Lewis v Commissioner of Inland Revenue & Ors

Sections 115 and 175 of the Insolvency Act 1986 regulate priority. They do not give a liquidator an automatic right to recover litigation costs from company assets. The relevant rules identify expenses of the liquidation and their order of priority, subject to the court’s power to alter priority.

Costs of proceedings under sections 214 or 239 do not fall within rule 4.218(1)(a), whether the proceedings succeed or fail, because the relevant cause of action and recoveries are not company property existing at the commencement of the liquidation. Nor are such costs “necessary disbursements” under rule 4.218(1)(m) merely because the proceedings were properly brought. Any discretionary indemnity requires careful judicial scrutiny and adequate evidence.

Floor Fourteen Ltd was in creditors’ voluntary liquidation. Its liquidator proposed proceedings against former directors under sections 214 and 239 of the Insolvency Act 1986. The preferential creditors opposed using the company’s realised funds to meet the litigation costs, including any adverse costs.

The Deputy Judge held that the proposed costs would be expenses of the winding up, payable in priority to the preferential creditors. The preferential creditors appealed. The central issues were whether sections 115 or 175, or rule 4.218(1), created a right of recoupment and, alternatively, whether the court should exercise a discretion to permit payment from the assets.

1. Appeal allowed. The order of the Deputy Judge was set aside. There was no automatic right to recoup the proposed litigation costs from the company’s assets.
2. Sections 115 and 175 of the Insolvency Act 1986 concern priority and do not independently make all expenses properly incurred payable from company assets. Rule 4.218 identifies expenses treated as expenses of the liquidation and their priority. The reasoning in Mond v Hammond Suddards [2000] Ch. 40, approving Re M C Bacon Ltd. [1991] Ch. 127, was binding.
3. The Deputy Judge was wrong to treat recoveries under sections 214 and 239 as company assets for rule 4.218(1)(a). Following Re Oasis Merchandising Services Ltd. [1997] 1 BCLC 689, the causes of action and their fruits arose only after liquidation and were held by the liquidator on the statutory trust for distribution.
4. Rule 4.218(1)(m) did not apply. “Necessary” disbursements could not simply mean expenditure which was “proper”. The costs of unsuccessful litigation were outside that paragraph, and the same reasoning applied to the proposed litigation.
5. The court was doubtful about the source of any discretionary power to permit recoupment. Assuming such a discretion existed, it would be exercised cautiously, particularly where preferential creditors opposed the proposed use of funds. The evidence did not provide the detail ordinarily supplied on a Re Beddoe [1893] 1 Ch 547 application or in Wallersteiner v Moir (No. 2) [1975] Q.B. 373. The liquidator remained at liberty to apply to the Companies Court on fuller evidence.

• Court of Appeal (Civil Division): appeal allowed and the Deputy Judge’s order set aside.
• High Court, Chancery Division, Companies Court: held that the proposed litigation costs would be expenses of the voluntary winding up payable in priority to preferential creditors: [1999] 2 BCLC 666.