Pearson & Ors (The Joint Administrators of Lean Brothers International (Europe)) v Lehman Brothers Finance SA & Ors

The general rule that costs follow the event applies to adversarial insolvency litigation. The fact that office-holders act fiduciary duties, or that proceedings concern an insolvent estate, does not by itself justify departing from that rule.

A departure may be justified by features analogous to litigation concerning deceased estates, including where the insolvent entity caused the uncertainty or where parties needed to assist the court before they could reasonably assess their positions. Such departures require careful, fact-specific justification. The court may also disallow costs attributable to an unsuccessful substantial issue, even where the party otherwise achieves its principal commercial objective.

The joint administrators of Lehman Brothers International (Europe) sought directions concerning the beneficial ownership of securities held for affiliated Lehman entities. The application developed into adversarial commercial litigation involving competing proprietary claims.

After determining the substantive issues in the main judgment, the court considered the incidence of costs. The issues included whether the proceedings were properly characterised as commercial litigation or as a joint insolvency application for directions, whether costs should follow the event, and how the parties’ partial success, offers to settle and preparation difficulties should affect the order.

1. Applicable approach. CPR Part 44.3(2) establishes the general rule that the unsuccessful party pays the successful party’s costs. That rule is fully applicable to commercial litigation. It is only a starting point, since the court retains a discretion having regard to all the circumstances.
2. The rule is not automatically displaced because proceedings concern an insolvent estate. By analogy with probate litigation, departure may be justified where the insolvent entity is responsible for the difficulty requiring determination, or where parties are properly joined to assist the court in administering the estate. The analogy requires caution. Parties must justify departure by reference to the facts, not by invoking a general insolvency principle.
3. The need to preserve the incentives created by the ordinary costs rule is important in insolvency litigation, where costs can readily become excessive. Office-holders’ fiduciary status and the fact that litigation is pursued for stakeholders do not, without more, justify leaving each party to bear its own costs.
4. As between LBIE and the respondent affiliates other than LBI, LBIE had succeeded on its principal proprietary case but failed on a substantial anterior issue. The court therefore ordered those respondents to bear 50% of LBIE’s attributable costs, apportioned severally at 16.66% each, treating LBCCA and LBAH as one for this purpose.
5. As between LBIE and LBI, LBI recovered less than it had been offered before trial. LBI was ordered to pay 25% of LBIE’s costs incurred after 27 September 2010. There was no order as to costs incurred before that date.