Security for costs in winding-up appeals—Re The Sherlock Holmes International Society Ltd

Tony Beswetherick, counsel at 20 Essex Street Chambers, discusses the decision in Re The Sherlock Holmes International Society Ltd, in which he acted for the respondent, and says the decision has put an end to the assumption that when a company appeals against a winding-up order the petitioner should be given security for costs.

Original news

Re The Sherlock Holmes International Society Ltd; Subnom Aidiniantz v The Sherlock Holmes International Society Ltd [2015] EWHC 2882 (Ch), [2015] All ER (D) 130 (Oct)

The petitioner had successfully applied to wind up a company previously involved in running the Sherlock Holmes Museum. The company was granted permission to appeal. The Companies Court dismissed the petitioner’s application, under rule 52.9 of the the Civil Procedure Rules 1998 (CPR), SI 1998/3132, for an order imposing conditions.

What was the background to the application?

This was an interim application made in the context of an appeal against a winding-up order. The appellant company was wound up upon a creditor’s petition. The company appealed against the winding-up order on the basis that the petition debt had been disputed or else was subject to a larger cross-claim and so the winding-up order should not have been made. Permission to appeal was granted to the company but prior to the hearing of the appeal the petitioner applied to the court for orders:

  • requiring the company (or those responsible for instigating the appeal) to provide security for the petitioner’s costs of the appeal pursuant to CPR 25.15, and
  • under CPR 52.9 varying the terms on which permission to appeal had been granted so as to make the appeal conditional upon the company (or those responsible for instigating the appeal) paying into court the petitioner’s costs of the petition and other sums which he was owed

What were the legal issues that the judge had to decide in this application?

At issue was:

  • the proper approach to an application by the petitioning creditor for security to be given in relation to its costs of opposing a company’s appeal against a winding-up order (and whether or not there was a general rule that security for costs should be ordered against the company or those causing the appeal to be initiated), and
  • whether the court should also impose other conditions upon the pursuit of the appeal against a winding-up order (such as requiring payment of or securing for the petitioner’s costs of the petition) and the appropriate approach to such an application

What were the main legal arguments put forward?

In relation to the application for security for the costs of the appeal, the petitioner argued that since the 19th century it has been a general rule that a company which appeals from a winding-up order will be ordered to give security for costs. Reliance was placed for that proposition upon In Re Diamond Fuel Company (1879) 13 Ch D 400 and In Re Photographic Artists’ Co-operative Supply Association (1883) 23 Ch D 370.

The company argued that there is no such general rule and that the court should approach the application for security in the same way as any other application for security for costs, taking into account all the circumstances of the case and making such order as it thought just, without any presumption that security should be ordered. It was argued that the order sought would be likely to stifle the appeal and that, in any event, the court should decline to order security for costs as the company’s want of means had been brought about by the conduct of the petitioner.

In relation to the application for orders requiring the company to secure for the petitioner’s costs of the petition and for other sums owed to it, it was common ground that the appeal court may only impose conditions upon the bringing of an appeal where ‘there is a compelling reason for doing so’ (CPR 52.9(2)). The petitioner argued, by analogy with cases in which conditions had been imposed (such as Calltel Telecom Ltd v HM Revenue & Customs [2008] EWHC 2107 (Ch), [2008] All ER (D) 89 (Jun)), that there were compelling reasons. In particular it was said that:

  • it would be impossible for the petitioner to enforce any order for the petition costs because the company had no assets
  • the company had access (through those funding the appeal) to resources to pay the petition costs
  • the company had breached the court’s order by failing to pay costs that were ordered to be paid
  • there had been insufficient disclosure of the company’s financial affairs and backers, and
  • there was no risk of stifling the appeal unless those backing the company chose not to pay the sums sought

The company argued that the cases relied upon by the petitioner were in a different category altogether. There was no breach of any court order because the winding-up order provided that the petition costs should be paid as an expense of the liquidation (to be assessed if not agreed). Accordingly, only the official receiver/liquidator could agree the costs or have them assessed, and even then payment could only be made by a liquidator if and to the extent that, after realising the assets of the company and paying priority expenses, there were funds available. The company was not in breach of any order as a result.

Insofar as the company was subject to other claims by the petitioner, those would rank as unsecured claims in the liquidation and payment could not be made by the company while in liquidation and so the making of the winding-up order prevented the company from making the very payments that the petition was seeking.

It was also argued by the company that as it was common ground that the company had no funds, the inevitable result if the proposed conditions were imposed was that they would have to be met by third parties. Such an order would short circuit the enforcement process against the company (and indeed the insolvency regime) and would mean that the petitioner obtained far more than he would obtain if the appeal were to be withdrawn. It was submitted, in reliance upon Societe Generale SA v Saad Trading, Contracting and Financial Services Company [2012] EWCA Civ 695, [2012] All ER (D) 04 (Jun), that there needed to be exceptional circumstances (in addition to the requirement for compelling reasons) if the court is to make an order which is contrary to the principle of respecting the existence of different legal personalities.

What did the judge decide, and why?

The judge dismissed the petitioner’s applications.

In dealing with the petitioner’s application for security for his costs of the appeal against the winding-up order, the judge rejected the argument that there is a general rule that a company should provide security for a petitioner’s costs of the appeal. The judge held that any practice that had been developed or any suggestions of such a general rule in the Victorian cases had long been overtaken by the statutory provisions and rules of court relating to security for costs which make it clear that the court has an unfettered discretion.

He therefore proceeded to approach the application for security for costs in the same way as the court would ordinarily approach such an application considering the relevant factors. He held that although the company’s impecuniosity was a relevant and important factor to be weighed in the balance, it was not necessarily determinative of the application. In the present case although the judge rejected the argument that the evidence established that the imposition of an order for security would stifle the appeal, he accepted that on the available evidence there was a strong argument that the company’s impecuniosity had been brought about by the petitioner and that was a weighty circumstance (along with the particular circumstances of the case) which meant it would not be just to order security for costs.

In relation to the application for conditions, the judge accepted the argument that the decision in Saad applied, that there was no breach of any order and that the imposition of the conditions sought by the petitioner would mean that he would obtain more than he would obtain whatever the outcome of the appeal.

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

The judge’s decision has put to an end the assumption that there is a general rule that when a company appeals against a winding-up order the petitioner should be given security for costs.

The judgment also helps to draw an important distinction in the way that an appeal court should approach applications for the imposition of conditions in the context of an insolvent entity.

Junior Counsel at 20 Essex Street, Tony Beswetherick regularly acts for receivers as well as liquidators, administrators, and trustees in bankruptcy in contentious and non-contentious insolvency matters. He has a busy commercial law practice and recent cases include a claim in the Commercial Court for rectification of two bank guarantees (guaranteeing £40m each) and a claim for fraudulent trading brought in the Chancery Division arising out of alleged VAT ‘carousel’ fraud.

Interviewed by Barbara Bergin.

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

Further Reading

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When can you wind-up a company when the debt is disputed?

Appeals in insolvency proceedings

Reviews of orders from the insolvency court: what is the process and how can you appeal or review a decision and which court do you apply to?

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First published on LexisPSL Restructuring and Insolvency

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