Summary

Costs orders made against a company's liquidators following civil proceedings undertaken by them had, in relation to the company's assets, priority over the general expenses of the liquidation and in particular over the legal costs which the liquidators had incurred in bringing their failed proceedings.

Facts

The applicants (D) sought payment, from the assets of a company (M) in liquidation, of their costs arising from unsuccessful proceedings brought against them by the respondent liquidators (B).

B's proceedings against D had been partly funded by the Inland Revenue. Following the striking out of the first set of proceedings and B's discontinuation of a second set, costs orders were made against M in favour of D, who argued that part of their costs could be paid from the money held in M's insolvency services account. They contended that such payment should take priority over all the general costs and expenses of the liquidation and, in particular, over the legal costs which B incurred in bringing their failed proceedings.

However, the solicitors (W) who had been instructed by B in that litigation submitted that (1) the court had a discretion pursuant to the Insolvency Act 1986 s.112 and s.156 to alter the priority of payments out of M's assets and the discretion should be exercised to require B to pay the money to them in preference to the claims of others; (2) the money in the insolvency services account was outwith M's general assets from which costs due to D could be paid as it was held for them on trust either (a) arising out of an earlier court order or (b) being a purpose trust into which all the Inland Revenue money had been paid.

Held

(1) In the normal course of events, any costs order made against liquidators in relation to civil proceedings undertaken by them had priority over the general expenses of the liquidation, London Metallurgical Co, Re [1895] 1 Ch. 758 applied. Although the court had a power under s.112, read in conjunction with s.156, to alter priorities, those provisions had no impact on that general rule. Section 156 was concerned with reordering the priorities of expenses in the liquidation, meaning the definitive list of expenses contained in the Insolvency Rules 1986 r.4.218(1). Costs which were payable as a result of a court order made against liquidators who engaged in litigation were not expenses incurred in the winding-up. Therefore, s.112 and s.156 could not be used to change the normal precedence afforded to costs made payable by court order (see paras 9-14, 19 of judgment). (2)(a) Before going into liquidation, M had been in administration. A judge had discharged the administration and ordered the balance of any funds available to the joint administrators to be paid into a designated trust account for preferential creditors. However, the judge's order did not purport to create a trust in the hands of B. The order had been made under s.18 and therefore had to be directed to administrators, UCT (UK) Ltd (In Administration), Re [2001] 1 W.L.R. 436 applied. It could not, and did not purport to, create a trust fund of which B were trustees (paras 33, 35). (b) It would be assumed that a purpose trust was created into which funds from the Inland Revenue were to be placed to be used solely and exclusively to meet B's lawyers' fees in the litigation against D. The remaining sum in M's insolvency services account had been derived from a VAT refund. However, it was clear that the refund was not money paid into any purpose trust. It did not come from the Inland Revenue nor was there any restriction placed on its use by B. Part of the refund had been used to reimburse the Inland Revenue. That sum was subsequently returned, but the Inland Revenue did not say that it was to be held in trust for payment of B's lawyer's fees. Therefore, whether a purpose trust was created or not had no relevance to that sum which remained under B's control to distribute in accordance with the normal priorities (paras 40-41).

Application granted