England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		20/05/2009

Peter Smith J :

INTRODUCTION

1. There were originally 2 applications for determination in this matter. First there was an application issued on 8th December 2008 by the Applicant for various declarations and directions concerning sanctions for bringing of the current proceedings. The First Applicant Gresham International Ltd ("Gresham") is a company in compulsory liquidation. The Second Applicant (Ms Brittain) is its Liquidator.
2. The second application was an application issued by the Defendant on 7th January 2009 for an order pursuant to section 726 Companies Act 1985 that Gresham provides security for costs in the sum of £469,783.
3. That second application was resolved by the parties before the hearing by the provision of a bond which the Respondents consider is sufficient security for their costs for the present.

BACKGROUND

4. Gresham was compulsorily wound up by the Court on 22nd May 2003 on the petition of HM Customs and Excise ("HMCE"). The petition was based on excise duty assessments which were not appealed.
5. Until its liquidation it traded in the business of wholesale distribution of alcoholic and soft drinks from premises in the Epsom/Tolworth Surrey area. Trading was also undertaken from warehouses in Barnsley, Cardiff and Calais.
6. It is the Applicant's case that from 2001 Gresham which has historically been profitable fell into financial difficulties. In the year to 30th June 2001 it made a pre-tax loss of £829,000. It was owed very substantial sums from a number of associated French companies that were unable to pay. In particular Alliance International SA was a debtor of Gresham in the sum of £1,448,000. On 21st January 2002 it entered into an agreement with Gresham whereby the debt was scheduled to be paid over 10 years the first payment not to be paid until March 2003. Gresham's solvency was entirely dependent on the ability of the French associated companies to meet their indebtedness. In the event they could not and eventually they all went into liquidation by early 2004.
7. In addition Gresham had various disputes with HMCE.
8. There were disputes between Gresham and HMCE with Gresham being subject to investigation like many other companies engaged in alcohol sales in the Calais area. Demands were made by HMCE for £1,808,343 and £1,265,423. Gresham's bank had provided a guarantee of £300,000 per month in respect of its liability to HMCE and pursuant to that guarantee HMCE made demands totalling £600,000. There then remained a balance outstanding of £2,473,767. Gresham whilst it took issue with HMCE's action in writing to its suppliers it did not dispute the demands in question.

STATEMENT OF AFFAIRS OF GRESHAM

9. According to paragraph 108 of Ms Brittain's first witness statement dated 26th November 2007 the total creditors appear to be £8,646,057.39 with assets only of £18,220.17. Since then she has received a dividend of €654,463 from the liquidator of the French company Alliance in 2008.
10. There were 3 creditors on the liquidation committee namely HMCE (£2,400,000 approximately), Scottish and Newcastle (£3,900,000 approximately) and Scottish Courage Brands (£436,000 approximately). Some of the Respondents have been admitted as creditors of Gresham for approximately £600,000.

ISSUE

11. The issue primarily relates to the Applicants seeking declarations that the sanction granted by the Secretary of State on 13th August 2007 ("the Secretary of State sanction") to the liquidator for the bringing of legal proceedings as specified in that sanction is valid and that the liquidator is entitled to an indemnity out of the assets of Gresham in respect to costs and adverse costs orders in respect of those claims. In the alternative the Applicants seek an order that the Court sanction the claims pursuant to section 167 (1) (a) and Schedule 3 Insolvency Act 1986 and the liquidator is consequently entitled to like indemnity. Finally the Applicants seek an order sanctioning fresh claims as set out in the schedule thereto with a like claim for indemnity in respect of them.
12. The proceedings were issued initially on 16th May 2007 in the form of an Originating Application against the 5 named Respondents seeking relief arising out of 3 separate transactions/arrangements in the 2 years prior to the liquidation. The proceedings were in the name of both the Liquidator and Gresham. In summary the claims related to:-

1) A transfer in January 2002 where Gresham transferred a property known as Meadow House, Meadow Walk, Walton on the Hill, Surrey to the Fourth Respondent Gresham (Gibraltar) Ltd ("Gibraltar")

2) A transfer in October 2002 by Gresham of a property 92-102 East Street Epsom to the First and Second Respondents Mr and Mrs Moonie trading as Gresham Consultants

3) A transfer between September-October 2002 of the business assets stock and goodwill to the Third Respondent Meadow Trading Company Ltd ("Meadow Trading"). By an amendment to the Originating Application dated 7th September 2007 a declaration was added that a contract to transfer Meadow House by Gresham to the Third Respondent on or about 2001 was a preference pursuant to section 239 of the Insolvency Act 1986. Some of the allegations of transactions at an under value or transactions defrauding creditors as set out in the original application were abandoned.

13. Mr and Mrs Moonie (the First and Second Respondents) and Mr Dickinson (the Fifth Respondent) were all directors of Gresham. Meadow Trading was a company formed on 26th June 2002. Mr Moonie and Mr Dickinson are its directors. Gibraltar was a company of which Mr and Mrs Moonie were directors.
14. In their application for permission the Applicants estimated that the likely recovery was around £4,000,000. It also estimated that the costs would be £150,000 and the costs of losing the action would be £150,000. Those latter two figures are optimistic and I am not in a position to comment on the correctness of the assessment of likely recoverability.

NEED FOR PERMISSION

15. It is accepted that where (as in this case) a company has been compulsorily wound up by the Court the liquidators powers are governed by Parts I and II of Schedule 4. Under Schedule 4 Part I paragraph 3A power to bring legal proceedings under section 213, 214,238, 239, 242, 243 or 423 (that is proceedings in the liquidator's name) requires sanction. Sanction is either by the Court or the liquidation committee if any. Paragraph 3A was not in the original Insolvency Act 1986 but was inserted by Enterprise Act 2002 s.253 which came into force on 15th September 2003. Prior to that it was considered that commencement of proceedings in the liquidator's name was covered by Part III paragraph 13 which did not require sanction.
16. I should also refer to rule 4.184 of the Insolvency Rules 1986 which provides as follows:-

"(i) any permission given by the liquidation committee (or if there is no such committee, a meeting of the company's creditors) or the Court under section 165 (2) or section 167 (1) (a), or under the Rules shall not be a general permission but shall relate to a particular proposed exercise of the liquidators power in question; and a person dealing with the liquidator in good faith for value is not concerned to enquire whether any such permission has been given

(ii) where the liquidator had done anything without that permission, the Court or the liquidation committee may, for the purpose of enabling him to meet his expenses out of the assets, ratify what he has done; but neither shall do so unless it is satisfied that the liquidator has acted in a case of urgency and has sought ratification without undue delay."

17. Under Schedule 4 Part II paragraph 4 there is a similar requirement for sanction for the bringing of any proceedings in the name and on behalf of the Company.
18. It is common ground that no sanction was obtained as required by the section to commence the proceedings before they were commenced.

SANCTION

19. The present application is stated by the Applicant (see paragraph 17 of Mr Shaw's skeleton who appears for them) to arise out of what are described as accidental omissions that were made by the liquidator in applying to the Secretary of State for the grant of sanction.
20. It is stated that in May 2007 the liquidator was advised that it was arguable that one of the proposed claims was at risk of becoming statute barred. I pause to observe as Mr Bompas QC who appears for the Respondents submitted that none of the proceedings the subject matter of the permission granted on 13th August 2007 can possibly have been statute barred because they all took place in 2002 which is less than 6 years after the issue of the proceedings. In any event time would only run against the liquidator in relation to those claims commenced by her personally pursuant to sections 238 and 239 Insolvency Act 1986 from the commencement of the winding up which was in May 2003 (or earlier relating back to the presentation of the petition).
21. It may be that the amended prayer for relief has a limitation issue but that is not clear and does not appear to have concerned the liquidator when she made the application because it was not in the original application for permission to commence proceedings. I am not persuaded there was any urgency to justify the issue of the original proceedings without sanction.

THE APPLICATION

22. The application was originally made to the members of the liquidation committee by a letter posted on 17th May 2007. The originating application had been issued the day before. No retrospective sanction was sought. The request asked for a response by 21st May 2007. Scottish Courage and Scottish & Newcastle resigned from the committee on 27th July 2007. This meant that the liquidation committee had only one member was therefore not quorate and was therefore incapable of acting. Accordingly sanction was required from the Secretary of State on whom the liquidation committee's functions devolved (section 141 (5) IA 1986).
23. The liquidator made an application for sanction to the Secretary of State on 7th August 2007. By this time the originating application had been issued for nearly 3 months. No mention of that fact was made in the application. It is significant that in the preamble to the application it is said "request for sanction should not be made retrospectively except in emergency in which case no undue delay should occur in applying for sanction". (Section 314 (4) and Rule 4.184 (2) see above.
24. It is plain that the Secretary of State thought he was considering an application for a prospective commencement of proceedings.
25. That is confirmed not only by that preamble but also by the text in the application. (See the entry on paragraph 1 for example "to make an application under section 212….")
26. On 13th August 2007 the Secretary of State acting by a Mr J Wright gave sanction for the commencement of legal proceedings for the specific purposes as set out in the liquidator's application. That did not of course include the challenge to the Meadow House contract dated sometime in 2001.
27. An important condition was attached to the consent "costs to be (sic) charged on a conditional fee arrangement and not to exceed £150,000 exclusive of 75% uplift, VAT and disbursements".
28. The £150,000 and the conditional fee arrangements were set out in the application. The figure of £150,000 is not realistic.
29. It therefore follows that the Secretary of State did not sanction that which had actually happened namely a retrospective sanction of the commencement of the proceedings. He could not do so because that is what was plainly not asked for. In any event for him to be in a position to grant retrospective sanction he is prevented from doing so unless the liquidator has acted in case of urgency and has sought ratification without undue delay.
30. It is interesting to see what Mr Wright has said about the sanction. On 19th August 2008 he wrote to Wedlake Bell the solicitors acting for the Respondents and said that had the Secretary of State been aware that the application for sanction was retrospective it would not have been granted. He would not have considered the 11 days between the resignation of the members of the liquidation committee and the application as being without undue delay. He therefore expressed a view that the application would have been rejected solely on the basis of delay. In a later letter to the liquidator dated 7th November 2008 Mr Wright appears to have taken a somewhat different stance. He expressed the view that the liquidator did act as a matter of urgency and sought ratification with the original committee without any delay. The only issue therefore he opined was the interval between 27th July and 7th August. He expressed the view that it would be exceptional for retrospective sanction to be granted when the application had been delayed for more than 5 working days. He also expressed the view that the Secretary of State was unable to reverse the sanction once granted and in the present circumstances he considered that the costs between May and August 2007 were covered by the sanction but he wanted assurance that no recurrence of this would occur in similar situations.
31. The parties agreed that the failure to obtain sanction does not affect the validity of the proceedings; it prevents merely the liquidator recovering costs out of the assets of the company in the event that she fails to recover the costs from a third party. I find Mr Wright's second letter a bit difficult. I do not see how the original sanction can be considered to have been intended to apply retrospectively to the commencement of the proceedings when he was not told that such a sanction was required and being sought. It is clear as I have said that the application is for a prospective permission. In his first letter Mr Wright expressed the view that the delay from the resignation of the liquidation committee to the application would not be undue delay. In his earlier letter he appeared to express the contrary view but his letter is not clear because it contains a double negative.
32. The more fundamental argument is what is the fate of the sanction given in the light of the failure on the part of the liquidator to indicate that she needed retrospective sanction for the proceedings to their commencement. A second question arises is that if the sanction is not effective retrospectively is it effective prospectively and if so what does it cover.

SUBSEQUENT STEPS IN THE PROCEEDINGS

33. The Originating Application was amended on 9th September 2007 to add the extra 2001 claim. The Originating Application was served on the Respondents on 12th September 2007 and the Particulars of Claim were served on 29th February 2008. On 3rd June 2008 Wedlake Bell, solicitors for the Respondents sought confirmation that the proceedings had been sanctioned by the liquidation committee.
34. Correspondence then ensued between Wedlake Bell, the Secretary of State and Moon Beever the Applicants solicitors investigating the situation. On 26th August 2008 Lawrence Graham became involved when they wrote to Moon Beaver criticising the letter dated 25th July 2008 sent to Wedlake Bell. Lawrence Graham in their letter set out a series of events which shows there was a delay between the investigation commencing and the issue of the proceedings (a period of nearly 4 years).

STANCE OF LIQUIDATOR

35. The first point to note is that there is no requirement to obtain sanction to bring proceedings under section 212 IA 1986. Sanction is required for the proceedings under section 238, 239 or 423.
36. A failure to obtain sanction does not render the proceedings a nullity or make them improperly constituted and does not confer on the Defendants any right to object to the proceedings see Dublin City Distillery v Doherty [1914] AC 823, 859-860 per Lord Parker.
37. The consequence of the lack of sanction is the inability on the part of the liquidator to recover expenses see re London Metallurgical Company [1897] 2 Ch 262 and In re a Debtor (No 26A of 1975) [1985] 1 WLR 6 (a bankruptcy case).
38. The Respondents had a twofold interest in the outcome of this application. First as Respondents they would wish the proceedings to be brought to an end and if they can do so by any proper way they will seek to achieve it. They are in my view entitled to investigate circumstances surrounding the sanction (or more realistically the lack of sanction). The liquidator as an officer of the Court owes a duty to the Court and those participating in it to ensure the litigation is conducted in accordance with the rules. They have a second relevant interest. As creditors they have a right to prove in the liquidation. If the liquidator's costs are disallowed out of the assets available for distribution there will be an increase in sums available for distribution (inter alia) to them.
39. It is of course well established that there is generally a difference between solicitor and own client costs and party and party costs on a standard basis. If the Respondents are sued successfully they will become liable to make a payment presumably of the value of the transaction and costs. If they pay the full amount (in their capacity as creditors) they will be able to seek to participate in any sums available for distribution. That surplus might grow as set out above. If they do not of course satisfy the judgment in full this will not arise because the liquidator will exercise rights of set off presumably to abate their entitlement to prove to cover any shortfall as between judgment and recovery.
40. If the Respondents are successful they will seek costs from the liquidator personally in respect of the sanctioned actions and also recoupment in respect of the security they have obtained. In that eventuality the liquidator without sanction will not be able to recover any of her costs from the funds. No funds will of course have been recovered from the Respondents if the liquidator loses but as I have said above there is a fund of €600,000 available (it not being available at the time of the application for sanction).

PRIMARY CONTENTION OF APPLICANT

41. The normal position in conducting litigation is the liquidator may recoup his costs out of the assets of the company pursuant to rule 4.218 (1) (A) IA 1986. If he was unsuccessful in proceedings in his own name he is ordinarily personally liable to the successful Defendant for any order to costs. He is ordinarily entitled to indemnity out of the assets of the company in respect of his personal liability unless he is guilty of misconduct (re MC Bacon (No2) [1990] BCLC 607). The successful litigant is entitled to his costs in priority to the liquidator see Norglen v Reeds Rains [1997] 3 WLR 1192.

APPLICANTS STANCE ON THE SANCTION GRANTED

42. The Applicants accepted that the application made to the Secretary of State made omissions in that it did not explain that the proceedings had already been issued, did not explain that there had been a creditors' committee which had not granted sanction and finally did not seek retrospective sanction.
43. The Applicants' primary submission was that the sanction granted should be regarded as a prospective sanction and that the maximum disallowance of indemnity concerning costs should be the pre sanction costs incurred prior to 13th August 2007 namely the preparation and issue of the Originating Application and the adjournment of directions hearing. The difficulty with that submission is Mr Wright's first letter. If the liquidator had explained the true position to Mr Wright apparently he would have rejected the application. At that stage the liquidator would know that she had no sanction for the already issued proceedings. She could have discontinued the existing proceedings, sought permission to commence new proceedings and then issued. The limitation concern might have worried her but she would have had full sanction for all costs in the second action. However this is something of course that she did not do.
44. Mr Bompas QC for the Respondents submits that the application was misleading because of its omissions. I have had no satisfactory explanation as to why the application was made in the form that it was. It may be that the liquidator considered that the application could be made prospectively because whilst the proceedings had been issued they had not yet been served (see her letter 21st July 2008 to Mr Wright). That is in my view a misunderstanding. The relevant time is when proceedings are brought and that is when the Court issues a Claim Form at the request of the Claimant (CPR 7.2 (1)). There may be earlier dates see for example Phillips v Nussberger [2008] UK HL 1 but that is not relevant to the present case.
45. Mr Bompas QC accordingly submits that the sanction given by the Secretary of State does not cover the proceedings started on 16th May 2007 for four reasons:-

1) The sanction was for proceedings yet to be started

2) No sanction has been given for any proceedings in the name of the company

3) No sanction has been given for proceedings under section 238 of the 1986 Act in relation to the East Street transfer

4) In view of the terms of rule 4.184 (2) there was no power to give retrospective sanction with a result that the sanction was ineffective he submitted.

46. The important point is to consider the extent of the ineffectiveness. The Applicants submit that at best it is ineffective as regards the retrospectivity element i.e. the costs incurred up until the date of sanction. In so submitting they rely upon the decision in London Metallurgical Company [1897] 2 Ch 262 at 270:-

"I must first point out that both in bankruptcy and in companies winding up it is made perfectly clear that the sanction of the Court or the sanction of the committee, as the case may be, must be obtained before the proceedings are initiated, excepting in cases of urgency. So far as I understand the facts here, there was no case in which the sanction of the committee of inspection was obtained before the initiation of the first step in the proceedings. Therefore it seems to me that prima facie the solicitors cannot, with regard to the earlier stages of any one of these actions, say they obtained the necessary permission of the committee of inspection. I am not saying that the Court may not give that leave now; but, when the Court is asked to give that leave, it will bear in mind the principle established by the very words of s. 12 of the Act of 1890, and of the Bankruptcy Rules, that the sanction must be obtained before the employment, except in case of urgency. But with regard to the later proceedings, they seem to me in some cases to have been authorised; and in that t respect the objections of the official receiver are clearly too wide, because he appears to assume that, unless the sanction is obtained before the commencement of an action, the whole of the proceedings in that action must be treated as if there had been no sanction. But I think that is wrong. His objection is to the costs of the action generally on the ground that the sanction was not obtained before the action was commenced.

I do not see that the section justifies that. The sections says, "bring or defend any legal proceeding." I think that if the liquidator, without getting the necessary sanction, commenced an action, and then, after he had done so, the attention of the committee of inspection was called to it, and their permission was asked to take a proceeding in the action, as, for instance, to issue execution, that sanction would, as regards that step be a compliance with the section. In other words, I do not think that "bring or defend any legal proceeding" necessarily means the issue of a writ, or whatever else may be the first step. I think you are bringing a legal proceeding if you take such proceedings for examination as to means as were taken against one of the contributories in this case, or if you issue execution".

47. Reference must also in my view be made to what is said at page 271 as follows:-

"I want it to be understood, however, that generally I shall not give the sanction after the proceedings have been commenced unless it is a case of urgency. But two things induce me to do it in this case – one that the solicitors do seem to have brought the fact that these actions were pending to the attention of the committee of inspection at an early date, on October 10 1894; and, secondly, that good faith is evidenced in the matter by the reasonableness of the bill of costs, which relieves the solicitors from the imputations of being anxious to run up a bill of costs at all hazards".

48. Mr Shaw for the Applicants submits that it is plain from a reading of the judgment at page 270 that Vaughn Williams J is distinguishing between prospective and retrospective costs. First Vaughn Williams J rejected the submission on behalf of the Official Receiver that sanction could only be obtained at the commencement of the proceedings and unless before the commencement the whole action is treated as if there is no sanction. Mr Shaw submits that where an application is made after commencement of the proceedings what Vaughn Williams J is saying is that retrospective sanction will only be obtained in the case of urgency as a matter of practice but there is no such limitation as regards prospective costs in the then action. I should also add 2 things that at the time of the judgment the giving of sanction and terms were a matter of practice. (The grant of sanction for the employment of solicitors – which was sought in that case – was also required pursuant to section 12 (4) Companies (Winding Up) Act 1890). As Vaughn Williams J makes clear at page 271 the general principle was that he would not give sanction unless it was a case of urgency. However despite that general principle it is interesting to note that he granted retrospective consent when there was no urgency.
49. Mr Bompas QC reads the judgment differently. His primary submission is that generally sanction has to be obtained before the proceedings are commenced. If no such sanction is obtained then there is no indemnity for any costs in that action save further costs when someone wished to take "a proceeding" in the action such as execution. The present application he submitted is not of that nature.
50. This in my view will put office holders in great difficulty. It would mean that any step taken in an action after the proceedings are commenced if no sanction is obtained at the outset would have to be examined as to whether it was a "proceeding" in the context of the use of that expression by Vaughn Williams J in the case.
51. The second difficulty is demonstrated by the terms of the sanction actually granted in this case. The Secretary of State was contemplating clearly a prospective issue of proceedings. Nevertheless he capped the costs at £150,000. I pressed Mr Bompas QC as to whether or not it would be possible for the liquidator to obtain further sanction if the £150,000 was exceeded. His response was it was not possible to obtain a further sanction unless it was a proceeding as defined and that the liquidator would have to go to the liquidation committee and the creditors to have permission to have recourse to the recovered funds for the purpose of recovering these extra costs.
52. I cannot believe that such complicated arrangements were ever contemplated by Vaughn Williams J. One has to appreciate that at the time of his decision the matter was almost entirely discretionary. It is dangerous in my view to attribute words to the judgment and give them a specific requirement. Thus whilst he referred to a proceeding in the action in my view that meant a "step" in the action. Now this all makes sense in my view. A liquidator goes to the Court for sanction to commence proceedings. Sanction is granted not in general terms but relates to a particular proposed exercise of the liquidator's power. Thus the Secretary of State or the liquidation committee or the Court might grant a full sanction to commence proceedings in their entirety. Alternatively sanction might be granted to take certain steps or up to a certain financial limit. This latter form is what the Secretary of State contemplated. If in the course of the proceedings a liquidator changes the form of the proceedings he is then required to seek further sanction. If the terms in the existing sanction have been reached then he needs further sanction. Exceptionally a retrospective application can be made if it satisfies the requirements of Rule 4.184 (2) IA 1986.
53. This in my view is the only way in which the sanction regime can operate sensibly.
54. It follows therefore that I reject Mr Bompas QC's primary submission that an application for sanction needs to be made before the proceedings are commenced unless a subsequent occasion for sanction within the proceedings is to take a "proceeding". I do not believe that is what Vaughn Williams J was contemplating in his judgment. It seems to me he rejects the Official Receiver's submission and makes it quite clear that he is giving an example. If the liquidator desires to take further steps or any other action within the proceedings which he does not believe are covered by the existing sanction he makes an application for a fresh sanction. If he omits to do that whilst Vaughn Williams J had a greater discretion the ability to provide retrospective sanction is now curtailed.
55. I was also referred to the decision of Scott J as he then was in Re a Debtor (No 26A of 1975) [1985] 1 WLR 6. It is plain that the Judge was faced with a very difficult decision. The Trustee had the benefit of a legal aid certificate to continue an action but when he came to the taxation of his costs it was pointed out that no sanction had been obtained from the committee and that therefore no costs could be recovered despite the fact that the costs were going to be provided by the legal aid board under the certificate if not recovered from the Defendant.
56. Mr Shaw relied upon this authority as providing an overriding discretion to the Court in regulating insolvency proceedings so as give it power to make any order that is appropriate. The power there was section 79 (3) Bankruptcy Act 1914. He also relied upon the observations in the Court of Appeal in Donaldson v O'Sullivan [2009] 1 WLR 924 at paragraph 41.

"All of those cases seem to me to support the thesis that bankruptcy is a court-controlled process in relation to which the court has wide powers, exercisable for the purpose of the insolvency process as a whole, which are not limited to those conferred expressly by the relevant legislation. There are non-statutory elements in the law of bankruptcy, such as the principle in Ex parte James, even though these may result in an application of assets which is not strictly in accordance with legal rights and obligations. There is also scope for the court to direct that things be done (or not done) in apparent conflict with express provisions of the legislation. Clearly if the Act said in terms that the court could make a certain kind of order only in given circumstances, it would be a very strong construction to hold that it could do so in other circumstances as well. That is not the present case. The Act provides for the court to appoint in certain specific circumstances, and to be able to remove in any circumstances, but is silent about replacement by the court of a removed trustee. It does include exclusive provisions in certain cases, for example section 298(1), quoted above, which defines the ways in which a trustee in bankruptcy may be removed. The provisions with which this case is concerned are not of that nature".

57. There Lloyd LJ considered the impact of the principle of Ex-parte James and as can be seen from that paragraph expressed the view that it would be "a strong construction" to hold that the Court could make a certain kind of order in circumstances other than circumstances prescribed by an order. That sentence is a little difficult to understand and further was not necessary to the decision in that case. The principle of ex-parte James is well known; it requires an officer of the Court to do the fullest equity and to act with the utmost fairness in insolvency matters even if that involves diminishing the extent of the bankruptcy estate. It is equally applicable to company cases see Gore-Browne "Companies" paragraph 59 [4B].
58. In addition both liquidators in Court winding ups and trustees in bankruptcy have the power to apply to the Court to seek directions (section 168 (3); section 303 (2) IA 1986).
59. Returning to the case of Re a Debtor it is quite clear that the Judge was troubled as to the potential unfairness of the special circumstances of the case (see page 14 D/E for example). He made a retrospective order under the Court's general sanctioning powers permitting the appointment of solicitors. He did not so far as I can discern make an order giving retrospective sanction under section 56 (3). That power was at that time subject to a requirement if applied retrospectively thus required a similar threshold to be applied as proof of urgency in being made without undue delay (section 83 (3) BA 1914; BR 1952 RR 106, 107). These provisions as regards bankrupt estates have also been similarly reproduced in the Insolvency Act 1986 see section 314 (4) IA 1986.
60. Thus in all statutory regimes both corporate and individual insolvency the same requirements have applied for retrospective sanction. They need to establish that the matter was urgent and that ratification had been sought without undue delay.
61. The significant point of Re a Debtor however is that Scott J said that it was not an appropriate case for retrospective sanction (see page 10 F). He said that none of those provisions had any application where a solicitor had been employed without sanction (ibid page 13 E). It appears that he exercised his discretion under section 79 (3) despite there being no question of the sanction satisfying the test of no undue delay and urgency. That is self evident because the issue only arose at the time of taxation. His conclusion is the exercise of his jurisdiction under section 79 (3) (page 15 C).
62. Thus Scott J exercised the general power to override what appears to be the requirements for a retrospective sanction as set out in the Bankruptcy Act 1914 and the 1952 Bankruptcy Rules. He thus to my mind gave a "very strong construction" of his power to do so despite the apparent overturning of the requirements set out in the Act and the Rules.
63. The same of course occurred in London Metallurgical as I have set out above but that was a matter of practice.
64. I conclude therefore that on the authorities such as they are the Court has power under its supervisory role of compulsory winding up and bankruptcy to make orders the effect of which is to grant retrospective sanction despite the requirements not being made out. For my part I would prefer the approach of Scott J despite the fact that that would be "a strong construction". It seems to me that it is essential that the Court retains a residual power of control in such areas where it can in appropriate circumstances overcome non compliance with the statutory requirements.
65. In case it be said that that is giving a strong discretionary power to the Court which might be used to override statutory requirements the answer is that the Court would act appropriately in the circumstances that arise. There would of course be no question of the power being invoked every time there was non compliance with a statutory requirement.
66. Further I would be of that view when construing the provisions of the current Insolvency Act 1986 and the attendant rules without reference to earlier decisions on different statutes. There is a danger in drawing in to an exercise of construing modern legislation authorities from very different periods. Those authorities nevertheless enable me to come to the conclusion that I have. However had I not been assisted by the direction of those authorities I would have come to the same conclusion. It is important to ensure that the Court retains the fullest power to regulate its proceedings. A Court would not of course exercise that power in a capricious way; there must be some appropriate justification for departing from a requirement in the Acts and the Rules. It may be that the reality is that the Court could not use the power to override some statutory provisions. It is not appropriate for me to suggest circumstances when it might not exercise its discretion; I am content to determine that in the present case it is appropriate for me to consider whether I should exercise a discretion to make an order enabling the liquidator to recover costs already incurred despite the fact that she has no sanction under section 167 IA 1986.

CONSIDERATION FOR EXERCISE OF DISCRETION

67. The first point to remember is that the Office Holders are pursuing statutory duties to realise assets for the benefit of the general body of creditors of the company or bankrupt. Whilst of course they undoubtedly will make profits arising out of the fees that they are entitled to recover I think the Court ought to be slow to refuse an indemnity out of the assets when the result of that decision throws the costs burden on them as opposed to out of the assets which have been recovered for the benefit of other parties. As I have said above apart from €600,000 there are no funds out of which the liquidator can recoup costs in the event that she is unsuccessful.
68. In that context I remind myself of the fact that if the liquidator misconducts herself in the litigation her costs in any event may be challenged by the liquidation committee and any creditor who is disaffected as a result. So even if I make an order sanctioning the recovery Mr Shaw acknowledges that any costs in respect to which an indemnity is sought is out of the assets recovered will be subject to a review of the Court if challenged by the creditors. I see no reason why as a matter of principle in most cases where there has been an inadvertent failure to obtain sanction the Court (even if urgency and no undue delay) should not retrospectively sanction the proceedings under its supervisory powers. There is no real justification for punishing a liquidator for such inadvertence and as a result conferring an uncovenanted bonus on the creditors of the company on whose behalf the liquidator is seeking to recover assets. It may be different of course if the application is unsuccessful but there are other assets out of which the liquidator's costs and liability to pay costs can be recovered. In that situation where there has been no sanction the Court will be able to investigate the case fully and decide whether or not it is appropriate to grant retrospective sanction only if the requirements of Rule 4.184 are made out.

CONCLUSIONS

69. Drawing these matters all together my conclusions are as follows.
70. First I do not accept that the sanction that was granted on 13th August 2007 was effective at all. My reasons are as follows. First what was needed at that time was retrospective sanction and that appears not to have been made. Second if prospective sanction was being sought when retrospective sanction was what was required I do not see how a prospective sanction can be re-read as a retrospective sanction. I do not think you can pick out of the sanction a different sanction as a justification for protection as regard costs prospectively to be incurred in an action which was already issued. This is because the Secretary of State believed that he was giving prospective sanction. This is hardly surprising because that is what the application appeared to be for. I prefer Mr Wright's first statement namely that the case required retrospective sanction and he would have refused it.
71. It follows therefore that I do not accept that the liquidator has any valid sanction at all for the present.
72. Nevertheless I reject Mr Bompas QC's submission that sanction has to be applied for at the start of the proceedings and cannot be applied for prospectively in stages save in the limited circumstances he argued for. I am firmly of the view that a sanction can be sought at the start. That sanction may cover all steps in the action down to trial; or it may simply allow the action to be commenced and prosecuted completely. The sanction granted had a cost cap on it. In my view depending on the sanction originally obtained it is open to the liquidator to make subsequent applications for fresh prospective sanction if the circumstances so justified. An example would be an amendment to the pleadings. A further example might be if the original costs cap was exceeded. Another example might be a diversion such as sanction to incur costs of a mediation if thought advisable. This in my view is the only sensible interpretation of the statutory procedures. It gives the Court flexibility and it ensures that a liquidator is not put unnecessarily at risk through having an inability to have recourse to the company's assets for litigation that he pursues from time to time.
73. It therefore follows that I can grant sanction pursuant to the present application to cover all costs that are to be incurred from the date of the application i.e. from 8th December 2008.
74. I can grant retrospective sanction if the requirements of the rules are satisfied or under the Court's supervisory powers even if they are not. In my judgment the liquidator requires retrospective sanction for all costs that have been incurred in the action before 8th December 2008.
75. I can see no reason for refusing the liquidator prospective sanction for all claims which she now wishes to bring and I will so order.

OUGHT I GRANT RETROSPECTIVE SANCTION?

76. First even if I had concluded that the original application was for retrospective sanction in my view the statutory requirements had not been made out. In this context it is important to appreciate that the period runs from the time when the originating application was issued which sets the urgency and then the need to act with proper dispatch from that date. I make no comment about Mr Wright's observation that the normal cut off date is 5 working days. I do not think it can be so mechanistic. The time for assessing whether there has been undue haste must be on a case by case basis according to the circumstances that appertain to each case. There is a danger in applying a rigid mechanistic number of days and I do not think that is appropriate.
77. Nevertheless it follows from the above that even if the sanction can be looked at as a retrospective sanction application there was no basis for the power under the statute being capable of exercise.
78. Equally for the reasons that I have set out above I do not accept that the sanction can be regarded as being effective as regards the existing proceedings. It was simply not what was being sought nor what was granted. What should have been sought was a retrospective sanction but for the reason I have set out above it would not have been successful in accordance with the statutory requirements.
79. It is possible (but this is academic) that an invocation of the overriding supervisory powers in September 2007 would have been successful. However no such application was of course made.

OUGHT I TO SANCTION UNDER THE SUPERVISORY POWERS THE COSTS INCURRED RETROSPECTIVELY UP UNTIL 8TH DECEMBER 2008?

80. If it was a mere matter of inadvertence I would have no doubt about it. However I have not been completely satisfied by the reasons put forward by the liquidator as to why the application was made in the form it was and I am not persuaded there was any inadvertence nor is there any other factor so far as I can discern that would justify departing from the statutory requirements. It is self evident that an application in 2009 for retrospective sanction back to the issue of the proceedings or even the date of the original sanction cannot possibly satisfy the statutory requirements.
81. Therefore whilst I grant the liquidator prospective sanction as regards all proceedings costs from 5th December 2008 I refuse sanction retrospectively for any costs (insofar as they required sanction) incurred in the proceedings before that date. I will invite the parties to submit the form of order for consideration. In particular I will invite them to consider whether or not the sanction should be open ended to trial and all costs incurred thereunder or whether there should be some cap with liberty to make further applications or whether there should be a limit to some stage in the proceedings and whether it should include a possibility of mediation. That might involve further submissions but I will await the parties deliberations.
82. I am grateful to both Counsels' help in this interesting point which was extremely strongly argued on all three sides.