Digital Equipment Company Ltd & Ors v Bower & Ors

A costs order made against a company in liquidation for its participation in civil litigation takes priority over the general expenses of the liquidation. The statutory power to reorder liquidation expenses under the Insolvency Act 1986 does not extend to altering that priority. In a voluntary winding up, the equivalent power under section 112 is subject to the same limitation. An order made under section 18 concerning an administration cannot create or bind a trust administered by liquidators appointed later. A purpose trust arising from litigation funding will not affect funds that were not supplied under the funding arrangement and were received as unrestricted company assets.

The claimants sought payment of approximately £60,000 held in the Insolvency Services Account of M.T. Realisations Ltd. The payment would satisfy part of costs awarded to them after proceedings brought by the company’s liquidators had been struck out, with the costs orders upheld or made on appeal. The liquidators did not oppose payment, but their solicitors, Withers, claimed that the fund was held on trust for them.

Withers argued that the fund was protected by an order made during an earlier administration, or alternatively by a purpose trust arising from Inland Revenue funding of the litigation. It also argued that the court could alter the priority of payments under sections 112 and 156 of the Insolvency Act 1986. The central issues were whether the costs orders had priority and whether the fund was trust property.

1. The application succeeded. The claimants were entitled to payment of the fund in accordance with the priority attaching to the costs orders.
2. Costs awarded against liquidators or a company in liquidation in respect of civil litigation have priority over the general expenses of the liquidation. That principle was established in In Re London Metallurgical Company [1895] 1 Ch 758 and preserved by rule 4.220(2) of the Insolvency Rules 1986.
3. Section 156 of the Insolvency Act 1986 concerns the reordering of the definitive list of liquidation expenses in rule 4.218(1). It does not permit the court to displace the priority of costs payable under a court order. Section 112 gives equivalent powers in a voluntary winding up, but does not enlarge the scope of section 156. The reasoning in Re Toshoku Finance UK plc [2002] 3 All E R 961, In Re M C Bacon Ltd [1991] Ch 127 and Lewis v Commissioner of Inland Revenue [2001] 3 All ER 499 supported that conclusion.
4. The order made under section 18 during the administration was directed to the administrators. Following In re UCT Ltd [2001] 1 WLR 436, it did not create a trust in the hands of subsequently appointed liquidators or bind assets received by them two years later.
5. Even assuming that the Inland Revenue funding created a purpose trust, the disputed fund derived from an unrestricted VAT refund. The Inland Revenue funding had already been spent before that refund was received. The returned money therefore formed part of the company’s assets and was available for distribution according to the normal priorities.