Insolvency—administration—personal costs liability of administrator—Insolvency Rules 2016, Rules 14.8 and 14.9

What are the practical implications of this case?

Under IR 2016, SI 2016/1024, r 14.8, a creditor has the right to appeal to the court against the administrator’s rejection of its proof of debt. The hearing is a hearing de novo, in which the court is entitled to consider further evidence and reach its own view: see Buckley J in Kentwood Constructions Ltd, Re [1960] 2 All ER 655n.

It is well established that in deciding whether to admit or reject a creditor’s proof, the administrator is acting in a quasi-judicial capacity: see Etherton J in Menastar Finance Ltd (in liq), Re, Menastar Ltd v Simon [2002] EWHC 2610 (Ch), [2002] All ER (D) 26 (Nov). For this reason, IR 2016, SI 2016/1024, r 14.9(2) provides that an office holder other than the Official Receiver is not personally liable for the costs incurred by any person in respect of an application under IR 2016, SI 2016/1024, r 14.8 unless the court orders otherwise.

Until now, there has been little reasoned authority as to the circumstances in which it is appropriate for the court to depart from the default rule in IR 2016, SI 2016/1024, r 14.9 and make a personal costs order against the administrator where an appeal against their rejection of the proof has been successful. There are a number of cases in which office holders have been ordered to pay the costs of the successful party and been deprived of their right of recoupment from the estate, but these are mainly cases in which the office holder initiated the unsuccessful application and therefore stepped outside a neutral, quasi-judicial role. See, for example, Coyne v DRC Distribution Ltd [2008] EWCA Civ 488, [2008], Re Capitol Films Ltd [2010] EWHC 3223 (Ch), and the bankruptcy case of Savage v Howard [2006] EWHC 3693 (Ch).

Chief ICC Judge Briggs’ judgment is therefore useful for its consideration of the underlying principles which apply where the administrator is merely the respondent to an appeal. The judgment makes clear that administrators who act neutrally will not be visited with personal costs liability absent ‘special circumstances’ or ‘good reason’. The administrator is under a duty to examine the proof of debt and requires satisfactory evidence that the debt is genuine. Provided that the administrator acts neutrally in responding to the appeal, the mere fact that the court has come to a different view on the proof of debt is not sufficient to justify a personal costs order.

What was the background?

The company in administration was a wholesale supplier of halal meat. It purchased supplies and obtained management services from Nimat. Nimat submitted two proofs of debt in the administration. Both were rejected, and one was subsequently withdrawn. However, Nimat’s appeal in relation to the other proof was allowed by the court in full. If the administrator was allowed to recoup his costs of the appeal out of the assets of the company, there would be little or nothing left for distribution to the creditors, even though their appeal had been successful.

Nimat therefore sought an order that the administrator should pay Nimat’s costs personally and should not be entitled to recoup his own costs out of the assets of the company. They complained that the administrator had not adopted a neutral approach, but had acted unreasonably and incompetently.

What did the court decide?

The only previous reasoned decision on IR 2016, SI 2016/1024, r 14.9 is Re Burnden Group Ltd; Fielding and another v Hunt (acting as Liquidator of the Burnden Group Ltd) [2017] EWHC 406 (Ch), where HHJ Judge Stephen Davies said that ‘the court should not direct otherwise save in a “special case” where there was a “good reason” to do so.’ That does not afford much guidance as to what might constitute a ‘special case’ or ‘good reason’ (another case, where the court made a personal costs order, but without reference to authority, is Promontoria (Chestnut) Limited v Craig and Another [2017] EWHC 2405 (Ch)).

In the present case, Chief ICC Judge referred to the reasoning in Fielding v Hunt, and added:

‘An order should not ordinarily be made against an office holder personally. Something more is required. Something more relates to the conduct of the office holder. The degree of conduct deserving of a personal costs order will depend on the circumstances of each case. A mere mistake is unlikely to be sufficient. Acting in a neutral manner, on an appeal from a rejection of proof, is unlikely to be sufficient. Acting for a personal advantage in resisting an appeal is very likely to lead to a personal costs order. Such conduct would present a “special case” and a “good reason”, and may be characterised as “irrational conduct”, or “unreasonable conduct”.’

The judge also said that the court will take account of the duties of the office holder to investigate the proof:

‘It has long been the law that an office holder is under a duty to examine every proof and consider the validity of the debt which is sought to be proved: Re Home and Colonial Insurance Co [1930] 1 Ch 102. He should require satisfactory evidence that the debt on which the proof is founded is a real debt: Re Fraser, ex parte Central Bank of London [1892] 2 QB 633, CA. And the obligation is not negated even where the proof is based on a judgment: Re Van Laun, ex p Chatterton [1907] 2 KB 23, CA.’

On the facts, Nimat had not provided the administrator with satisfactory evidence of the debts, and it was not irrational or perverse for him to reject the proofs on the basis of the material available to him at that time. He was entitled to subject the evidence to critical scrutiny. At the appeal hearing, new evidence had come to light which caused the court to reach a different view, but that was not a reason for ordering costs against the administrator. He had acted ‘appropriately and with integrity’ and had adopted a neutral position.

The court therefore declined to make the personal costs order sought, and ordered that the administrator should be entitled to recoup his costs as an expense of the administration (the court did, however, order that Nimat should recover most of their own costs from the company’s estate).

Case details

• Court: Chancery Division, Insolvency and Companies Court

• Judge: Chief Insolvency and Companies Court Judge Briggs

• Date of judgment: 03 April 2020