Factual and Procedural Background
This judgment concerns an application by a group of companies (the Applicants) for payment of just over £60,000 held in the Insolvency Services Account of a company in liquidation ("the Company"). The sum sought would partially satisfy costs awarded to the Applicants arising from litigation initiated by the liquidators of the Company. The respondents include the current and former liquidators and a law firm (Withers) instructed by the liquidators; Withers is the only active respondent in this application.
The Applicants are pursuing two separate applications: one for payment of the £60,000 and another seeking recovery of sums they allege were improperly dissipated by the liquidators but should have been used to satisfy costs orders. The costs orders arose from two sets of proceedings brought by the liquidators against the Applicants alleging breaches of the Companies Act 1985. The first proceedings were struck out with costs awarded against the Company, upheld on appeal. The second proceedings were discontinued with costs again ordered against the Company on an indemnity basis. Approximately £250,000 remains outstanding under these orders.
The Applicants contend their costs orders should have priority over all other liquidation expenses, including the liquidators' own legal costs and fees. The liquidators do not oppose payment of the £60,000 currently held but object to payment of any sums already disbursed. Withers, however, claims the £60,000 is held on trust for it and opposes the payment to the Applicants.
The liquidators' litigation was partly funded by the Inland Revenue under a guarantee arrangement, which Withers argues created a purpose trust restricting use of those funds solely to payment of the liquidators' legal costs. The Applicants sought permission to pursue the Inland Revenue for recovery of costs but have not yet initiated such proceedings.
Legal Issues Presented
- Whether the Applicants are entitled to payment of their costs orders out of the £60,000 held by the liquidators, with priority over other liquidation expenses including legal fees incurred by the liquidators.
- Whether the £60,000 held in the Insolvency Services Account is subject to a trust in favour of Withers, either pursuant to an order made during administration or as a purpose trust arising from the Inland Revenue funding arrangement.
- Whether the court has discretion under sections 112 and 156 of the Insolvency Act 1986 to alter the priority of payments from the Company's assets in favour of Withers.
- Whether the application should be adjourned pending further evidence and related proceedings against the liquidators and the Inland Revenue.
Arguments of the Parties
Applicants' Arguments
- The Applicants assert entitlement to priority payment of their costs orders out of the Company's assets, including the £60,000 held.
- They contend that the trust claimed by Withers is unproven and irrelevant to the £60,000, which was never part of any such trust.
- Even if a purpose trust existed, the Inland Revenue, not Withers, would be the proper beneficiary entitled to enforce it.
- Delaying the application would not improve Withers' position and there is no basis for adjournment.
Respondent Withers' Arguments
- Withers contends it is unfair to decide this application separately from related claims against the liquidators and potential proceedings against the Inland Revenue, seeking an adjournment.
- They argue that the £60,000 is held on trust under two bases: (a) an order by Ferris J during the Company's administration creating a trust fund for preferential creditors (including the Inland Revenue), and (b) a purpose trust created by the Inland Revenue funding arrangement restricting use of those funds solely to payment of legal fees incurred by the liquidators.
- Withers asserts a discretionary power exists under sections 112 and 156 of the Insolvency Act 1986 to alter payment priorities in their favour.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| In Re London Metallurgical Company [1895] 1 Ch 758 |
Established that costs awarded against a company in liquidation have priority over general liquidation expenses. |
The court reaffirmed this principle, holding that costs orders take precedence over other liquidation expenses. |
| Barclays Bank v Quistclose Investments [1970] AC 567 |
Recognition of purpose trusts, where funds are held for a specific purpose. |
Referenced in relation to the Inland Revenue's funding arrangement claimed to create a purpose trust. |
| In Re M C Bacon Ltd [1991] Ch 127 |
Clarified that costs awarded by court orders are not expenses of liquidation under statutory rules and have priority. |
Supported the view that statutory powers under Insolvency Act do not override court costs orders. |
| Re Toshoku Finance UK plc [2002] 3 All ER 961 |
Confirmed that court-ordered costs take precedence and rules listing liquidation expenses do not affect this. |
Used to reject argument that court has broad discretion to reorder payment priorities beyond listed liquidation expenses. |
| Re Floor Fourteen Ltd, Lewis v IRC [2001] 3 All ER 499 |
Confirmed that liquidation expenses and their priorities are governed by Insolvency Rules. |
Reinforced that costs payable by court order are distinct and not subject to statutory reordering. |
| Re Mark One (Oxford Street) plc [2000] 1 BCLC 462 |
Discussed the protection of assets of preferential creditors under administration orders. |
Referenced by Withers to support trust claim based on Ferris J’s order; court rejected application here. |
| In re UCT Ltd [2001] 1 WLR 436 |
Confirmed that orders under section 18 of the Insolvency Act 1986 apply only to administrators, not liquidators. |
Used to reject Withers’ argument that Ferris J’s order created a trust binding on liquidators. |
Court's Reasoning and Analysis
The court began by addressing Withers' request for adjournment, concluding that without understanding the substantive issues, such adjournment was unwarranted. The court then considered the statutory powers under ss 112 and 156 of the Insolvency Act 1986, finding they do not permit altering the established priority that court-ordered costs against a company in liquidation take precedence over general liquidation expenses. This was supported by the Insolvency Rules and authorities including Re M C Bacon Ltd and Re Toshoku Finance UK plc.
The court rejected Withers' argument that s 156 and s 112 could be used to reorder priorities beyond the expenses listed in the Insolvency Rules. It emphasized that costs payable by court order are distinct and enjoy primacy, a principle preserved by the rules and case law.
Regarding the alleged trust created by the Ferris J order during administration, the court held that such an order applies only to administrators and cannot impose obligations on liquidators or create a trust fund binding on them. The VAT refund received post-administration was held by the liquidators as Company assets, not as trust property.
On the primary trust argument based on the Inland Revenue's funding arrangement, the court found no evidence that the £60,000 in issue was ever held in trust. The funds from the Inland Revenue were fully spent before the VAT refund was received. The refund, from which the £60,000 derives, was not subject to any trust restrictions. The Inland Revenue itself did not claim the refund was held on trust and had reversed its earlier position on reimbursement.
Consequently, the court concluded that the £60,000 remains part of the Company's assets subject to normal priorities and must be paid to the Applicants in accordance with the established rule that costs orders take precedence. The arguments advanced by Withers did not justify adjournment or alteration of priorities.
Holding and Implications
The court granted the Applicants' application and ordered payment of the £60,000 held in the Insolvency Services Account to the Applicants.
Holding: The £60,000 held by the liquidators is not subject to any trust in favour of Withers and must be paid to the Applicants in priority to other liquidation expenses, including legal fees incurred by the liquidators.
Implications: This decision affirms the longstanding principle that costs awarded by court order against a company in liquidation have priority over general liquidation expenses. It clarifies that statutory powers under the Insolvency Act 1986 do not permit the court to reorder this priority beyond the scope of listed liquidation expenses. The judgment also confirms that administration orders cannot impose trust obligations on liquidators appointed thereafter. No new precedent was established beyond application of existing principles to the facts.