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The Insolvency Court is not a court of debt collection! The aftermath of an abandoned statutory demand... costs

28-July-2014
28-July-2014 16:33
in General
by Admin

The issue of legal costs in statutory demand proceedings is driven to the forefront as soon as a claimed creditor (“the creditor”) decides to withdraw, discontinue or consent to an application to set aside the demand. Often a hearing will follow where the frustrated creditor will seek to show that the demand was brought properly but, until recently, there were settled, no-nonsense principles for the court in such circumstances.

These principles, specifically tied to this unique bankruptcy procedure, were based on the premise that a creditor who served a statutory demand without a judgment having been given did so entirely at his own risk as to costs (In Re A Debtor (No.620 of 1997) The Times, June 18, 1998).

The law sought to deter the use of the procedure as an inappropriate short-cut through a fully pleaded and argued CPR Pt.7 claim. The consequence being that where the statutory demand procedure was used for a debt which was substantially disputed and it turned out that there was a defence, the creditor would be ordered to pay the costs of the party against which he so proceeded (Re Cannon Screen Entertainment Ltd [1989] 5 B.C.C 207, expressly affirmed in Theodoulos Papanicola (as liquidator of Atlantic Fashions Limited) v Bulbinder Singh Sandhu [2011] EWHC 1431).

More recently, however, there seems to be a greater emphasis on looking to the general costs principles in the Civil Procedure Rules. Such reliance on CPR 44.2, the general rule that the unsuccessful party will pay the costs of the successful party (in this instance the party successfully resisting the demand), and the factors for the court to consider contained therein, did not necessarily conflict with the prior case law that has developed out of this niche procedural area. However, it appears that the utility of these earlier cases and principles have fallen away somewhat in the wake of the CPR.

This was certainly the judge’s approach in a recent case in which Mr Power, representing the applicant who sought to set aside a statutory demand, successfully obtained an order for the respondent to pay the applicant’s costs. The respondent had consented to the application to set the demand aside at a very late stage but still sought his costs. A hearing was convened to decide the sole issue of who was to be liable. At the hearing, the respondent abandoned his claim to costs but proceeded to ask the court to depart from the normal costs order that the applicant would get his costs on the basis that there were “exceptional circumstances” justifying that course.

The respondent’s position on costs was underpinned by the decision of the High Court in In re Sykes & Sons Ltd [2012] EWHC 1005 (Ch); [2013] Bus. L.R. 106. The case concerned the costs of a dismissed winding up petition. There had been allegations by the petitioner of the company fabricating documents in order to support a false defence to the winding up petition.

In those circumstances, Richard Snowden QC, sitting as a deputy High Court judge, took the unusual step of adjourning the company’s application for costs on the basis that justice would not be served by ordering the petitioner to pay the company’s costs when it might transpire that those allegations were true. He found that the factual circumstances of the case amounted to exceptional circumstancesjustifying an adjournment to await the outcome of the disputed issues in separate proceedings.

Whilst the concept of “exceptional circumstances” is nothing new (see Fernforest Ltd [1991] B.C.C. 680), arguments based on it have very rarely led to a departure from the general rule. Consequently,In Re Sykes did not assist the respondent in the instant case, with the judge preferring to take a strict route through CPR 44.2 by reference to the factors contained at CPR 44.2(4): conduct, degree of success and admissible offers to settle. The judge agreed with Mr Power’s submissions that the general rule prevailed and the successful applicant should have his costs.

This more-CPR driven approach to hearings of the kind is potentially favourable for parties seeking to disturb the general rule. It unsettles the near-certainty that previously existed in case law that the party abandoning a demand would be liable for the costs and increases the scope for arguments based on conduct (CPR 44.2(4)(a)). This approach does, therefore, create more risk in regards to costs for the applicant seeking to set aside a demand but, fortunately, in practice it appears that the courts are still very alert to the potential for misuse of the statutory demand procedure – (the Insolvency Court is not a court of debt collection!)

© 2014 Chambers of Lawrence Power, 4 King’s Bench Walk, Temple, London, EC4Y 7DL. Tel: 020 7822 8822.  www.4kbw.net.