England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY

		11th October 2006

HHJ NORRIS QC:

1. Isher Fashions Ltd (" Isher") was a company of which Mr Sandu was the sole director, and Mr Mehta had financial oversight. In 1999 it suffered a fire. Mr Sandhu made a claim on Isher's insurance policy; but the insurers avoided the policy on the ground is that claim was inflated. On the 5^th January 2001 Isher entered creditors' voluntary liquidation and Mr Bhardwaj was appointed liquidator. The Statement of Affairs indicated assets having a very substantial book value but a very small realisable value. For example the insurance claim was carried in the books at a value of £325,000, but estimated to realise nothing. By July 2002 liquidator had realised just under £6,000, but incurred costs and disbursements of over £5000. The creditors received nothing. The final meeting of creditors took place on the 12^th September 2003 and on the 22^nd December 2003 Isher was dissolved.
2. Unadkhat & Co (Accountants) Ltd ("the Accountants") were (by virtue of a debt assignment) a creditor of Isher for some £25,000. The Accountants took the view that the liquidator of Isher ought to have considered taking proceedings against Mr Sandhu and possibly Mr Mehta arising from the manner in which Isher's insurance claim had been handled. The dissolution of Isher prevented the pursuit of such a remedy. On the 21^st December 2005 the Accountants commence proceedings against Mr Bhardwaj and the Treasury Solicitor seeking (a) a declaration that the dissolution of Isher be declared void under section 651 of the Companies Act 1985 (b) the appointment of David Bottomley as liquidator and (c) an order that the period between the dissolution of Isher and the date of its restoration should not count for the purposes of limitation in relation to any claim by the company or its liquidator against any officer or employee of the Company arising out of their conduct during the period prior to the 5^th January 2001.
3. On the 29^th March 2006 District Judge Cooke decided that Mr Sandhu and Mr Mehta should not be entitled to intervene in the revival application and made an order declaring that the dissolution of Isher should be void and appointing Mr David Bottomley as liquidator. He adjourned the issues relating to the "limitation override" relief to the Judge and ordered "that the costs of the application are reserved to the Chancery Judge". That same day Mr Bottomley as liquidator of Isher commenced proceedings in the name of Isher against Mr Sandhu and Mr Meta for misfeasance. The misfeasance proceedings had been prepared at a cost of the accountants and they provided a cheque for £1700 in respect of the issue fee payable. The Accountants had been hoping that Mr Bottomley would assign the benefit of the misfeasance proceedings to them. But following the commencement of those proceedings Mr Bottomley was able to reach a compromise with the defendants under which they paid £60,000 in full and final settlement of all claims against them. This rendered academic any pursuit of the "limitation override" relief which had been adjourned to the Judge, and also effectively disposed of an appeal by Mr Sandhu and Mr Mehta against the refusal to grant permission to intervene in the Accountant's revival application. This leaves outstanding and for disposal the costs of that application (reserved to the Judge). That and, by agreement, the costs paid by the Accountants in relation to the misfeasance proceedings are the matters before me for determination.
4. At the conclusion of yesterday's hearing I ordered (1) that (a) the Accountants' costs of the application dated the 1st December 2005 to revive the company down to the conclusion of the hearing on the 29^th March 2006 and (b) the costs paid by the Accountants to the Treasury Solicitor in that application (assessed on the standard basis in default of agreement) should be paid by Isher and should be treated as an expense of the voluntary winding up; and (2) that the costs of the misfeasance proceedings (summarily assessed in the sum of £2000) paid by the Accountants on behalf of the liquidator should be treated as an expense of the voluntary winding up. I indicated that I would give my reasons in writing, and this I now do.
5. Section 651 of the Companies Act 1985 provides:

"Where a company has been dissolved, the Court may on an application made for the purpose by the liquidator of the company or by any other person appearing to the Court to be interested, make an order, on such terms as the Court thinks fit, declaring the dissolution to have been void"

It has been common ground before me that because the section empowers the Court to make an order "on such terms as the Court thinks fit" the order for revival could include an order relating to the costs of the application. This provision supplements the power the Court in any event has under section 51 of the Supreme Court Act 1981. Form 188 in Volume 9(1) of Atkin's Encyclopaedia of Court Forms (2004 Reissue) contains a standard form order declaring the dissolution of a company void, and it includes as one of the options an order

"That the costs of the Claimant of this claim be assessed and included in the costs of the voluntary winding up of the company".

The question that has been argued before me is whether that suggested order (which the editors of the volume do not support by reference to any specific rule or decided case) is one that I have jurisdiction to make, or one that I ought to make. From that argument two distinct issues relating to jurisdiction arose. The first was whether I could order Isher to pay the Accountants' costs of the revival application at all; the second was whether I could order that those costs should be included in the costs of the voluntary winding up (thereby conferring upon them a particular priority which they might otherwise not have).

6. For the Accountants Mr Morgan argued that plainly I could order Isher to pay the Accountants costs of the application.

(a) The words of section 651 were sufficiently broad to permit me to do so.

(b) Works of authority support the making of such orders: in Buckley para.653.26 it is said in relation to applications for restoration under section 653 (which is closely analogous and in some cases an alternative to revival under section 651) that "if the applicant is a creditor (and therefore unlikely to have been responsible for the fault which gave rise to the striking-off) the order may include an order that his costs (including the costs he is ordered to pay the Registrar) be paid by the company".

(c) Such orders had in fact been made: in Re Commonwealth Store (Slough) Ltd (3 May 1971 unreported, but noted in Buckley paragraph 653.26) Pennycuick V-C made just such an order on an application under the predecessor to s.653. Mr Morgan relied also on Re Gosscott Groundworks Limited (1988) 4 BCC 372 (with which I deal in paragraph 14 below).

7. For the liquidator Mr Najib argued that though the words of section 651 might on their face appear wide enough to support such an order, the reported cases indicated that such orders were not in fact made. He relied on Re Test Holdings (Clifton) Ltd [1970] Ch 285 (which considered section 352 of the Companies Act 1948). Having reviewed the arguments Megarry J said (at p.294)

" I do not find the contentions of the applicants persuasive. He who seeks the revival of the defunct company must I think face the prospect of bearing the cost of whatever has to be done to ensure that the restoration is properly effected. In the absence of anyone against whom he could seek an order for costs he must bear them himself".

Mr Najib also drew to my attention a passage in McPherson's Law of Company Liquidation (1^st edition paragraph 17.33) where the editors record the view (apparently derived from the Law Commission's 1998 Consultative Paper on the Third Parties (Rights Against Insurers) Act 1930) that

"… the applicant will be substantially out of pocket as a result of the application. The applicant will have to pay the costs of the Court, the costs of the Treasury Solicitor had any costs incurred by the registrar of companies, as well as his or her own costs…"

8. In my judgement the words of section 651 are sufficiently wide to enable the Court, when declaring the dissolution of a company to be void, to provide that the Claimant's costs of obtaining that relief are to be paid by the company (now restored). I would follow the view taken in Re Commonwealth Store (Slough) Ltd in connection with s.653. But it is plainly a matter of discretion. The risk is exactly as described in McPherson and by Megarry J in Re Test Holdings (Clifton) Ltd : but is not inevitable that that risk will eventuate. The Court has a power and may exercise it to relieve the claimant of the prospective burden he has assumed. In my judgement Re Test Holdings (Clifton) Ltd properly read does not say otherwise. What was being argued in that case was who should pay costs incurred by the Registrar of Companies in relation to the application. The applicant (who was a creditor and the principal shareholder) argued that the registrar should bear his own costs. Megarry J held that the applicant had to face the prospect of bearing the costs of whatever had to be done to ensure that the restoration was properly effected, that the Registrar of Companies was a public officer discharging public functions, and that

"[he could] see no reason why the applicant should be immune from paying the costs of the officer whose intervention has extracted from the applicant an undertaking to put right the defaults in making returns in respect of his company".

This strikes me as the exercise of a discretion on particular facts not the formulation of an absolute rule. In the related case (where Counsel had argued that the company ought to pay the Registrar's costs) Megarry J. had earlier said (at p 293):

" I do not think that I ought to make an order for costs against the company which has only a spectral existence and is before Court only in the sense that its name is on the notice of motion as a respondent, the notice being served at what I suppose was the company's last registered office before its demise".

This against strikes me as the exercise of a discretion on particular facts. I am by no means confident that if the facts had then been as they are in the case before me (where at that time the order comes to be made it is known that the company has a substantial existence with the least £60,000 worth of assets and is actively represented by a competent liquidator) Megarry J. would have felt compelled to give the same answer.

9. But the making of an order that the company should pay the applicant's costs in connection with the revival application might not of itself mean that those costs had to be accorded any priority. Mr Morgan (Counsel for the Accountants) argued that there was no provision in the Insolvency Rules which prevented such costs being accorded priority if the Court so decided, and a common-law rule which suggested that they should be accorded priority. Mr Najib (Counsel for the liquidator) argued that the Insolvency Rules prevented such costs being accorded any priority, and that if they were awarded their costs the Accountants must simply prove along with the other creditors in the voluntary liquidation.
10. It was common ground that the expenses of the winding up and the order in which they are payable out of the assets of the Company are listed in Insolvency Rule 4.218, and that this is to be treated as a complete statement of the liquidation expenses (subject only to qualifications contained in the Rules themselves). See Re Toshoku Finance UK plc [2002] 1 WLR 671 at 676-677 per Lord Hoffman. It was agreed that the only head of liquidation expenses not mentioned in the Rules was that referred to in the qualification contained in Insolvency Rule 4.220(2). This provision states

" Nothing in [Rules 4.218 and 4.219] applies to or affects the power of any Court, in proceedings by or against the company, to order costs to be paid by the company or the liquidator; nor do they affect the right of any person to whom such costs are order to be paid"

The latter clause refers to the decision of Vaughan Williams J in Re London Metallurgical Co [1895] 1 Ch 758. This concerned the rights of "a successful litigant in proceedings with the liquidator, or with the company through its liquidators, or with the company after liquidation had begun" (p.763). In relation to such persons Vaughan Williams J. held (at p.763):

" I start... with the proposition that successful litigants and other persons who become creditors of the company after the winding up order are prima facie entitled to be paid in full……. Thus two its steps have been taken in the line of reasoning (1) that successful litigants are not be placed in competition with the creditors who where such at the time of the winding up (2) that prima facie they have a right to be paid in full".

From this derives that rule (preserved by Insolvency Rule 4.220(2)) that the costs payable to a successful litigant are prima facie payable immediately and in full out of the net assets of the Company and the onus is on the liquidator to show that the condition of the assets is such had immediate payment cannot be made.

11. From this common ground the point of the divergence was this. Mr Morgan argued that if I was making an order for costs against Isher I could make any order I chose (including an order that certain costs should be treated as costs of the voluntary winding up): alternatively, that if I made an order for costs such order would be within the reservation preserved by rule 4.220(2) and the Accountants would be entitled to payment of their costs in priority to any of the liquidation expenses strictly so-called. Mr Najib argued that I could only make an order for costs that was consistent with the heads of expense and priorities set out in rule 4.218, and that any other order was in excess of the jurisdiction.
12. I hold that I have jurisdiction to make an order that the costs of the restoration application shall be treated as an expense of the voluntary winding up, because section 651 confers an unrestricted power to do so, and because the effect of making an order in favour of successful litigant is to engage the principle expressed in Re London Metallurgical Co.
13. First, the words of section 651 are plainly wide enough to permit the making of such an order and do not require that the conditions imposed by the Court must be consonant with Rule 4.218. The terms on which the Court might see fit to make the order might affect the applicant (e.g. requiring undertakings as to the filing of documents), or third parties (e.g. a limitation override) or the revived company itself (e.g. the validation of a voluntary liquidation). See Re Townreach Ltd [1995] Ch 28. Nothing in the language of the section suggests that the conditions cannot (where the revived company is in voluntary liquidation) include a term that the costs of the revival application shall be treated as expenses of the revived liquidation. Indeed, in similar circumstances this is routinely done under section 653. As Buckley in paragraph 653.27 points out, if the application under s.653 is made both for the restoration of the company and its winding up " the order for costs will be the same as in the case of an ordinary winding up petition; that is to say, normally the petitioner's costs will be payable out of the company's estate"; and if the petitioner has paid costs of the Registrar of Companies then the petitioner is given leave to add those costs to his own. If Mr Najib is right neither the petitioner's costs so far as they relate to the restoration nor the Registrar of Company's costs could be payable out of the company's estate because neither of them constitutes a legitimate head of liquidation expense for the purpose of Insolvency Rule 4.218.
14. This approach to the jurisdiction conferred by section 651 is consistent with that adopted in one (and possibly two) other cases. In Re Gosscott Groundworks Limited (1988) 4 BCC 372 a winding up petition was presented against the company. Five days later the directors presented an administration petition in good faith, reasonably, and on the advice of insolvency practitioner. The two petitions came on for hearing together and at the substantive hearing the company did not seek to support the administration petition, so that a compulsory winding up order was made. Mervyn Davies J. saw no difficulty in holding that section 51 of the Supreme Court 1981 conferred a power wide enough to enable the Court to order that the administration costs be treated as costs in the winding up. I take the same view of s.651. In the course of his judgement Mervyn Davies J. analysed the decision of Harman J. in Re W F Fearman Ltd (1988) 4 BCC 141. He considered that Harman J had in that case been prepared to allow as costs in a winding up the costs of preparing and presenting an administration petition. If that analysis is correct then Fearman also supports the ability of the Court in making orders about costs to say that particular costs shall be treated as costs in a winding up although they are not liquidation expenses within Insolvency Rule 4.218.
15. Second, in my judgement the order sought might properly be made on the grounds that the costs in question are the litigation costs of a successful claimant. The Accountants brought the revival proceedings for a declaration that the dissolution of Isher be void. They succeeded. In my judgement the revival proceedings are "proceedings against the company". The company was not actually a party because it did not exist (having been dissolved). But the former liquidator Mr Bhardwaj was a Defendant. Once the order was obtained the dissolution was declared void ab initio and the voluntary liquidation revived, Mr Bhardwaj being reclothed in his character as liquidator. I hold that in Insolvency Rule 4.220 the expression "proceedings… against the company" includes litigation with the company through its liquidators (as Vaughan Williams J put it in Re London Metallurgical Co. ). Insolvency rule 4.220 says that nothing in rule 4.218 affects the power of Court in proceedings against the company (which I have held the revival application to be) to order that costs be paid by the company. I have held that the words of section 651 are sufficiently wide to enable the Court, when declaring the dissolution of a company to be void, to provide that the Claimant's costs of obtaining that relief are to be paid by the company. There is therefore no inhibition on my making an order that Isher pay the Accountants' costs. If I make such an order then Re London Metallurgical Co applies (which falls within the reservation contained in Insolvency Rule 4.220(2), and the Accountants are entitled to have those costs paid immediately and in full unless Mr Bottomley establishes that the state of the net assets is insufficient. That would require payment in advance of any liquidation expenses listed in rule 4.218, because the costs of a successful litigant are not treated as expenses of the liquidation but as something having a superior right: see Re MT Realisations Ltd [2004] 1 WLR 1678. But the Accountants do not press for that; they are content that their costs should rank along with the liquidation expenses (and they do not ask for me to establish the exact priority). If I can make an order which gives their costs priority over general liquidation expenses I cannot see what prevents me giving them the order they seek viz. that they shall rank with the general liquidation expenses.
16. The existence of the jurisdiction to make such an order might be anticipated. Suppose it is discovered that a dissolved company is entitled to a valuable asset. If the former liquidator makes an application to declare the dissolution void, to reconstitute the liquidation, and to gather in the asset he would appear to be entitled to his costs and expenses of so doing under Insolvency Rule 4.218(a). If, because of lack of assets in his hands he is unwilling to make that application, but some other person who is "interested" is willing to take that step, I do not find it surprising that the Court should have a discretion order that that person's costs and expenses of so doing shall rank as expenses of the liquidation. Indeed I would find it positively odd if the statutory scheme gave one of two categories of applicant his costs as of right but had an absolute rule that the other category of applicant should never recover his costs.
17. But the existence of the jurisdiction does not mean that the Accountants are entitled to an order that their costs of the revival application shall be treated as expenses of the voluntary winding up. The matter is one of discretion and they must make out case.
18. A general rule it seems to me unlikely that the discretion will be exercised in favour of making an order. First, in cases where the dissolved company is revived for the purpose of making a claim against it the benefit is entirely on the applicant's side and it is difficult to discern any ground on which the costs of revival should be ordered to be borne by the company. (Indeed the Court is often invited to order that the costs of the revival application shall be treated as costs in the intended proceedings).Second, in cases where the dissolved company is revived for the purpose of getting in an overlooked asset, at the time when the question of costs normally falls to be considered Megarry J.'s observation that the company merely has "a spectral existence" will often be true: the asset may well not have been gathered in and its value may be uncertain. Third, I would respectfully endorse the observation of Harman J. in Re W F Fearman Ltd (at p 143 col.2) that a bona fide act which has the effect of benefiting the creditors " cannot be a passport in the sharing out of an insolvent estate where all claimants are going to suffer by allowing precedence to those claims for costs". In each case the justification for diminishing the distributable assets must be made out..
19. What is sought in the present case falls into four categories:-

(a) the costs of the revival proceedings;

(b) the costs incurred by the Accountants in resisting the appeal of Mr Sandhu and Mr Mehta against district Judge Cooke's order (in so far as it said that they were not entitled to intervene in the application to revive the company);

(c) the costs of investigating the background to see whether it was worth applying to revive the company;

(d) the costs in connection with the misfeasance proceedings.

I can immediately dispose of this last category. The liquidator recognises that these proceedings were brought by him and that the Accountants paid the issue fee: he also recognises that some costs must have been incurred in the preparation of the misfeasance claim form. He does not oppose the treatment of these sums as expenses of the liquidation (being effectively expenses incurred on his behalf in the preservation of an asset namely the cause of action against Mr Sandhu Mr Mehta). Mr Morgan suggested a figure of about £1000 for professional fees. I assess the sum of £300 (representing the time cost of an appropriate person to prepare a present the claim form). That makes the £2000 I have ordered.

20. I can also shortly dispose of category (b). Once Mr Bottomley was in the saddle as liquidator the question of whether a limitation override should be sought (and the attitude to Mr Sandhu and Mr Mehta's s appeal relating to their participation in that process) was essentially one for him acting in the interests of the general body of creditors. If a creditor who hopes to take an assignment from the liquidator of any cause of action that does exist seeks to protect his prospective cause of action, then he does so at his own expense (even if the pursuit of his own interest might also incidentally benefit other creditors). If he wants to ensure that the cost burden of bringing this issue before the Court is borne by all of the creditors as an expense of the liquidation he must leave the matter to the liquidator.
21. I can also dispose shortly of category (c). In Re W F Fearman (supra) Harman J. appears to have been prepared to grant the directors the costs of " the mere preparation and presentation fee on the administration petition", but certainly refused them " any separate and extra costs" (which appear to have included the costs of a detailed investigation into the financial affairs of the company), which he thought must be borne by those who chose to incur them. This seems to me to be entirely just. The Accountants chose to undertake investigations into what complaints could be made against Mr Sandhu and Mr Mehta. There was no impartial direction or control of these investigations, and no one was on a notice that any attempt would be made to cast these costs onto the liquidation estate.
22. This leads me to the first category (described as "the costs of the proceedings"). The proceedings when commenced were under case management by the Court, and on notice to the former liquidator and the Treasury Solicitor. They undoubtedly sought purely a class remedy (the revival of the company by a declaration that the dissolution was void, the reinstatement of the voluntary liquidation and the appointment of the new liquidator). At the time when the decision on costs falls to be made it is known that the reinstatement of the voluntary liquidation has led to the gathering in of an asset worth £60,000. In my view justice requires that the creditors in the voluntary liquidation should not be entitled to take anything out of the liquidation estate (the existence, nature and extent of which is now known) until they have reimbursed the necessary expenses of reconstituting the estate. The necessary expenses are the costs of the application down to the date when the order was made and the costs that the applicant had to pay to other parties to secure the order.
23. The liquidator resists the exercise of the discretion in this way for a number of reasons which may be grouped under the following headings:-

(a) The Accountants' motive was the recovery of their debt (or a profitable assignment of the misfeasance claim) not the benefit of the creditors generally. But pure altruism is not a pre-condition of the costs order sought. Every application under section 651 by a person who is "interested" will be driven by an anticipation of some personal advantage (because that potential advantage is their very "interest"). So will some applications by liquidators. In the instant case it is positively established (since Mr Bottomley does not say that he settled the claim against Mr Sandhu and Mr Mehta for a sums simply sufficient to cover his own costs) that there is a benefit to the general body of creditors.

(b) The Accountants had undertaken investigations going back as far as October 2005 and had been seeking to negotiate a settlement with Mr Sandhu and Mr Mehta, all without any assurance that their costs would be paid by anybody. That is true; but I have not allowed them to recover the costs of all those negotiations. The fact that they have to bear the costs of all the preparatory work does not mean that they should also have to bear the necessary costs of obtaining the order. The general body of creditors benefit directly from the making of the order because (unless the £60,000 is expended in litigating what constitutes the expenses of the voluntary winding up) they have a voluntary liquidator in office who will make a distribution.

(c) The Accountants really wanted a beneficial assignment of the claim against Mr Sandhu and Mr Mehta and they have not succeeded in obtaining that. That is true. But the Accountants do not seek to recover any of the expenses incurred in that fruitless negotiation. They are seeking "the costs of and occasioned by the proceedings", and I am granting them the costs of the application down to the conclusion of the hearing at which the order was made.

24. I therefore intend to exercise the discretion I consider that I have in the sense set out in paragraph 4 above.
25. I will formally hand down this judgement at 2 p.m. on the 12th October 2006.
26. As indicated that the conclusion of the hearing I reserve the question of the costs of the hearing (and of the earlier hearing) with permission to either party to restore. I understand that the impact of certain correspondence passing between the parties cannot be truly measured until the costs I have ordered to be treated as expenses of the liquidation are assessed or agreed.
27. Mr Bottomley sought permission to appeal. I grant that permission.

HHJ Alastair Norris QC…………………………………………..11^th October 2006