London Borough of Redbridge v Mustafa

In costs proceedings following annulment of a bankruptcy order, there is no automatic presumption that the petitioning creditor must pay. The court must exercise its discretion by examining why the order was made, the conduct of the parties, and the cause of the costs incurred. A creditor is not under a legal duty to seek annulment or notify the Official Receiver when a debt is later reduced to nil, where the bankruptcy order was properly made on the information then available. Costs of the petition and the Official Receiver ordinarily follow the properly made order. Trustee costs may be allocated separately, having regard to the conduct that caused them. An appellate court may interfere with a costs discretion where the judge has erred in principle or failed to consider material factors.

The London Borough of Redbridge appealed, with permission, against a costs order made by District Judge Bowles after he annulled a bankruptcy order against Mustafa under section 282(1)(a) of the Insolvency Act 1986. The bankruptcy petition had been based on council-tax liability orders. After the order was made, information supplied by Mustafa caused the council-tax debt to be reduced to nil. The District Judge ordered Redbridge to pay the Trustee in Bankruptcy’s costs and kept the annulment order on file pending payment.

Redbridge challenged the costs order but not the annulment. The central issues were the applicable costs principles, whether Redbridge had been under a duty to take further steps after learning that the debt was nil, and whether annulment under section 282(1)(a) created a presumption that the petitioner should pay.

1. Appeal allowed. Paragraph 4 of the District Judge’s order was set aside. The Chancellor exercised the discretion afresh rather than ordering a rehearing, because the factual disputes were peripheral or immaterial and a new trial would cause further cost and delay.

2. Costs of the petition and the annulment application are governed by the applicable provisions of the Civil Procedure Rules as applied to insolvency proceedings. The costs and expenses of the Official Receiver and Trustee in Bankruptcy are dealt with under a different regime, including the court’s jurisdiction under section 282(4) of the Insolvency Act 1986 and, if necessary, its inherent jurisdiction.

3. There is no legal obligation on a creditor to obtain annulment of a bankruptcy order properly made when made, or to notify the Official Receiver after the underlying debt is reduced to nil. R v Tower Hamlets Borough Council ex parte Chetwynd Developments Ltd [1988] 1 AC 858 did not impose such an additional burden on a local authority.

4. Nor does section 282(1)(a) create a legal presumption that the petitioner must pay the petition costs, annulment costs, or the costs of the Official Receiver and Trustee. Butterworth v Soutter [2000] BPIR 582 identified a possible starting point in particular circumstances, but did not lay down a presumption. The analysis must consider whether the order was properly made and the causes of the subsequent costs. Royal Bank of Scotland v Farley [1996] BPIR 638 showed that annulment may follow from grounds existing at the time of the order even where the order was properly made.

5. The original bankruptcy order was properly made: the liability orders were outstanding, the statutory demand was properly served, and the petition was properly presented. Redbridge’s inability to see Mustafa without an appointment was part of the history, not a legal failing. Mustafa’s prolonged failure to act on repeated advice was material to the Trustee’s costs. The costs of the petition and Official Receiver were therefore payable by Mustafa; each side was to bear its own costs of the annulment application, subject to the Trustee’s costs being added to the other costs and expenses payable by Mustafa.

6. The discretion had been exercised on an erroneous basis because the District Judge treated the alleged presumption as controlling and failed to consider material events before and after the bankruptcy order. That justified appellate intervention under the approach stated in Roache v Newsgroup International Ltd [1998] ENLR 161.

1. Romford County Court: District Judge Bowles annulled the bankruptcy order under section 282(1)(a) of the Insolvency Act 1986 and ordered Redbridge to pay the Trustee in Bankruptcy’s costs.
2. High Court (Chancery Division): The Chancellor allowed Redbridge’s appeal, set aside paragraph 4 of the District Judge’s order, and substituted costs directions.