Lomas & Ors v Burlington Loan Management Ltd & Ors

The ordinary rule that costs follow the event is only a starting point. In insolvency-related directions proceedings, the court may order costs to be paid from the estate where the proceedings were sponsored by office-holders, required judicial determination, involved reasonably arguable issues, and provided general benefit to the administration. The court must exercise that discretion cautiously and characterise the substance of the proceedings, rather than their form alone. Commercial claims pursued for the claimant’s own benefit remain subject to the ordinary rule, even if presented within an application for directions.

The joint administrators of Lehman Brothers International (Europe) sought a costs order following the Waterfall IIC proceedings. Those proceedings concerned the construction and effect of ISDA Master Agreements and German Master Agreements in relation to creditors’ entitlement to statutory interest.

Wentworth, which had succeeded on most issues, sought its costs from the unsuccessful parties. The Senior Creditor Group and Goldman Sachs International argued that the respondents’ costs should be paid from the administration estate because the proceedings were sponsored directions proceedings brought to obtain guidance for the administration. The central issue was whether the proceedings were, in substance, a necessary judicial inquiry benefiting the estate or adversarial commercial litigation.

1. The general rule that costs follow the event is a starting point, but the court has a discretion to depart from it. In insolvency litigation that discretion must be exercised cautiously, by reference to the circumstances and substance of the particular proceedings. The court should not allow estate-funded costs to encourage litigation or discourage settlement.

2. The ISDA Master Agreement issues were treated as a necessary application for directions in the interests of the general body of creditors. Although the issues concerned pre-administration contracts and the parties advanced adversarial arguments, the issues had been formulated iteratively with the joint administrators, were of general application, were reasonably and solidly maintainable, and required determination once raised. The process provided guidance across the administration and was an efficient means of resolving complex issues requiring different creditor perspectives.

   Accordingly, the Senior Creditor Group’s and Goldman Sachs International’s costs relating to those issues were payable out of the administration estate. The Senior Creditor Group was limited to the costs that would have been incurred had it retained one firm of solicitors.

3. The German Master Agreement issues were different in substance. They had been driven and included by the Senior Creditor Group, the joint administrators had played no substantive part, and the issues advanced a commercial claim for the group’s own benefit without an identified wider benefit. They were therefore adversarial commercial litigation despite the formal application for directions.

   The ordinary rule applied to that part of the proceedings, and the Senior Creditor Group was ordered to pay the relevant costs.

This was a first-instance costs determination. The judgment refers to earlier Waterfall IIA and IIB proceedings, in which costs had generally been ordered out of the administration estate, but states that the approach in those tranches did not necessarily carry over to Waterfall IIC.