Assessing who pays the costs of a wrongful trading claim—Brooks v Armstrong; Re Robin Hood Centre plc (in liquidation)

What order for costs will the court make where an applicant is only partially successful in its claim? Chloe Poskitt, a solicitor, and Dominic Offord, a partner and head of commercial litigation and insolvency, at Browne Jacobson LLP, discuss the implications of the costs decision in Re Robin Hood Centre plc (in liquidation).

Original news

Brooks and another v Armstrong and another; Re Robin Hood Centre plc (in liquidation) (in the matter of costs) [2015] EWHC 2289 (Ch)_2, [2015] All ER (D) 69 (Oct)

Following the judgment in the case of Brooks and another v Armstrong and another [2015] EWHC 2289 (Ch), [2015] All ER (D) 45 (Aug) (see blog post: Establishing the requirements of a wrongful trading claim) the Companies Court considered the issue of costs. The case had concerned allegations of wrongful trading. The position was complicated by the fact that, while the applicants had succeeded, their success was very substantially less than the claim made. They had not succeeded on a number of important issues, and the case they had won on would have looked very different to the case brought and would have incurred considerably less costs. The Registrar decided to make no order as to costs.

What was the background to this costs judgment?

The applicants issued an application seeking the sum of £701,000 from the respondent directors of the company for misfeasance and wrongful trading.

In their original application, the applicants had alleged that there were a number of events which the meant that the directors knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation. The events on which their conclusions were based were:

  • the year-end accounts for 2005 and 2006 (31 January 2005 and 31 January 2006)
  • the receipt of professional advice in October 2006 about a large VAT liability (in respect of which the directors had sought a review) confirming that the company’s chances of successful reconsideration/appeal were ‘slim’ (9 October 2006)
  • the year-end accounts for 2007, which showed a loss and did not include the VAT liability or an increase in rent expected from a pending rent review (31 January 2007)
  • a letter from HMRC stating that the VAT liability had been confirmed on review (3 May 2007)

The Registrar found that from 31 January 2007 the knowledge condition was satisfied as the directors acting reasonably could not have rationally held that the company would be able to afford to pay the VAT liability and therefore avoid insolvent liquidation. However, the Registrar held that the directors’ minimising defence (that they took all steps to minimise the losses to creditors) succeeded until 3 May 2007.

By that date, circumstances had changed following receipt of the letter from HMRC confirming the VAT liability. Further, it was (or ought to have been) foreseeable that the company would be unable to make the next rent payment. From that date, the directors had failed to take every step to minimise the losses to the creditors as a whole.

The directors were ordered to pay compensation calculated by a deficiency comparison based on the difference between the date of a hypothetical liquidation on 3 May 2007 and the actual date of liquidation on 6 February 2009 which was calculated at £35,000.

The matter having been determined, the Registrar then had to decide the position on costs. The applicants, whose solicitors were acting on a conditional fee agreement (CFA) with a 100% uplift, are believed to have submitted costs in the region of £1.1m with an after the event (ATE) premium of £106k.

What did the Registrar decide, and why?

When assessing costs, the Registrar considered the general rule that the losing party pays the successful party’s costs. However, the Registrar distinguished this case by stating that while the applicants had succeeded, the level awarded was substantially less than the claim made. Further, the applicants had not succeeded on a number of important issues.

Therefore, it was necessary to separate the work required for the elements of the application which succeeded and those that did not. The Registrar did not look at each and every issue but took a proportionate approach:

  • while the applicants had failed in relation to the three specific dates prior to 31 January 2007, the financial position of the company had to be shown to set the scene for the change in financial circumstances which gave rise to wrongful trading—however, their analysis of the pre-31 January 2007 position was incorrect
  • essentially, the applicants had succeeded from 31 January 2007 but the minimising loss defence succeeded until 3 May 2007
  • although the applicants succeeded from 3 May 2007, the amount awarded was substantially less than the sum claimed and their analysis of loss was largely rejected
  • while the applicants did not make any offers to settle, the directors made no admissions and defended the application
  • the directors had succeeded in their main defence that the applicants had misconstrued the accounts and the general financial position of the company when alleging the base point from which the wrongful trading claim started
  • however, the applicants’ case concerning the VAT decision and advice was successful

Therefore, taking those matters into account, the Registrar said that it was arguable that about 60% (or possibly more) of litigation time was engaged in the issues on which the directors had succeeded upon. Accordingly, it would have been wrong to award the applicants 30–40% of their costs as that failed to take into account the amount awarded to them and that the directors had incurred costs on matters which they were largely successful. The Registrar commented that the directors had a stronger argument for costs but to do so would overlook that:

  • the applicants had succeeded, and
  • the directors should have recognised that there was a case to face

However, the Registrar stated that:

‘[The directors’] decision not to “back down” had to be viewed in the context of a very substantial claim which to a substantial extent has been shown to have been incorrect. A wholly different approach might have been adopted if the claim had originally been drawn to its proper scale with regard to the bases for the amount claimed, the quantum and the costs involved. It is to be borne in mind when considering conduct that the Respondents were facing a claim with costs on a conditional fee basis which would be potentially ruinous.’

[...]

‘If an Applicant presents a largely misconceived claim with an unattainable quantum, it can be unfair to criticise the Respondent for failing to settle and for adopting an intransigent approach.’

Therefore, taking all matters into account, the Registrar made no order as to costs.

To what extent is this judgment helpful in clarifying the law in this area?

This judgment highlights the court’s wide ranging discretion with regards to costs and that it will, in appropriate circumstances, depart from the general rule that costs follow the event.

What practical lessons can those advising take away from this costs judgment?

This judgment serves as a useful reminder that parties need to assess the merits of their claim and ensure that the quantum of their claim can be substantiated, otherwise they may be unable to recover their costs even if partially successful in their claim. Had there been any offer of settlement (on either side) in this case, perhaps a different approach would have been adopted.

This case also has to be considered in conjunction with the recent decision in the case of Stevensdrake Ltd v Hunt [2015] EWHC 1527 (Ch), [2015] All ER (D) 229 (May) in which the High Court held that the liquidator was personally liable for his solicitors and barristers’ fees under a CFA. One has to question if the applicants’ CFA in this case contained an express term that their liability to pay their solicitor’s costs, success fee and disbursements (including the ATE insurance premium) only arose if a recovery was made from the directors. If not, it is arguable that under Stevensdrake, they could be personally liable.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

If you are a LexisPSL subscriber, click the link below for further information:

A summary procedure under section 212 of the Insolvency Act 1986 and the process for bringing a misfeasance claim

Wrongful trading claims under sections 214 and 246ZB of the Insolvency Act 1986 and the process for bringing the claim

Ways in which an IP can fund litigation/investigations where there are no assets in the estate

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First published on LexisPSL Restructuring and Insolvency

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