an order for costs (a) creates an obligation to pay money and (b) is a contingency in legal proceedings is not sufficient, however, to make a claim that the court should exercise its discretion to make such an order a "contingent liability" of the person against whom such an order may ultimately be made. It is accepted that before an order is made there is no present liability to pay. Nor can there be a future liability; there is no certainty that the court will exercise its discretion to make such an order. If, as some of the authorities hold, a contingent liability must arise out of an existing or underlying liability, no such liability can exist simply by reason of a claim for costs made in a writ, summons, application or notice of appeal to the judge or to the Court of Appeal.

(4) Even if, as Mr Arnold forcefully contends on the authority of Re Sutherland (supra), a contingent liability can exist for insolvency purposes without any existing or underlying obligation, the discretionary nature of the court's power to order costs indicates that there is no liability, contingent or otherwise, in the absence of a court order. When asked at what date the contingent liability arose, Mr Arnold initially submitted that it was when Mrs Rowe lodged her notice of appeal claiming costs. This is a difficult position to support, because, as Mr Arnold rightly accepted, it is necessary to identify some thing agreed or some act done by Mr Glenister to give rise to a liability on his part. Mr Arnold then submitted that the liability arose when Mr Glenister issued his summons to strike out Mrs Rowe's claim for want of prosecution; alternatively, when he lodged the notice of appeal from the refusal of the Chief Master to make that order. But what are those acts of Mr Glenister? They are, in my view, no more than notifications by him to the opposing party, Mrs Rowe, that in certain events, usually the success of the proceeding, a request will be made to the court to make an order for costs. Such notification of a claim cannot, contrary to Mr Arnold's contentions, involve any commitment by Mr Glenister to a course of action which will necessarily and ultimately lead to the actual order for costs against him, in this case by the Court of Appeal.

(5) It is true that the language of the 1986 Act differs from that of the earlier insolvency legislation, particularly in the definition of "liability" to include a liability to pay money. That is wide enough to include an order for costs when it is made. But it is not wide enough to embrace a possibility that the court may exercise its discretion to make a costs order. Further, the reference to liability "under an enactment" is open to the same comment. The Supreme Court Act 1981, as amended, confers a wide power on the court to make orders as to costs, but the liability to pay costs is created not under the Act but under the specific order made by the court in each particular case in the exercise of the general power conferred on the court by the Act.

(6) At a late stage in the hearing Mr Arnold sought to re-argue the point on Section 382(1)(b) which had been rejected by the deputy judge, not raised in a respondent's notice and expressly stated by Mr Arnold in his skeleton argument not to be a point taken on the appeal. The court refused his application to argue the point: it was raised too late and, in any event, in view of the conclusions stated above, the point would have been rejected.

LORD JUSTICE THORPE: I am in complete agreement. In my judgment Mr Arnold's endeavour to uphold the judge founders on his inability to distinguish between liability and risk of a liability. Of course when his client issued his strike out application he exposed himself to the risk of a liability for costs contingent on the future exercise of the court's discretion when determining the pending application. The element of contingency is certainly satisfied but, in my judgment, the element of liability is not. The future exercise of the court's discretion might eliminate that risk of liability. Equally it might elevate the risk of liability into an actual liability, either present, in diem, or subject to taxation. This essential distinction between incurring a liability and exposing oneself to the risk of liability should not be undermined.

LADY JUSTICE BUTLER-SLOSS: I agree with both judgments and that this appeal should be allowed. Consequently the appeal is allowed and we restore the statutory demand dated 3 December 1997.

Order: Appeal allowed; statutory demand, dated 3 December 1997, restored in the sum of £16,531.35; respondent to pay the costs of the appeal, the costs before the Deputy Registrar and the costs before the Deputy Judge; legal aid taxation of the appellant's costs; leave to appeal to their Lordships' House refused; leave granted to the appellant to issue a bankruptcy petition within 28 days from today, unless within that time there has been a petition to their Lordships' House and their Lordships have made a different order. (This order does not form part of the approved judgment)