Lewis v Inland Revenue & Ors [2000] EWCA Civ 274 (2 November 2000)

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
CHANCERY DIVISION COMPANIES COURT
Mr. David Donaldson Q.C.
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 2 November 2000

B e f o r e :
LORD JUSTICE PETER GIBSON
LORD JUSTICE MUMMERY
and
MR. JUSTICE MAURICE KAY
 
LEWISRespondent
– and –
COMMISSIONER OF INLAND REVENUE AND OTHERSAppellant

– – – – – – – – – –
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
– – – – – – – – – –

Mrs. Jane Giret (instructed by Messrs Isadore Goldman of London) appeared for the Respondent
Mr. John McCaughran (instructed by Mr. Philip Ridd, Solicitor of Inland Revenue) appeared for the Appellants

Judgment
As Approved by the Court
(Crown Copyright)

PETER GIBSON L.J:
1 This appeal gives rise to an issue of some general importance, far greater than the amount involved in the case, as to whether the liquidator of an insolvent company, proposing to bring proceedings under s. 214 (wrongful trading) or s. 239 (preferences) of the Insolvency Act 1986 (“the Act”) against the former directors, has the right to recoup the costs of the litigation, whether or not successful, including any costs which he may be ordered to pay, out of the assets of the company as an expense of the liquidation. Mr David Donaldson Q.C., sitting as a Deputy Judge of the High Court, held that the liquidator had such right. That is challenged on this appeal by four preferential creditors (the Commissioners of Inland Revenue, the Commissioners of Customs and Excise, the Secretary of State for Employment and the Secretary of State for Social Security).
2 The Deputy Judge’s decision is now reported ([1999] 2 BCLC 666) and we need only refer to the background facts shortly. Floor Fourteen Ltd. (“the Company”) went into creditors’ voluntary liquidation on 15 August 1995. The deficiency shown in the Statement of Affairs was £257,088. It owed unsecured creditors £304,680. It owed preferential creditors £27,707. After realisation of assets, the liquidator held £11,250. 38. This would pay a dividend of just under 44p in the pound to preferential creditors, leaving nothing for unsecured creditors.
3 The liquidator’s investigations and advice from solicitors and counsel led him to conclude that there are substantial claims against the former directors under ss. 214 and 239, the possible recovery being estimated at about £150,000 for the s. 214 claim and £14 – £15,000 for the s. 239 claim. He asked the preferential creditors for their consent to him taking that course. That consent was not given. He convened a liquidation committee meeting. Not surprisingly the representatives of the unsecured creditors, whose position could not be made worse but might be improved by the litigation if successful, were in favour of the liquidator pursuing the directors, and the meeting resolved to authorise the liquidator to commence proceedings. The liquidator has agreed with his legal advisers that they will act in the proceedings on a conditional fee basis, and insurance cover against an adverse costs order requiring the liquidator to pay the directors’ costs of up to £25,000 is available at a cost of £3,750. The former directors have assets in the form of two properties which, if realised, would appear sufficient to satisfy the claims. We are told by Mrs. Giret for the liquidator that he has tried unsuccessfully to obtain funding from the unsecured creditors.
4 The liquidator applied to the court, seeking an order that he be at liberty to use the realised funds of the Company for the commencement of the proposed proceedings against the former directors. It was on that application that the Deputy Judge was asked to rule.
5 He made clear at the outset that the court’s approval of or authority for the proposed proceedings was neither sought nor required, and that the preferential creditors did not contend that such proceedings were inappropriate or ill-founded. Their case before the Deputy Judge was and in this court is that whilst the court has a discretion to allow the liquidator to be paid his costs (and any costs ordered to be paid by the liquidator to another party) out of the uncharged assets of the Company, the liquidator has no automatic right to recoup such costs out of the assets. The main issue was identified by the Deputy Judge as: “Would the costs of the proposed proceedings constitute expenses of the voluntary winding up to be paid automatically in priority to the preferential creditors?”
6 That issue turns on the true construction of the statutory provisions relevant to the point in issue and on the effect of the authorities which, unhappily, are not all in agreement.
The statutory provisions
7 Chapter V of Part IV of the Act, comprising ss. 107-116, contains provisions applicable to a members’ voluntary winding up and to a creditors’ voluntary winding up.
8 By s. 112(1) the liquidator or any contributory or creditor may apply to the court to determine any question arising in the winding up of a company or to exercise, as respects the enforcing of calls or any other matter, all or any of the powers which the court may exercise if the company were being wound up by the court. It is under this section that the liquidator made the application which came before the Deputy Judge.
9 By s. 112(2), the court, if satisfied that the required exercise of power will be just and beneficial, may accede wholly or partially to the application on such terms and conditions as it thinks fit, or may make such other order on the application as it thinks just.
10 S. 115 of the 1986 Act (relating to expenses of voluntary winding up) provides:
“All expenses properly incurred in the winding up, including the remuneration of the liquidator, are payable out of the company’s assets in priority to all other claims.”
11 Also in Part IV is s. 156, containing one of the powers conferred on the court in a compulsory winding up. That provides:
“The court may, in the event of the assets being insufficient to satisfy the liabilities, make an order as to the payment out of the assets of the expenses incurred in the winding up in such order of priority as the court thinks just.”
12 In Part VIII of the Act is s. 175, relating to preferential debts. It provides:
“(1) In a winding up preferential debts …. shall be paid in priority to all other debts.
(2) Preferential debts –
(a) rank equally among themselves after the expenses of the winding up and shall be paid in full, unless the assets are insufficient to meet them, in which case they abate in equal proportions ….”
13 S. 411(1) allows rules to be made for the purpose of giving effect to Parts I to VII. S. 411 (2) (read with para. 17 Sch. 8 to the Act) allows rules to be made which make provision as to the fees, costs, charges and other expenses which may be treated as expenses of a winding up.
14 By the Insolvency Rules 1986 the following relevant rules were made.
“4. 218 General rule as to priority
(1) The expenses of the liquidation are payable out of the assets in the following order of priority –
(a) expenses properly chargeable or incurred by the official receiver or the liquidator in preserving, realising or getting in any of the assets of the company;
….
(m) any necessary disbursements by the liquidator in the course of his administration ….
4.220 Saving for powers of the court
(1) In a winding up by the court, the priorities laid down by Rules 4.218 and 4.219 are subject to the power of the court to make orders under section 156, when the assets are insufficient to satisfy the liabilities.
12.2 Costs, expenses etc.
All fees, costs, charges and other expenses incurred in the course of winding up or bankruptcy proceedings are to be regarded as expenses of the winding up or, as the case may be, of the bankruptcy.”
The authorities
15 In Re M C Bacon Ltd. [1991] Ch. 127 the liquidator of a company in creditors’ voluntary liquidation unsuccessfully challenged the validity of a floating charge in favour of a bank on the basis that it was a voidable preference under s. 239 and that the bank was liable under s. 214 for wrongful trading. The liquidator’s proceedings were dismissed with costs. The liquidator applied to the court for reimbursement out of the assets of the company (including those subject to the floating charge) of his own costs and the costs he was ordered to pay the bank. The basis of that claim was that the costs were either “expenses of the winding up” within s. 175(2) or “expenses properly incurred in the winding up” within s. 115. The effect therefore of his claim if upheld would have been that the bank would have had to pay out of the assets subject to its charge the costs of the liquidator’s unsuccessful attempt to challenge the security.
16 Millett J. rejected the liquidator’s claim. He assumed that the proceedings by the liquidator were properly brought, but he held that the costs did not fall within r. 4. 218(1)(a) for the following reasons. First, any sums recovered in an action pursuant to s. 239 did not become part of the company’s assets but were received by the liquidator impressed with a trust in favour of those creditors among whom he has to distribute the assets of the company (Re Yagerphone Ltd. [1935] Ch. 392), and so a claim to set aside a voidable preference is not a claim to realise or get in any of the assets of the company; accordingly the costs of the claim did not come within para. (a). The same reasoning, Millett J. said, applied with even greater force to a claim under s. 214, where there was no existing asset to be got in or realised. Second, where litigation is unsuccessful or nothing is recovered, the costs are not expenses incurred in realising or getting in any of the assets of the company. Third, the costs did not fall within para. (m) as even if they were “proper” they were not “necessary”. Fourth, s. 115, which, the liquidator claimed, conferred an independent statutory right on him, did not assist. Millett J. said (at p. 140):
“In my judgment, however, section 115, like its predecessors, does not confer the right claimed. It is merely a priority section. In my view, it does not provide that the expenses with which it is concerned are to be payable out of the company’s assets; it assumes that they are so payable and provides for their priority. It does not mean “All expenses properly incurred in the winding up … are payable out of the company’s assets [and are so payable] in priority to all other claims,” but “All expenses properly incurred in the winding up … [if and so far as payable out of the company’s assets] are [so] payable … in priority to all other claims.” The former construction would produce an unnecessary overlap with rule 4.218(1) and a conflict between paragraph (m) thereof, with its requirement that the expenditure must be “necessary,” and section 115 with its more liberal allowance of expenditure which is merely “proper.” In my judgment, the latter construction not only gives sensible effect to section 115 but is consonant with the authorities, all of which treat the liquidator as having not a statutory right of recoupment but the right to apply to the court for an order permitting it.
….
As I construe the section, it is concerned with expenses properly incurred by the liquidator which are aliunde made payable, inter alia, out of the floating charge assets ….”
Fifth, the court has jurisdiction to order the payment of costs out of the assets available for distribution to the general body of creditors, not out of assets subject to a floating charge, and when the order is made it does not make the costs expenses of the liquidation or bring them within r. 4.218(1).
17 Millett J. then considered, if he was wrong, whether he would order payment. He rejected the argument that because the expenditure was properly incurred, the order should be made, saying that the test was whether it would be just to make the order. On that test he would have refused to make the order.
18 In Re Oasis Merchandising Services Ltd. [1997] 1 BCLC 689 a liquidator of a company in compulsory liquidation brought proceedings under s. 214 against former directors of the company. He assigned the fruits of the proceedings to another company. The assignment was champertous, but it was argued by the liquidator and the assignee that the power conferred on the liquidator by para. 6 Sch. 4 to the 1986 Act to sell “any of the company’s property” authorised the sale of the fruits of the proceedings. This court held, in agreement with Robert Walker J. ([1995] 2 BCLC 493), that “the company’s property” in para. 6 was confined to the property of the company at the commencement of the liquidation and property representing the same and did not include property which only arose after the liquidation of the company, which was recoverable only by the liquidator pursuant to his statutory powers and which was then held on the statutory trust for distribution. This court said that the fruits of the s. 214 proceedings fell into the latter category. The reasoning of Millett J. in M C Bacon that a claim under s. 214 was not an existing asset and that an application for an order under the section was not to realise or get in an asset of the company was expressly approved (see pp. 699-700).
19 Re Exchange Travel (Holdings) Ltd. (No.3) [1997] 2 BCLC 579 involved proceedings under s. 239 brought by the liquidators of a company in compulsory liquidation against former directors of the company. The directors were ordered by the trial judge to make repayment. The directors appealed and the liquidators cross-appealed. One of the points taken by the directors was that by reason of the decision in M C Bacon the liquidators had no right to recoup the costs of the s. 239 proceedings from the recoveries made in the proceedings. Phillips L.J. (at p. 587) said that he was unable to accept Millett J.’s analysis as it ran counter to a clear and straightforward statutory scheme. But Phillips L.J. said that this court in that case had not had the depth of argument that this important question would merit, were its resolution to constitute a ratio decidendi of that case, and that his conclusions were not determinative of the issue before him. Those conclusions were expressed as follows (pp. 587-8):
“(1) Section 115 confers a right to payment of the expenses specified. It may, of course, be sensible for the liquidator to obtain the approval of the court that the expenses are `properly incurred’.
(2) Expenses incurred by a liquidator in s. 239 and similar proceedings constitute `expenses of the winding up’. Rule 12.2 would seem to put this beyond doubt.
(3) Rule 4.218 sets out to make comprehensive provision for the order of priority of all types of expense properly incurred by the liquidator in the performance of his duties and its provisions should be interpreted accordingly.
(4) `Assets’ in r. 4.218(1) and (1)(a) include those recoveries made by the liquidator in s 239 and similar proceedings. This meaning accords with that which should be given to `assets’ in rr 4.127, 4.138, 4.179, 4.180 and 4.186.
(5) `necessary disbursements’ in r 4.218(1)(m) should be interpreted to mean disbursements rendered necessary by the proper performance of the liquidator’s duties, as opposed to unnecessary disbursements not properly incurred.”
He therefore rejected the directors’ argument that what he called “the s 239 expenses” (by which we think he meant the s. 239 recoveries) were not “assets” under r. 4. 218(1)(a). The decision in Oasis was distinguished as relating to the meaning of “the company’s property” in para. 6 of Sch. 4.
20 Those observations received the powerful support of Morritt L.J. He accepted that the right of a liquidator to bring s. 239 proceedings was not property of the company at the commencement of the winding up capable of being sold by the liquidator. But he said that it did not follow that the recoveries did not become assets in the hands of the liquidator out of which the costs and expenses of the liquidation may be paid. He continued (at p. 596):
“In my view recoveries in respect of voidable preferences are assets for the purposes of ss 115, 156 and 175 of the 1986 Act and rr 4.218 and 4.220. Were it otherwise it is hard to understand how the recoveries in respect of a voidable preference ever become subject to the statutory trusts for a pari passu distribution to creditors. The decision of this court in Re Oasis Merchandising Services Ltd is consistent with this view. The fact that the cause of action was not the property of the company at the commencement of the winding up and therefore not within the statutory power of sale conferred by para 6 of Sch 4 to the 1986 Act is a different issue altogether.
Given that the recoveries are assets for the purposes of those sections and rules the question then is whether there is any comparable statutory right to obtain reimbursement for the costs incurred out of those assets. I agree with Phillips LJ that the costs incurred in proceedings to set aside a voidable preference must be fees, costs, charges, and other expenses incurred in the course of the winding up and therefore expenses of the winding up within r 12.2 of the 1986 rules. Proceedings to set aside a voidable preference are, par excellence, winding-up proceedings. If this is right then s 156 of the 1986 Act and the opening words of r 4.218 of the 1986 rules provide or recognise that those expenses are payable out of the assets in the hands of the liquidator whether derived from property of the company or not.
The decision of Millett J in Re M C Bacon Ltd (No 2) would seem to be contrary to this conclusion. If it were necessary to do so in order to resolve this appeal I would respectfully disagree with him.”
But Morritt L.J. added that the point did not receive the depth of argument its importance warranted and that it was not necessary to reach any final conclusion.
21 Leggatt L.J. agreed with both judgments without finding it necessary to impugn the decision in M C Bacon.
22 Finally in Mond v Hammond Suddards [2000] Ch. 40, decided shortly after the Deputy Judge gave judgment but without that judgment or Exchange Travel being cited, this court again considered M C Bacon. The case included a dispute between the receivers of a company which went into compulsory liquidation and the liquidator as to which of them was entitled to a sum paid to the liquidator by way of compromise of a claim to recover money paid by the company to its solicitors after the presentation of the winding up petition. The trial judge held against the liquidator, but said that the liquidator was entitled to be reimbursed his costs of the unsuccessful litigation out of the assets of the company, which he held to include assets subject to the floating charge. Another judge was then asked to review the trial judge’s decision but he held that he had no jurisdiction to set aside the trial judge’s order. The result was that the liquidator was permitted to deduct his own costs from his liability to the receiver, rendering that liability ineffective. The receivers appealed to this court.
23 Chadwick L.J. (with whom Clarke L.J. and Sir Iain Glidewell agreed) said that Millett J. in M C Bacon accepted that the liquidator had a statutory right to recoup costs which fell within the categories described as “the expenses of the liquidation” and listed in r. 4.218(1). Chadwick L.J. commented that that must follow from the fact that the Insolvency Rules were made under s. 411 and he referred to para. 17 of Sch. 8. He expressly agreed both with Millett J.’s conclusion in M C Bacon that para. (a) in r. 4.218(1) could have no application to the costs of an unsuccessful attempt to recover assets and with the reasoning upon which that conclusion was based. Chadwick L.J. also agreed with Millett J.’s conclusion that there was no other paragraph under r. 4.218(1) which could be said to encompass the costs of unsuccessful litigation. He commented (at p. 52):
“I do not find that surprising. It would be remarkable if the Rules did give to the liquidator an unfettered right to recoup his costs of unsuccessful litigation. It must be kept in mind that a liquidator may bring or defend proceedings in his own name without first obtaining sanction; and it is necessary that the court should retain some control over his right to recoup the costs of such proceedings where the liquidator is unsuccessful.”
24 Chadwick L.J. then referred to Millett J’s views on s. 115. He pointed out that s. 115 had no application in a winding up by the court, but that s. 156, allowing the court in a compulsory winding up when assets are insufficient to satisfy the liabilities, to order payment out of the assets of “the expenses incurred in the winding up” in such order of priority as it thinks just, was the relevant section in the case before him. That expression he thought synonymous with the expression in s. 115, “expenses properly incurred in the winding up”. He concluded that both expressions were wider in scope than the expression “the expenses of the winding up” in s. 175(2) or the expression “expenses properly chargeable or incurred …. in pursuing, realising or getting in any of the assets of the company” used in r. 4.218(1)(a). He continued (at p. 53):
“Both sections 115 and 156 recognise that there will be expenses properly incurred in the winding up which do not fall within the more restricted expressions used in section 175(2) and rule 4.218(1)(a); but which are, nevertheless, payable out of the assets of the company. Those expenses may include the costs of unsuccessful litigation: see In re Silver Valley Mines (1882) 21 Ch. D. 381 and In re Wilson Lovatt & Sons Ltd. [1977] 1 All E.R. 274, referred to by Millett J. in Re M.C. Bacon Ltd. [1991] Ch. 127, 140. But neither section 115 nor, a fortiori, section 156 of the Act gives the liquidator a right to recoup such costs. The sections are, as Millett J. pointed out, concerned with priority. The court retains power to disallow such costs if it thinks fit.”
The Deputy Judge’s Judgment
25 The Deputy Judge did not of course have the benefit of this court’s judgment in Mond. He referred to what Millett J. said in M C Bacon about s. 115 in the passage which we have cited, but said that like Phillips L.J., and probably also Morritt L.J., he was led by “the structure of the legislation” to the conclusion that s. 115 was logically prior to r. 4.218(1) and that the same was true of s. 175, those sections not being restricted to imposing the priority of expenses over other obligations but also creating the right and obligation to pay the expenses. He said that by contrast r. 4.218(1) purported only to determine the priority as between different categories of expenses, and not to create the right and obligation to pay them or even to define the meaning of expenses in the two sections. He thought it would be appropriate to interpret r. 4.218(1) so as to embrace all expenses naturally falling within the words of the two sections “so as to avoid a lacuna in the hierarchy of priority as between such expenses”, and that on that basis any conflict between “proper” in s. 115 and “necessary” in r. 4.218(1)(m) disappeared. He considered that the costs of the proposed proceedings would be “expenses properly incurred in the winding up” (s. 115) or “expenses of the winding up” (s. 175) or “fees, costs, charges and other expenses incurred in the course of winding up …. proceedings” (r. 12.2), all these formulations being identical. As the propriety of the liquidator’s decision was not challenged, he held that the costs would plainly fall within ss. 115 and 175 and were therefore recoverable in priority to the distribution to the preferential creditors.
26 The Deputy Judge then turned to the question whether the costs of the proposed proceedings fell within para. (a) or para. (m) of r. 4.218 (1). He agreed with Phillips and Morritt L.JJ. in Exchange Travel that from the moment of recovery money or property recovered under s. 239 is an asset of the company and by identity of reasoning so are monies paid to the liquidator under s. 214. He distinguished Oasis on the same grounds as Phillips and Morritt L.JJ. He thought the words “realising or getting in any of the assets of the company” fairly susceptible of a wider interpretation than realising or getting in existing assets. He could see “no reason of structure, function or policy why r. 4.218(1)(a) should seek to distinguish between the cost of increasing the fund of distributable assets according to the nicety of whether or not the recovery is based on pre-existing ownership”. However he agreed with Millett J. that the costs of unsuccessful proceedings could not fall within para. (a). As for para. (m) the Deputy Judge applied the test suggested by Phillips L.J. in Exchange Travel (at p. 591) of whether the costs were “rendered necessary by the proper performance of the liquidator’s duties”, and held that they were, regardless of the outcome of the proceedings.
27 The result, therefore, if the Deputy Judge were right in his conclusion, is that both M C Bacon and Mond should have been decided differently, and in each case the owners of charged assets should in effect have been required to fund the unsuccessful litigation against them on the footing that the liquidator had incurred the litigation expenses properly. That is a remarkable result.
The first issue: ss. 115 and s. 175(2)
28 The first issue which arises on the Deputy Judge’s reasoning is whether s. 115 or s. 175(2)(a) gives the liquidator the right to recoup out of the assets the costs of the proposed litigation. As we have noted the Deputy Judge followed the guidance given by Phillips and Morritt L.JJ. in Exchange Travel in finding the structure of the legislation leading him to the conclusion that ss. 115 and 175 were logically prior to r. 4.218(1). Mrs. Giret submitted that the reasoning in Exchange Travel and that of the Deputy Judge should be preferred to that of Millett J. in M C Bacon. Mr. McCaughran for the preferential creditors submits that Millett J. was entirely correct and that in any event the decision of this court in Mond, in which the reasoning of Millett J. was expressly approved, is binding.
29 The considered views of Phillips and Morritt L.JJ., expressed in reserved judgments, deserve the highest respect; but, as they themselves acknowledged, the points were not explored in argument in sufficient depth and their remarks were obiter. They are therefore not binding on this court, whereas the reasoning which led to the conclusions reached by this court in Mond is binding, unless that decision can be said to be per incuriam. It is surprising and unfortunate that Exchange Travel was not brought to the attention of this court in Mond, but Mrs. Giret rightly does not suggest that the failure to take note of obiter dicta renders the Mond decision one which this court can choose not to follow. However Mrs. Giret submitted to us that the absence of any reference to r. 12.2 in the Mond judgment does have that effect. Her argument was that the rule, made pursuant to s. 411(2)(a) and para. 17 of Sch. 8, providing the fees, costs, charges and other expenses which may be treated as expenses of a winding up, was r. 12.2. R 4.218, she said, governed the order of priority of expenses of the liquidation inter se, though she accepted that that rule was intended to be a comprehensive statement of those expenses.
30 We are not able to accept that submission for two reasons. First, the fact that a provision is not referred to in a judgment does not mean that the provision was not cited or was overlooked. If Chadwick L.J. thought r. 12.2 was too insignificant for mention, that would not appear to be far different from the view of the Deputy Judge who referred only to it as providing an elucidative gloss. Phillips L.J. too seems to have thought it only confirmatory of his view formed from other provisions. Second, we find it impossible to read r. 12.2 as providing a complete statement of what are to be treated as expenses of a winding up. It only applies to fees, costs, charges and other expenses incurred in the course of winding up or bankruptcy proceedings. Mrs. Giret’s initial submission was that the reference to “winding up” was not limited by the word “proceedings”. That is an impossible construction, creating an absurd distinction between liquidations and bankruptcies. Plainly “winding up” is used in an adjectival sense attached to the noun “proceedings”, just as “bankruptcy” goes with “proceedings”. The rule can only be comprehensive if all the fees, costs, charges and other expenses incurred in the winding up or bankruptcy are within the rule. But it cannot be right to ignore the word “proceedings” (compare, for example, in r. 12.3 the expression “in both winding up and bankruptcy”). Pace Morritt L.J. we doubt if s. 214 and s. 239 proceedings are winding up proceedings within the meaning of the Insolvency Rules. They are insolvency proceedings, as defined in r. 13.7, being proceedings under the Act, and they are proceedings in the winding up. But to our minds the expression “winding up proceedings” connotes the proceedings instituted by the petitioner to obtain a winding up order, just as bankruptcy proceedings are proceedings to obtain a bankruptcy order. So read, r. 12.2 does no more than make clear that the expenses incurred in those proceedings are to be treated as expenses of a winding up or bankruptcy. Mr. McCaughran pointed out that there appears to be no predecessor to this provision which appeared for the first time in the Insolvency Rules. It may be that it was included for the avoidance of doubt. Accordingly, we cannot accept that the authority of Mond is undermined by the absence of reference to r. 12.2.
31 In our judgment, the reasoning of this court in Mond on the first issue is binding on us. In reaching his conclusion that the liquidator was not entitled to his costs in his unsuccessful litigation out of the assets, Chadwick L.J., dealing as he was with a company in compulsory liquidation, expressly approved the reasoning of Millett J. in M C Bacon, dealing as he was with a company in voluntary liquidation, and held that there was no material difference in the applicable statutory provisions. He expressly stated that s. 115 and a fortiori s. 156 did not give the liquidator a right to recoup costs, being sections concerned with priority.
32 We would add that in any event we agree with the way Millett J. expounded how the relevant statutory provisions were intended to operate. Where the Act specifically contemplates, by s. 411(2)(a) and para. 17 of Sch. 8, that the rules are to provide what fees, costs, charges and other expenses are to be treated as the expenses of a winding up, it would be odd if s. 115 were to be construed as meaning that all winding up expenses, so long as properly incurred, are to be payable out of the company’s assets. As it seems to us, the section is concerned with the priority of expenses in the liquidation, not inter se but as against other claims. R. 4.218 tells one both what are the expenses to be treated as the expenses of a winding up and what priority they have inter se. The liquidator has the right to recoup those expenses out of the assets in that order, subject to the ability of the court on an application under s. 156 in the case of a compulsory liquidation, or an application under s. 112, in the case of a voluntary liquidation, to exercise the power under s. 156, to dictate a different order of priority.
33 We can deal with s. 175 more shortly as Mrs. Giret did not press her submission that this too provided the liquidator with the right to recoup litigation costs out of the assets of the company. The Deputy Judge, it will be recalled, appears to have thought s. 175(2) did confer that right, treating the reference to “expenses of the winding up” as identical to the similar expressions in s. 115 and r. 12.2. Again, that cannot stand in the light of Mond, Chadwick L.J. stating that the expressions in ss. 115 and 156 were wider in their scope than the more restricted expression in s. 175(2). We would add that s. 175(2)(a), with its passing reference to the priority of the expenses of the winding up, seems to us to be a wholly improbable source of an independent right in the liquidator to recoup such expenses out of the assets. S. 175 is not even in a Part of the Act to which effect was to be given by the Insolvency Rules.
34 For these reasons, therefore, we respectfully disagree with the Deputy Judge on the first issue.
The second issue: r. 4.218(1)
35 The second issue is whether the costs of the proposed litigation fall within r. 4.218(1). Only two paragraphs of that rule are suggested to be relevant: (a) and (m).
36 The Deputy Judge held that the costs would not fall within para. (a) if the proceedings were unsuccessful. The correctness of that conclusion was confirmed in Mond and is not challenged by Mrs. Giret. We therefore need say no more about it. The Deputy Judge however held that the costs of successful proceedings would qualify under para. (a), because in agreement with Phillips and Morritt L.JJ. he considered that moneys recovered from proceedings under s. 239 or s. 214 became assets of the company. Like them he thought that the decision of this court in Oasis was distinguishable, as deciding only the quite different issue that the fruits of a s. 214 claim were not “the property of the company” within para. 6 of Sch. 4.
37 Mr. McCaughran submitted that the reasoning of this court in Oasis which led it to the decision on that issue covered this point and is therefore binding on this court. In Oasis this court drew a distinction between the property of the company existing at the commencement of the liquidation and assets which arise only after the liquidation of the company and are recoverable only by the liquidator pursuant to the statutory powers conferred on him. The right of action of a liquidator for preferences or wrongful trading and the fruits of such an action were said by this court not to be the property of the company but to be held on the statutory trust for distribution by the liquidator, and that distinction was said to be supported by a number of authorities including M C Bacon. We agree with Mr. McCaughran. We therefore conclude that the Deputy Judge was wrong to find that the costs of the proposed litigation, if successful, would fall within para (a).
38 The Deputy Judge held that the costs also fell within para. (m), relying on Phillips L.J.’s remarks that necessary disbursements were those rendered necessary by the proper performance of the liquidator’s duties. Mr. McCaughran relies again on Mond as being inconsistent with that view. In Mond Chadwick L.J., as we have already noted, expressly agreed with the reasoning of Millett J. in M C Bacon in concluding that neither para. (a) nor any other paragraph of r. 4.218(1) could be said to encompass the costs of unsuccessful litigation. The reasoning of Millett J. included drawing a distinction between “necessary” in para. (m) and “proper” in s. 115, and saying that whilst the liquidator did not have a statutory right of recoupment, he had the right to apply to the court for such recoupment. Mrs. Giret points out that in one of the two cases referred to by Millett J. as authorities for treating the liquidator as having the right to apply to the court for an order permitting the payment of the costs out of the assets of the company, Re Wilson Lovatt & Sons Ltd [1977] 1 All E.R. 274, Oliver J. at p. 286 treated as a prima facie presumption the entitlement of a liquidator to recoup himself, unless the liquidator’s decision to do so is challenged. But that was noted by Millett J. ([1991] Ch. at p. 140B). Whatever be the true position on the court’s discretion, the reasoning in Mond is again decisive of whether para. (m) is applicable. It would be surprising if “necessary” meant no more than “proper”. We would respectfully disagree with the Deputy Judge on the applicability of that paragraph.
Discretion
39 It was asserted by the preferential creditors before the Deputy Judge that there was a discretionary power in the court to permit recovery of the costs of the proposed litigation from the assets of the company. The Deputy Judge said that the existence of such power was assumed by Millett J. in M C Bacon and not disputed, but that its source was unclear to him as were the principles to be applied in the exercise of any such discretion. He refrained from considering the matter further.
40 Mrs. Giret asked that this court should decide whether the liquidator should be permitted to recoup the costs from the assets of the company. She submitted that the liquidator having made his investigations and taken the decision that the litigation against the former directors should proceed and having agreed with his own legal representatives a conditional fee arrangement and obtained the quotation for insurance which we have recounted, and because the propriety of the proposed proceedings is not in doubt, the court should authorise the payment of costs (such as the insurance premium) out of the assets of the Company. She pointed out that the litigation if successful could benefit the preferential creditors as well as the other unsecured creditors. Mr. McCaughran submitted that no order should be made in advance of the outcome of the proceedings. The liquidator, he said, should not use moneys, which would otherwise be paid as a dividend to the preferential creditors, in funding litigation largely for the benefit of the unsecured creditors, who should be required to provide that funding or else buy out the preferential creditors.
41We share the Deputy Judge’s uncertainty as to the source of the asserted discretion. We are doubtful whether s. 156 read with s. 112 assists as it merely permits a rearrangement of the order of priority of expenses (presumably of the priority in r. 4.218; see r. 4.220(1)). Mr. McCaughran relied on the inherent jurisdiction as an alternative source of the discretion of the court, but it is surprising to find that having to be relied on in this field so overlaid with statutory provisions.
42 Let us however assume that the court has that entirely desirable and beneficial discretion. In the circumstances of this case we would not be prepared to exercise it, as we do not think that we have sufficient information before us to reach a proper decision. It is appropriate to be cautious where the court is asked to provide for the liquidator’s costs out of the assets even if the litigation ultimately proves unsuccessful, particularly where the preferential creditors who would otherwise be paid a dividend oppose the use of the Company’s moneys for that purpose. We have not been provided with the sort of information that is regularly provided on a trustee’s Beddoe application (Re Beddoe [1893] 1 Ch. 547) or what is required for obtaining an indemnity as to costs in a minority shareholder’s action (Wallersteiner v Moir (No. 2) [1975] Q.B. 373 at pp. 392 and 404). Thus we do not know in what terms counsel was instructed and advised in recommending the litigation proposed. The evidence before us is also now rather dated and these proceedings have no doubt taken their toll in costs. We were also told by Mrs. Giret that a writ has already been issued (for limitation purposes) but not served.
43 In all the circumstances we do not think that we are in a position to exercise the assumed discretion, though the liquidator must of course be free to go back to the Companies Court if so advised to pursue an application on fuller evidence to be put before the court.
44 For these reasons we would allow the appeal and set aside the order of the Deputy Judge.
Order: Appeal allowed; no order for costs; permission to appeal refused; liberty
to apply to Registrar of Companies Court.
(Order does not form part of approved judgment.)

 

Source: www.bailii.org