Who bears the cost of an unsuccessful appeal of a bankruptcy order? (Cooke v Dunbar Assets plc)

How will the costs judgment in Cooke v Dunbar Assets Plc shape the laws around bankruptcy orders? Faith Julian of 9 Stone Buildings explores the judgment, which is the first case to consider the issue of costs on an appeal against a bankruptcy order, and looks at the impact it may have on future disputes.

Original news

Cooke v Dunbar Assets Plc [2016] EWHC 1888 (Ch), [2016] All ER (D) 07 (Aug)

The Chancery Division ruled that it was permissible to order that the claimant debtor (Mr Cooke), who had unsuccessfully appealed against a bankruptcy order, had to pay the defendant petitioning creditor's (Dunbar) costs. Rule 12.2 of the Insolvency Rules 1986, SI 1986/1925 (IR 1986) did not provide that recovery in accordance with that rule should be the only means by which costs should be recovered. Dunbar had invited the court to make an order within its power under IR 1986, r 7.51A and Part 44 of the Civil Procedure Rules (CPR) that costs of the appeal should fall on the Mr Cooke. Mr Cooke had made himself subject to that regime by appealing. The costs of the appeal did not constitute an expense of the bankruptcy or a provable debt. Accordingly, Mr Cooke was ordered to pay the costs of his unsuccessful appeal. The court held that, to the extent that the costs were not paid by Mr Cooke, they might be treated as an expense of the bankruptcy.

What was the background to the case?

Mr Cooke was made bankrupt on 18 December 2014 on Dunbar’s petition. He appealed against that decision, and was unsuccessful (see Cooke v Dunbar Assets plc [2016] EWHC 579 (Ch), [2016] All ER (D) 49 (Apr)). The parties could not agree how the court ought to deal with the costs of that unsuccessful appeal.

What were the issues before the court?

It was agreed that the costs of the appeal had to be dealt with as falling within three possible categories:

  • as a cost and expense of the bankruptcy, and thus falling to be dealt with in accordance with the order of priority set out in IR 1986, r 6.224(1) (category 1)
  • as a provable debt in the bankruptcy (category 2), or
  • as a liability outside of the bankruptcy—that is to say, as costs ordered against Mr Cooke personally (category 3)

The issues, therefore, were:

  • under which category (or categories) a costs order could be made, and
  • whether this was a matter of discretion or law

What were the main legal arguments put forward?

Mr Cooke submitted that the costs must be dealt with as category 1, or alternatively as category 2. The costs of the appeal could not be divorced from the underlying proceedings and that, applying the provisions of IR 1986, r 12.2(1) (which provides that all costs ‘incurred in the course of…bankruptcy proceedings are to be regarded as expenses of…the bankruptcy’), the costs of the appeal fell squarely within category 1. Failing this, it was submitted that the costs ought to be treated as a provable debt (ie category 2)—either way they would be payable from the bankruptcy estate, the difference between the two is as to how the costs would rank in order of priority.

Relying on Re Nortel GmbH [2013] UKSC 52, [2013] All ER (D) 283 (Jul), three propositions were made in support of this submission:

  • the costs constituted a contingent liability—the bankruptcy petition preceded the making of the bankruptcy order, and at the point of presentation Dunbar and Mr Cooke had submitted themselves to the statutory regime whereby the relationship between them was governed by the rules of court, those rules make provision for an appeal. Thus Mr Cooke had a contingent liability for the costs of the appeal by the time of the bankruptcy order (relying on Lord Neuberger’s speech in Nortel at paras [88]–[90] and that of Lord Sumption at para [136])
  • the status and ranking of a liability in respect of costs is fixed by IR 1986, r 12.2 (or alternatively section 382 of the Insolvency Act 1986 (IA 1986)), so it is not open to the court to make a personal costs order (relying again on Lord Neuberger’s speech at paras [115]–[117]), and
  • there are strong ‘fresh start’ public policy reasons for treating the costs of the appeal as a cost and expense of the bankruptcy (or as a provable debt in the alternative) (once more relying on Lord Neuberger at para [93])

Finally it was submitted that there would be no prejudice in treating the costs as an expense since, with that status, those costs would rank in priority above the claims of any other unsecured creditors.

Dunbar submitted that the costs ought to be dealt with as category 3 but, to the extent that the costs are not paid by Mr Cooke, in the alternative they could be dealt with as category 1 (as they had been in, for example, Foenander v Allan [2006] EWHC 2102 (Ch), [2006] All ER (D) 352 (Jul)). The costs could not fall within category 2 because the liability was incurred post-bankruptcy (relying on Lord Neuberger in Nortel at paras [88]–[89])—this was distinguishable from Nortel because this case, unlike Nortel, did not concern litigation that pre-existed the bankruptcy proceedings.

The principal submission advanced on behalf of Dunbar was, however, that in light of the express provision of IR 1986, r 7.51(A) (which provides that CPR 44 and 47 apply to insolvency proceedings) the court has an unfettered discretion as to what order should be made for the costs of an appeal, and that these provisions are the only statutory guidance as to the treatment of the costs of appeals from bankruptcy orders. It was thus a matter for the court to decide whether to order costs against the estate or against Mr Cooke personally (relying on Foenander).

In rebuttal to Mr Cooke’s case, it was submitted that IR 1986, r 12.2 does not address the court’s jurisdiction to make costs orders but exists to ensure that office-holders are not left out of pocket. The costs order still remained in the discretion of the court, and to order costs out of the bankruptcy estate would mean that the creditors, rather than the bankrupt, would be the persons who suffered the consequences of the bankrupt’s decision to appeal. The simple point was that costs should follow the event, and not be thrown on the successful party.

(Both counsel also referred to analogous winding up cases, but the judge deemed these to be of limited relevance as, unlike in bankruptcy, there is no ‘life after winding up’.)

What did the court decide, and why?

The judge concluded that the court could order Mr Cooke to pay Dunbar’s costs, with a Foenander order in the alternative.

He held that IR 1986, r 12.2 is designed to ensure that costs incurred in the course of proceedings are to be regarded as costs in the relevant insolvency process, but this does not mean that costs incurred in such proceedings cannot be recovered from another source. The flaw in the argument advanced on behalf of Mr Cooke was that IR 1986, r 12.2 does not contain an exhaustive statement as to how costs are to be treated. It does not provide that recovery in accordance with that rule shall be the only means by which costs may be recovered. As such, there is no inconsistency between the provisions of IR 1986, r 12.2 and the general rule as to costs in CPR 44. The starting point must be that Mr Cooke should pay Dunbar’s costs.

The judge held that Nortel afforded no assistance to Mr Cooke:

  • Nortel decided that where, within a statutory scheme of priority upon the liquidation or administration of a company, a position as to ranking within the scheme is established, it is not open to a court (in the absence of a statutory power) to vary the order of priority. In the instant case, Dunbar did not ask the court to vary the order of priority. Dunbar merely requested that the costs liability fall personally on Mr Cooke rather than on the bankruptcy estate
  • similarly Nortel is not authority for the proposition that costs of this nature can be described as a contingent debt. If that were the case, and these costs were in fact provable, then the costs would need to rank twice both as a priority as an expense, and then again much lower as a non-preferential debt. Such an analysis cannot be reconciled with the structure of the IA 1986
  • finally, Nortel could not assist as to the ‘freed man’ submission. The court is still empowered to order Mr Cooke to pay costs because Mr Cooke elected to initiate his appeal. He made himself subject to a regime (IR 1986 and CPR 44) pursuant to which the court has jurisdiction to order him to pay costs if merited

Neither was the judge persuaded by Mr Cooke’s public policy arguments:

  • no party should be afforded the opportunity to litigate in a bankruptcy without being at risk as to costs. The risks of an adverse costs award acts as a deterrent against advancing meritless cases
  • a person who appeals against the making of a bankruptcy order does so of his own volition, and must actively pursue permission to appeal. It is a distinct process, and does not flow inexorably from being caught up in the initial bankruptcy proceedings
  • where possible, a bankruptcy estate should be protected from the need to fend off unmeritorious disputes that will dissipate the estate to the prejudice of creditors

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

This judgment is tremendously helpful because, somewhat unbelievably, it is the first authority (reported or otherwise) to address the issue of costs on an appeal against a bankruptcy order.

What practical lessons can those advising take away from this case?

This is a salutary reminder that bankrupts do not operate in a no-costs regime—when they pursue litigation they put themselves at risk of the usual costs orders pursuant to CPR 44. This cuts the other way for creditors, too—when faced with a litigious debtor, it is worth remembering that a costs order does not need to rank as a priority and eat into the estate. The bankrupt does not necessarily get a ‘free punt’ at the creditor’s expense, but can be pursued in the usual way.

Faith Julian has a broad commercial chancery practice which encompasses in particular personal and corporate insolvency, real property, landlord and tenant, probate, company, commercial and chancery.

Interviewed by Barbara Bergin.

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

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Disputed bankruptcy petitions

Appeals in insolvency proceedings

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First published on LexisPSL Restructuring and Insolvency

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