Howley v Lohan (Approved)

Factual and Procedural Background

This judgment concerns a bankruptcy petition initiated by Plaintiff, the Collector General of the Revenue Commissioners, against Defendant, a solicitor residing in The City. The Plaintiff obtained judgments against Defendant for unpaid tax liabilities and issued a bankruptcy summons on 21 October 2019, followed by a petition on 16 April 2020 after Defendant failed to pay the sums demanded within fourteen days. The petition hearing was initially scheduled for May 2020 but was delayed due to the Covid-19 pandemic. The Defendant challenged the petition on grounds including alleged defects in the petition papers and asserted that the audit leading to the judgments was motivated by improper purposes. The parties engaged in multiple affidavits, motions, and interlocutory applications, including discovery requests and cross-examinations. Over time, Defendant made payments towards the debt, eventually discharging the petition debt in full by mid-2022. The Plaintiff then sought an order for costs incurred in presenting and prosecuting the petition, which Defendant opposed. The court reserved judgment to address the issue of entitlement to costs where a petition is withdrawn due to full payment of the debt prior to hearing.

Legal Issues Presented

1. Whether a petitioner who withdraws a bankruptcy petition due to the debtor having discharged the petition debt prior to the hearing is entitled to recover the costs of presenting and prosecuting the petition.
2. How the court's discretion to award costs under the Bankruptcy Act 1988 and related legal principles applies in circumstances where the petition does not proceed to adjudication because the debt is paid.
3. Whether allegations of defects in the petition or mala fides in the underlying audit affect the entitlement to costs.
4. The applicability of principles from company winding-up proceedings regarding costs to bankruptcy petitions.

Arguments of the Parties

Appellant's Arguments

• The Bankruptcy Act 1988, while mandating costs orders after adjudication, does not expressly address costs where the petition is withdrawn due to payment; however, the court retains inherent jurisdiction to award costs to do justice.
• By analogy with company winding-up cases, specifically Re MCR Personnel Limited, a petitioner who obtains payment of the debt prior to the petition hearing is entitled to costs as the discharge of the debt is the "event" which costs follow.
• The absence of a statutory mechanism for substitution of petitioning creditors in bankruptcy (unlike company winding-up) strengthens the petitioner's position to recover costs.
• The petition falls within the definition of "civil proceedings" under the Legal Services Regulation Act 2015, granting the court broad discretion to award costs.
• The debtor's payment of the petition debt over two years was a successful outcome in the petitioner's favour, justifying an order for costs despite no adjudication order being made.
• The petitioner rejected allegations of mala fides and defects in the petition, emphasizing that judgments underpinning the petition were not appealed and remain valid.

Appellee's Arguments

• The petition was invalid and defective, and thus the petitioner should not recover costs.
• There is no legislative provision in the Bankruptcy Act 1988 allowing recovery of costs where the debt is paid prior to adjudication, reflecting a legislative intent to omit such rights.
• The petitioner’s conduct, including refusal to engage in alternative dispute resolution and alleged bad faith, disentitles it from costs.
• The only relevant "event" in the proceedings is the granting of an adjudication order, which did not occur.
• The use of bankruptcy petitions as debt collection devices is discouraged; awarding costs for payment of the debt prior to adjudication would undermine this policy.
• The petitioner had already obtained costs in prior judgment proceedings, including penalties and interest arising from the audit challenged by the debtor.

Table of Precedents Cited

Court's Reasoning and Analysis

The court recognized the complexity of awarding costs where a bankruptcy petition is withdrawn due to payment of the debt before hearing. It noted that bankruptcy petitions are inter partes proceedings until adjudication, involving contest between petitioner and debtor. The court rejected the debtor’s allegations of defects in the petition and mala fides as collateral attacks on valid, unappealed judgments underpinning the petition.

Drawing on the analogy of company winding-up petitions from Re MCR Personnel Limited, the court identified the discharge of the petition debt as the "event" which costs must follow. It reasoned that denying costs to the petitioner in such circumstances would unfairly penalize a creditor who has effectively "won the day" by recovering the debt, while allowing a debtor to avoid costs by paying over time rather than contesting the petition.

The court emphasized that the Bankruptcy Act 1988 does not expressly provide for costs where a petition is withdrawn, but inherent jurisdiction and general civil procedure principles under the Legal Services Regulation Act 2015 and the Rules of the Superior Courts allow the court to exercise discretion to award costs to do justice.

The court also acknowledged policy concerns against using petitions as debt collection devices but found that the petitioner had taken appropriate procedural steps and that the debtor’s full payment of the debt was a sufficient basis to grant costs. It rejected the debtor’s contention that the absence of an adjudication order precluded costs, holding that the payment of the debt was a satisfactory resolution.

The court noted that the petitioner was entitled to recover costs of ancillary applications related to the petition, including motions for discovery and to set aside cross-examination notices, which were struck out by consent.

Holding and Implications

The court’s final decision was to strike out the bankruptcy petition on the basis that the petition debt had been fully discharged by the debtor prior to hearing.

The court ordered that the petitioner is entitled to recover his costs of presenting and prosecuting the petition, as well as costs related to ancillary motions brought by both parties. The costs are to be adjudicated if not agreed.

This decision affirms that payment of the petition debt prior to hearing constitutes an "event" triggering entitlement to costs in bankruptcy petitions, aligning bankruptcy practice with analogous principles in company winding-up proceedings. The ruling clarifies the court’s discretion to award costs in such circumstances but does not establish new precedent beyond the application of existing principles. It emphasizes the importance of balancing creditor’s rights to recover costs with the policy against misuse of bankruptcy petitions as debt collection tools.