Cost Allocation in Struck-Out Insolvency Applications: Insights from Morrow v Donworth Capital Ltd [2021] IEHC 558

Introduction

Morrow v Donworth Capital Ltd & Ors (Approved) [2021] IEHC 558 is a pivotal decision by the High Court of Ireland that delves into the intricacies of cost allocation in insolvency proceedings, particularly under the Companies Act 2014. The case revolves around an application made by the examiner of two companies in examinership—Cold Move Dublin Limited and Malonevale Limited—to recover certain assets and sums of money from the respondents, which included Donworth Capital Limited and other associated entities. The core issue pertains to whether the respondents should be ordered to bear the costs of this application, especially given that the application was struck out due to unforeseen circumstances leading to the termination of examinership.

Summary of the Judgment

The applicant, Dessie Morrow, acting as the examiner for the insolvent companies, initiated an application under section 557 of the Companies Act 2014. This application sought orders directing the respondents to return certain assets or pay corresponding sums, alleging that these assets were improperly disposed of to the detriment of the company and its creditors. However, the application was struck out when the examinership was abruptly terminated following the withdrawal of a prospective investor, rendering the examiner unable to proceed with his proposals.

The respondents contended that the applicant should be held liable for their legal costs incurred in defending the proceedings. Conversely, the applicant argued that no costs should be awarded against him, emphasizing that the termination of the examinership was beyond his control and not a result of any wrongdoing or procedural missteps on his part.

Ultimately, the High Court ruled in favor of the applicant, determining that no costs order should be made against him. The court highlighted that the termination was due to external factors unrelated to the merits of the s.557 application and that it would be unjust to impose a costs order under these circumstances.

Analysis

Precedents Cited

The judgment extensively references key precedents to elucidate the principles governing cost allocation in moot or struck-out proceedings:

• Re Wogan's (Drogheda) Limited [1992] 5 JIC 0703: This case addressed the court's discretion in making costs orders against examiners, particularly when there are breaches of duty. The court held that costs orders against examiners should only be made in exceptional circumstances where significant breaches are evident.
• Re Visual Impact and Displays Ltd Murphy v. Murphy [2003] 4 IR 133: This case involved personal liability of a liquidator for costs incurred due to fundamental errors. It underscored the rarity and specific conditions under which insolvency office holders might be held personally liable for costs.
• Re Ballyrider Ltd (in Voluntary Liquidation) v The Revenue Commissioners [2016] IECA 228: This judgment further reinforced the principle that costs follow the event, especially when an insolvency officer’s conduct leads to termination of proceedings.
• Telefonica O2 Ireland Ltd v Commission for Communications Regulation and Others [2011] IEHC 380 and Cunningham v The President of the Circuit Court [2012] IESC 39: Both cases provided comprehensive analyses on mootness, establishing that costs should generally not be awarded if proceedings become moot due to external factors beyond the control of the parties.

Legal Reasoning

The court's legal reasoning centered on the application of section 169 of the Legal Services Regulation Act 2015, which specifies that costs generally follow the event unless special reasons dictate otherwise. In this case, the "event" was the striking out of the s.557 application due to the termination of the examinership, not based on the merits of the application itself.

The court examined whether the termination rendered the proceedings moot and whether any party should bear the costs as a consequence. It determined that the application did not become moot in the traditional sense because the underlying issues remained unresolved. Instead, the termination was due to the unforeseeable withdrawal of an investor, an external factor outside the control of both the examiner and the respondents.

Drawing on the precedents, particularly the teachings from Telefonica O2 and Cunningham, the court concluded that since the termination was not a result of any party's actions aimed at causing mootness, and given that the examiner was performing his statutory duties diligently, it would be inequitable to order costs against him.

Impact

This judgment has significant implications for insolvency practitioners and the application of cost orders in similar scenarios:

• Protection for Examiners: Examiners engaged in bona fide attempts to recover assets or rectify fraudulent dispositions via applications like s.557 can expect judicial leniency regarding cost orders if proceedings are terminated due to external, uncontrollable factors.
• Clarification on Mootness: The decision reinforces the legal understanding that not all terminations render proceedings moot in a way that warrants cost orders, especially when such terminations do not stem from procedural failings or misconduct.
• Encouragement for Rigorous Scrutiny: While providing protection, the judgment also indirectly encourages examiners to meticulously document their efforts and the factors leading to the termination of proceedings to safeguard against potential cost liabilities.
• Legislative Considerations: The case highlights certain ambiguities in the Companies Act 2014, particularly around section 557 and the roles of various insolvency officers, signaling potential areas for legislative refinement.

Complex Concepts Simplified

Conclusion

The High Court's decision in Morrow v Donworth Capital Ltd & Ors serves as a crucial reference point for insolvency practitioners, elucidating the conditions under which cost orders may or may not be imposed in the wake of terminated proceedings. By distinguishing between terminations caused by procedural shortcomings versus those resulting from uncontrollable external factors, the judgment offers a balanced approach that upholds the integrity of examinership roles while ensuring fairness in cost allocations. This case not only safeguards examiners acting in good faith but also underscores the judiciary's role in mitigating undue financial burdens arising from unforeseen terminative events in insolvency processes.