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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.
Cooke v Dunbar Assets Plc  EWHC 1888 (Ch),  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.
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  EWHC 579 (Ch),  All ER (D) 49 (Apr)). The parties could not agree how the court ought to deal with the costs of that unsuccessful appeal.
It was agreed that the costs of the appeal had to be dealt with as falling within three possible categories:
The issues, therefore, were:
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  UKSC 52,  All ER (D) 283 (Jul), three propositions were made in support of this submission:
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  EWHC 2102 (Ch),  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 –)—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’.)
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:
Neither was the judge persuaded by Mr Cooke’s public policy arguments:
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.
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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Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.
Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.
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