State Bank of India & Ors v Mallya

Validation under section 284 of the Insolvency Act 1986 is exceptional. The court generally requires credible evidence that the debtor is solvent, or that the proposed transaction benefits or does not prejudice unsecured creditors as a class.

A narrow humanity-based exception permits funding for legal costs directly incurred in opposing a bankruptcy petition. It does not extend to collateral litigation merely because that litigation may affect the bankruptcy proceedings. The court should not conduct a detailed taxation or reasonableness assessment at the validation stage. A suitably limited order may preserve later scrutiny by a trustee in bankruptcy.

Dr Mallya, the subject of a bankruptcy petition presented by 13 Indian banks, applied for payment of substantial historic and future legal expenses, living expenses and other costs from money held in the Court Funds Office. He also sought validation under section 284 of the Insolvency Act 1986.

A previous validation order had authorised living expenses and reasonable costs directly incurred in defending the bankruptcy petition. The present application concerned whether those existing permissions extended to payment from the Court Funds Office, and whether further validation should cover Indian proceedings, worldwide-freezing-order proceedings, extradition proceedings and related Diageo litigation.

1. Existing validation. The previous validation order continued to apply to living expenses and past and future costs of defending the bankruptcy petition. In the absence of an application to vary it, the court gave effect to that order. The Court Funds Office monies were not subject to a trust or other restriction preventing their use for appropriate purposes; the parties’ private intentions and negotiating correspondence were irrelevant to the objective construction of the order.
2. Approach to petition-defence costs. The court applied the narrow exception recognised in In Re Sinclair (1885) 15 QBD 616, and confirmed in In re A Debtor [1937] Ch 92 and Rio Properties v Al Midani [2003] BPIR 128. Validation may cover costs directly referable to opposing the bankruptcy petition, but the exception does not extend to collateral litigation, even where that litigation may materially affect the bankruptcy proceedings.
3. Assessment and safeguards. It was inappropriate at this stage to conduct a detailed assessment or taxation of the proposed petition-defence costs. Consistently with National Westminster Bank plc v Lucas [2013] EWHC 770 (Ch), a limited validation order preserving a subsequently appointed trustee’s ability to scrutinise the expenditure was sufficient.
4. Other proceedings. Validation was refused for the Indian proceedings, the concluded worldwide-freezing-order proceedings, the historic unsuccessful extradition defence and the Diageo litigation. Those costs were collateral, insufficiently evidenced, or would preferentially benefit particular creditors. Future costs in the Indian proceedings also lacked a sufficiently detailed evidential breakdown, and a later Lucas safeguard was inadequate where the payees were outside the jurisdiction.
5. The application therefore succeeded only to the extent of permitting payment from the Court Funds Office of expenses already validated by the previous order, subject to appropriate safeguards.