Factual and Procedural Background
Isher Fashions Ltd ("the Company") was a company whose sole director was Mr Director A and financial oversight was held by Mr Officer B. In 1999, the Company suffered a fire, and a claim was made on its insurance policy. The insurers avoided the policy on the ground that the claim was inflated. On 5 January 2001, the Company entered creditors' voluntary liquidation, with Mr Liquidator appointed as liquidator. The Statement of Affairs showed assets with substantial book value but minimal realisable value, including the insurance claim valued at £325,000 in the books but estimated to realise nothing. By July 2002, the liquidator had realised just under £6,000 but incurred costs exceeding £5,000. Creditors received nothing. The final meeting of creditors occurred on 12 September 2003, and the Company was dissolved on 22 December 2003.
Unadkhat & Co (Accountants) Ltd ("the Accountants"), a creditor by debt assignment for approximately £25,000, contended that the liquidator should have considered proceedings against Mr Director A and Mr Officer B regarding the handling of the insurance claim. The dissolution of the Company prevented such remedies. On 21 December 2005, the Accountants commenced proceedings against Mr Liquidator and the Treasury Solicitor seeking (a) a declaration that the Company's dissolution was void under section 651 of the Companies Act 1985, (b) appointment of a new liquidator, and (c) an order that the period between dissolution and restoration should not count for limitation purposes for claims against officers or employees arising before liquidation.
On 29 March 2006, District Judge Cooke declared the dissolution void and appointed the new liquidator, refusing intervention to Mr Director A and Mr Officer B. The issues relating to limitation override relief were adjourned. Subsequently, the new liquidator commenced misfeasance proceedings against Mr Director A and Mr Officer B, which were settled for £60,000. This settlement rendered the limitation override issue academic and disposed of an appeal by the former officers. The costs of the revival application and those paid by the Accountants in relation to the misfeasance proceedings remained for determination.
Legal Issues Presented
- Whether the Court has jurisdiction to order the Company to pay the Accountants' costs of the revival application under section 651 of the Companies Act 1985.
- Whether the Court can order that those costs be treated as expenses of the voluntary winding up, thereby granting them priority in payment.
- The exercise of discretion in ordering costs and their priority in the context of a company dissolved and then restored to liquidation.
Arguments of the Parties
Accountants' Arguments
- Section 651's wording is broad enough to permit the Court to order the Company to pay the Accountants' costs of the revival application.
- Authorities such as Buckley and Re Commonwealth Store (Slough) Ltd support such orders, including costs payable by the company to a creditor applicant.
- The Court's power under section 651 supplements powers under section 51 of the Supreme Court Act 1981.
- The Accountants argued no provision in the Insolvency Rules prevents their costs being accorded priority, and common law supports such priority for successful litigants.
Liquidator's Arguments
- Although section 651's words appear broad, reported cases indicate such costs orders are not typically made.
- Reliance on Re Test Holdings (Clifton) Ltd, where the applicant for revival must bear costs unless someone else is liable.
- Reference to McPherson's Law of Company Liquidation suggesting applicants bear their own costs, including court and Treasury Solicitor fees.
- Insolvency Rules restrict costs that can be treated as liquidation expenses, and costs awarded must comply with these rules.
- The Accountants' costs should be treated as unsecured claims proven alongside other creditors, not as expenses with priority.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Re Commonwealth Store (Slough) Ltd (1971, unreported) |
Supports ordering costs of restoration application payable by the company under s.653 (analogous to s.651). |
Court followed this view to confirm jurisdiction to order costs payable by the restored company. |
| Re Test Holdings (Clifton) Ltd [1970] Ch 285 |
Applicant for revival generally bears costs of restoration; no automatic costs order against the company. |
Court interpreted this as a discretionary rule, not an absolute bar to costs orders against the company. |
| Re London Metallurgical Co [1895] 1 Ch 758 |
Successful litigants in proceedings against a company have a prima facie right to immediate payment of costs out of company assets. |
Applied to support that costs awarded against the company may have priority over liquidation expenses. |
| Re Toshoku Finance UK plc [2002] 1 WLR 671 |
Insolvency Rule 4.218 is a complete statement of liquidation expenses and their priority. |
Confirmed the scope of liquidation expenses and the limits on costs that may be treated as such. |
| Re Townreach Ltd [1995] Ch 28 |
Section 651's language allows conditions on revival including costs being treated as liquidation expenses. |
Supported the Court's discretion to include costs as expenses of liquidation in revival orders. |
| Re Gosscott Groundworks Limited (1988) 4 BCC 372 |
Costs of administration petition can be treated as costs in winding up. |
Supported the Court's power to treat certain costs as liquidation expenses even if not listed in Insolvency Rules. |
| Re W F Fearman Ltd (1988) 4 BCC 141 |
Costs of presenting administration petition may be allowed; detailed investigations costs generally borne by incurring party. |
Supported limiting recoverable costs to necessary expenses, excluding preparatory investigations. |
| Re MT Realisations Ltd [2004] 1 WLR 1678 |
Costs of successful litigants against a company have a superior right to payment over liquidation expenses. |
Confirmed that such costs rank above general liquidation expenses. |
Court's Reasoning and Analysis
The Court found that section 651 of the Companies Act 1985 confers a broad discretionary power to declare a company's dissolution void and to impose terms including costs orders. The Court accepted that it has jurisdiction to order the restored company to pay the costs of the revival application, following the reasoning in Re Commonwealth Store and consistent with section 51 of the Supreme Court Act 1981.
The Court distinguished the decision in Re Test Holdings, interpreting it as an exercise of discretion on particular facts rather than an absolute prohibition on costs orders against the company. The Court noted that in the present case, the restored company has substantial assets and an active liquidator, justifying a different approach.
Regarding priority, the Court acknowledged Insolvency Rule 4.218 as the general rule for liquidation expenses and the qualification in Rule 4.220(2) preserving the Court's power to order costs payable by the company outside those rules. The Court relied on Re London Metallurgical Co and Re MT Realisations to conclude that costs payable to a successful litigant in proceedings against the company are prima facie payable immediately and may have priority over liquidation expenses.
The Court held that the revival proceedings constitute "proceedings against the company" within the meaning of the Insolvency Rules, as the company is reinstated and represented by the liquidator. Therefore, it is within the Court's power to order the Company to pay the Accountants' costs, and those costs may be treated as expenses of the voluntary winding up.
The Court exercised its discretion to order that the Accountants' costs of the revival application and the costs paid to other parties to secure the order be paid by the Company and treated as expenses of the liquidation. However, the Court declined to order costs for preparatory investigations or costs related to resisting an appeal concerning intervention rights, reasoning these were not proper liquidation expenses and should be borne by the Accountants.
The Court justified the decision by noting the benefit to the general body of creditors from the revival and asset recovery, and that the creditors should not receive distribution until the necessary costs of reconstituting the estate are reimbursed. The Court rejected the liquidator's arguments that the Accountants' motives or the timing of investigations precluded such an order, emphasizing the distinction between necessary costs of revival and preparatory or personal costs.
Holding and Implications
The Court's final decision was to ORDER that:
- The Accountants' costs of the revival application and the costs paid to the Treasury Solicitor be paid by the Company and treated as expenses of the voluntary winding up.
- The costs of the misfeasance proceedings paid by the Accountants on behalf of the liquidator be treated as expenses of the voluntary winding up (summarily assessed at £2,000).
- The costs related to preparatory investigations and resisting the appeal against intervention refusal not be paid by the Company.
The Court granted permission to appeal.
Implications: This decision confirms that under section 651, the Court has jurisdiction to order costs of revival applications to be paid by the restored company and to treat such costs as liquidation expenses, thus granting them priority. However, the exercise of this jurisdiction is discretionary and does not extend to preparatory or personal costs unrelated to the revival itself. The ruling clarifies the balance between protecting creditors' interests and imposing costs on applicants seeking restoration.