Winding Up Petition - Petition Debt Paid - Costs

[1] Strictly speaking, it is not that the petition must actually be dismissed, just that the petition would be dismissed. This is because another (alleged) creditor (or contributory) of the company/debtor, may apply to be substituted as petitioner to the petition, under Insolvency Rules 2016, r.7.17 entitled ' Substitution of creditor or contributory for petitioner'. Where that application for substitution is successful, the applicant will become the substituted petitioner and will be directed to file and serve an amended petition, founded upon the debt/basis the substituted petitioner says the substituted petitioner is entitled to pursue the petition (as amended).

Where the petition is taken over by a substituted petitioner, the original petitioner will still be entitled to claim costs (as if the petition had simply been dismissed in the normal way). However, procedurally, the original petitioner will have to wait until the petition is finally determined, before the Court will determine the original petitioner's claim for costs against the company/debtor.

Insolvency Rules 2016, r.7.18, entitled 'Order for substitution of petitioner', reads (so far as presently relevant):

'An order for substitution of a petitioner must contain -

...

(e) the following orders -

...

(vi) that the question of the costs of the original petitioner and of the statutory deposit (if appropriate) be reserved until the final determination of the amended petition;'

[2a] In the personal insolvency of Oben v Blackman [1999] BCC 446, Stanley Burton QC (sitting as a deputy High Court Judge) confirmed, at 447:

'The normal rule in winding-up proceedings in the Companies Court...are clearly set out by Lindsay J, ... in [Nowmost]'

As an aside, the deputy judge confirmed that the same approach applies to personal insolvency cases. He stated, at 447:

'...I see no reason why the practice of the court in bankruptcy proceedings should differ from that in winding-up proceedings.' (447).

[2b] In Reliance Wholesale Limited v AM2PM Feltham Limited [2019] EWHC 1079 (Ch), Morgan J said, at paragraph 24, 'Those being the principles...', after stating, at paragraphs 22-23:

'The principles to be applied were set out in detail with full explanation by Lindsay J in the Nowmost case. [Counsel] for the petitioner summarised the principles which one finds in Nowmost in five propositions, and I will quote what is said in [Counsel for the petitioner's] skeleton argument...'

[3] In Re Nowmost Company Limited [1997] BCC 105 ('Nowmost'), a curious situation was allowed to take place in relation to submissions for the respondent/company. Lindsay J sets this out, at 492:

'No counsel or solicitor appeared on that day for the company but there did appear a Mr Stevens, who is the father, I am told, of a director of the company....Mr Stevens on 8 May sought to resist an order for costs on the basis that genuine attempts had been made by the company to settle the matter without the need for a petition. He said that he could produce documents to the court to show that an order for costs in the petitioner's favour should not be made. The registrar, on hearing Mr Stevens, dismissed the petition with no order as to costs.'

Quite what Mr Steven's right to make submissions for the respondent/company, is left unclear. Mr Steven did attend 'for' the respondent/company on the appeal before Lindsay J. Lindsay J recorded that '...Mr Stevens, the father of a director of the company, appears before me. He has, of course, no right, to speak on the company's behalf but has been most helpful in addressing me and I have put no obstacle in his way.'

It is unclear why, if Mr Steven had not right to speak on the respondent/company's behalf,  he was able/allowed to address the court at all.

Later, Lindsay J says, at 497:

'I did what in my view the registrar should have done on 8 May and extended to the company, by Mr Stevens, the opportunity either to lay in front of me material on which I could rule here and now or to consider whether it needed an adjournment in order to put in front of me such material as it chose. Mr Stevens indicated that the material was not extensive and that it could be ruled upon here and now and [counsel] for the petitioner supplemented that material with some further letters. But, between them, they are content, as I understand it, that I rule on the issue of costs here and now in the light of the material informally put in front of me, and so I do.'

Implicitly, Mr Stevens was to be elevated to a person who did have authority to speak and represent the company at the hearing.

[4] In Re Nowmost Company Limited [1997] BCC 105 ('Nowmost'), Lindsay J said, at 493-4:

'It is plain that, upon payment of the petition debt, dismissal of the petition with an order for costs in the petitioner's favour was once the habitual practice of the Companies Court: see Re Flagstaff Silver Mining Co of Utah (1875) LR 20 Eq 268. However, by 1957 at the latest, a different practice had developed in the Companies Court. Dismissals of petitions, unless the company appeared and consented to an order for costs or unless by letter from it or its solicitors the company indicated that it was willing to accept an order for costs against itself, were, by 1957, habitually made with no order as to costs. The supposed reasoning behind such a practice was, I apprehend, that on a dismissal, albeit upon payment of the debt in full, the petitioner obtained none of the principal relief that he had asked for. He did not get a usual compulsory order. On the face of things, therefore, it could in a sense be said that he had not succeeded. There being no apparent success on the petition, it could not be said that the petitioner should be awarded costs as following the event as the event was not, on the face of things, the success of the petitioner. Conversely, as the debt had been paid in full, the petition could hardly be described as a failure such that the company could be given costs. So it was, it seems to me, that the practice became that, on a dismissal without more, there should be no order as to costs.

A refined form of argument to the same conclusion was that by accepting a dismissal of his petition the petitioner put it out of the court's power to investigate further the relative merits of the parties' arguments on the substance of the petition and hence that no order as to costs would be made.

Coupled with that then-conventional approach was the view, then widely held, that a petitioner could, if he chose, obtain a winding-up order where his debt had been paid but not his costs. It was then common for a petitioner, naturally more anxious to obtain money than a compulsory winding-up order, not to seek dismissal with an order for costs in his favour, but rather to invite the court to stand the petition for seven days so that arrangements could be made for the payment of costs or for the making of satisfactory arrangements for their payment. If no arrangements were made the petitioner could press for a compulsory order.

The system did have advantages. The fact that the petitioner could still obtain a winding-up order even when his debt had been paid led to companies almost invariably making satisfactory arrangements for the costs of the petitioner because the threat against them at that time was that, unless they did so, the company would be wound up notwithstanding that it had managed to pay the debt.

Accordingly, petitioners, without having to await taxation of costs or to involve themselves in any expense in taxation of costs, commonly got their costs and were then unconcerned with questions such as whether an order for costs would be honoured because they already had an agreed sum for the costs in hand. One can see that has advantages over the alternative position, namely that the petitioner would get only an order for costs as that order might not ultimately be honoured and the petitioner would then be left in the unattractive position of having to consider the presentation of a second petition in order merely to obtain payment of the costs of the first.

The then-practice was also a convenient practice from the court's point of view because the court had relatively few disputes as to costs before it. It was generally unconcerned with taxation of costs and it was untroubled by the presentation of subsequent petitions whose object was merely to obtain payment of the costs of former petitions. The practice of those days can be seen summarised in Buckley on the Companies Acts (13th edn, 1957), pp 469–473.

However, on 31 October 1977 an application was made to Templeman J in Re Universal Display Fittings Co Ltd (No 003073 of 1977) (31 October 1977, unreported) for the dismissal of a petition upon payment of the petition debt in full but with no one having appeared for the company and, as I would think, without there having been any indication on the company's part that it consented to an order for costs.'

[5] In Re Nowmost Company Limited [1997] BCC 105, Lindsay J said, at 494-5:

'My contemporary note indicates that, as counsel appearing for another petitioner on the same day, I obtained a similar order in Re FGJ Motors (Fulham) Ltd (31 October 1977, unreported). In those days the Companies List was heard on Mondays, turn by turn in rotation by that half of the Chancery Bench then described as 'Group A'. Templeman J was in Group A and the change of practice that his decision of 31 October 1977 indicated was not reported but, as time passed, I have no doubt but that the judges of Group A began, if asked to do so, to dismiss petitions with an order for costs in the petitioner's favour where debts had been paid in full, even in the absence of any appearance or consent from the company concerned.'

[6] In Re Nowmost Company Limited [1997] BCC 105, Lindsay J said, at 495-6:

'By the time of the 14th edition of Buckley on the Companies Acts in 1981 the position could be described as follows (p 547):

'Costs of petition dismissed by consent. If the company wishes to get rid of the petition, it must not only pay the petitioner's debt, but his costs of the petition as well. Sometimes the petitioner is content with an order for costs, but there is no guarantee that they will be paid, so that the petitioner may have to present another petition to recover them. The alternative is to ask for a winding-up order, on the ground that the failure to pay an agreed sum for costs indicates inability to pay. Such orders have occasionally been made, but the threat is usually enough.'

A note to p 547 includes the following:

'Until recently an order for costs against the company was never made in such circumstances unless the company appeared (including appearances by a consent brief), but in the unreported case of Re Universal Display Fittings Co Ltd (No 003073 of 1977) Templeman J, on 31 October 1977, made such an order and since then many such orders have been made. Even if

(eg because the petition has not been advertised) the petition is struck out, instead of being dismissed, such an order can be made.'

By 1983 the new possibility, as it seemed to be, introduced by Templeman J had become recognised as firm practice. In Re Shusella Ltd [1983] BCLC 505 at 506 Nourse J says:

'In recent years it has become the practice of the court in a case where a petitioner who has duly complied with all the provisions of the Rules has received payment of his debt but no provision for the costs of the petition to dismiss the petition with an order for costs against the company, even if the company does not appear. That course is often acceptable to the petitioner on grounds of convenience, although there can be no certainty that the order for costs will be satisfied. The modern practice, which seems to have originated in Re Universal Display Fittings Co Ltd (31 October 1977), an unreported decision of Templeman J, is recognised in Buckley on the Companies Acts (14th edn) vol 1, p 547, note 11.'

As to that last sentence, there is, in Nourse J's judgment, a reference to an unreported case of Oliver J (Re a company (No 001083 of 1978) (19 June 1978)) which in effect Shusella failed to follow. Since then the practice, I think, has been that indicated in Shusella rather than in the unreported case of Oliver J.

Petitions not known to be contested on substantial grounds are not now heard by a judge, but are heard by the registrars on and from Wednesdays. I have spoken to Mr Registrar Buckley, the Companies Court Registrar who most commonly hears the list, as to the 'modern practice' referred to by Nourse J in that 1983 decision. I gather that it still represents the usual day-to-day practice of the registrar. Indeed, so entrenched is it as a modern practice that it is now unknown, or virtually unknown, I am told, for a petitioner to press on with his petition asking for a compulsory order after payment of his debt. The threat by a petitioner who has been paid the petition debt that, if not satisfied as to costs, he would none the less press on with his petition and could none the less get a compulsory order would nowadays, it seems, be likely to be regarded as an idle threat. That threat which in earlier times was very effective to avoid the airing of disputes as to costs, to avoid taxation of costs and to avoid the risk of failure to honour an order for costs has in practice (I say nothing about the legal position under the Insolvency Act 1986) now ceased to be a truly effective threat, at all events for the time being.'

[7] In Re Nowmost Company Limited [1997] BCC 105, Lindsay J said, at 497:

'What happened here, as I have indicated, is that the registrar was told on 8 May by the father of a director of the company that attempts had been made by the company to settle the matter without the need for a petition and that he could produce documents to the court to show that such an order for costs in the petitioner's favour should not be made. However, that was, as I understand it, there and then disputed by the petitioner's counsel. The attempts that had been made by the company to settle the matter without need for a petition were not further explained or substantiated and the documents said to be capable of being produced were not in fact produced. It is not that they were not capable of being produced but that the registrar went on, I am told, to dismiss the petition without them being produced.

I cannot regard the mere disputed averments made by the father of a director of the company as sufficient to displace the ordinary order which the petitioner could expect to be made in its favour had the company been silent. It may be that the registrar on 8 May was harking back, unconsciously perhaps, to the practice as it had been before the change that followed Templeman J's decision in 1977. I do not regard his order of 8 May as representing a proper exercise of the discretion as to costs which he undoubtedly had. On being told that the issue of costs was disputed, he could either, in the pragmatic way that I have indicated, have had whatever material that was sought to be relied on by the company handed up to him to see if a quick conclusion one way or another could be arrived at on the subject or he could have invited the company to consider whether it wished to ask for a brief adjournment of, say, seven days, in order that the material which was being referred to could be put into evidence and be considered as necessary by the petitioner's advisers. He took neither course, but simply went on immediately to the dismissal of the petition.

I therefore set aside his order as to costs.'

[8a] The parties were content for Lindsay J to determine the question of costs there and then. After finding that the 1st instance judge (registrar) had not exercise his discretion on costs property, and having stated that he would set aside the order on costs made, Lindsay J in Re Nowmost Company Limited [1997] BCC 105 said, at 497:

'Have I got material sufficient for me to exercise the discretion which falls now to me, his exercise having been deficient? I did what in my view the registrar should have done on 8 May and extended to the company...the opportunity either to lay in front of me material on which I could rule here and now or to consider whether it needed an adjournment in order to put in front of me such material as it chose. [The Company's 'representative'] indicated that the material was not extensive and that it could be ruled upon here and now and [counsel] for the petitioner supplemented that material with some further letters. But, between them, they are content, as I understand it, that I rule on the issue of costs here and now in the light of the material informally put in front of me, and so I do.'

In Reliance Wholesale Limited v AM2PM Feltham Limited [2019] EWHC 1079 (Ch), Morgan J said, at paragraph 23:

'The way in which Nowmost Co Limited and Fitzgerald & Law were dealt with is illustrative of the practical questions which arise on applications of this kind. In Nowmost Lindsay J hearing an appeal was prepared to receive in a pragmatic way somewhat informal evidence on behalf of the company and, having done so, came to the view that the company had not discharged the onus of avoiding the usual default order against it. In Fitzgerald & Law, Evans-Lombe J considered the material before him, but reached the conclusion that he simply could not make a decision which was a judicial and fair decision between the rival parties on that material, and he then directed the issue to be dealt with.'

[8b] Note, there is no requirement in corporate insolvency, to first serve a statutory demand (i.e. a section 123(1)(a) of the Insolvency Act 1986 statutory demand), before presenting a creditors winding up petition. A simple demand can be served. The position is different in personal insolvency. 

[9] In Oben v Blackman [1999] BCC 446, the deputy judge said, at 447:

'In the present case, the debt related to building work carried out by the creditors. The statutory demand, dated 3 March 1997, stated that the work had been carried out in 1996. The debtor did not apply to set aside the demand, but in her affidavit sworn on 6 November 1997 set out facts which, if correct, established that the debt was bona fide disputed in its entirety. Her affidavit was not answered on behalf of the creditors. In June 1997 an agreement was reached for remedial work to be carried out by the creditors on the debtor depositing with her solicitors the amount of the debt. This agreement seems to be a recognition that there were defects in the creditors' work; and if so, the debt could not have been due in full at the date of the statutory demand. However, nothing came of that agreement, because the debtor did not deposit the money with her solicitors. The creditors therefore proceeded with their petition. After the first hearing resulted in an adjournment for the creditors to serve further evidence, and when it seemed to the debtor's solicitors that the formal points which they had raised would not prevent a bankruptcy order being made, the debtor paid the debt under cover of her solicitors' letter of 11 November 1997.

In these circumstances, given the paucity of evidence before me, I think that I should infer from the ultimate payment of the debt that the debtor did not have a bona fide defence to the entirety of the creditors' claim.'

[10] In Reliance Wholesale Limited v AM2PM Feltham Limited [2019] EWHC 1079 (Ch), Morgan J said, at paragraphs 29-31:

'It is said that the petition was not justified, and the petitioner should not have its costs because the petition was very much wrapped up with or confused with other proceedings under s.994, and it is possible to infer that the purpose behind the petition was a collateral purpose, making the petition an abuse of the process of the court. I am not persuaded that the company has done anything like enough to get a case of that kind on its feet. I am not persuaded that that is the approach I should take on the material before me.

Equally, as I have said more than once, this is not a case where I infer that there is a virtual admission by the company that it owed the money as in some of the cases to which I have referred. It seems to me that the case all turns on my assessment on the material before me as to whether the company raised a bona fide dispute on substantial grounds in relation to the petition debt. I will assume in the company's favour that they would have a lot to say, possibly persuasively, in relation to the part of the petition debt which was up to £33,059.26, however I have been unable to see anywhere a bona fide defence on substantial grounds to the part of the petition debt represented by the £6,000 paid by the petitioner to the company.

On that basis the petitioner was entitled to present its petition, at any rate based on a petition debt of £6,000. The petition is not invalidated because the petition debt was said to be more than £6,000. Accordingly, if the company had not paid £6,000 on the [3.12.08] the petitioner would have been entitled to continue with its petition and seek the winding-up of the company. On that basis, it seems to me that the petition was justified, and I can find that to be the case on the material before me. The petition was dismissed but that was because the full amount of the petition debt was paid before the hearing. But the ordinary order should be made, which is that the company should pay the petitioner's costs of the petition.'

[11] The same situation can arise in personal insolvency, and by situation, it is meant: a petition debt is paid off, and the petition dismissed, but the debtor claims to have had a defence to the petition from much earlier in the process, and so the petition ought not to have been pursued beyond that earlier date. The fact the petitioner did pursue it beyond that point, was wrong, and so the debtor should not have to pay the petitioner's costs of the petition, from that point forward. As will be appreciated, this pivots on whether this additional defence/ground for opposition, did indeed exist at the earlier point in the process, as claimed by the debtor (and is itself a meritorious defence/ground for opposition).

In personal insolvency, there may be a bankruptcy petition founded upon a debt, and that later in the bankruptcy proceedings, the debtor pays off the bankruptcy debt. The bankruptcy petition is then dismissed (assuming no petitioner substitution). The petitioner then seeks an inter parties adverse costs order against the debtor, which the debtor resists, on the ground that the debtor had good defence/ground of opposition, which had arisen much earlier in the bankruptcy proceedings, and which rendered the petitioner wrong to have continued with the bankruptcy petition, beyond the point it arose. Reference is made here to the case of Westaway v Durkan [2016] EWHC 3101 (Ch)('Westaway') (a permission to appeal case).

In Westaway, Judge Behrens (sitting as a judge of the High Court) heard a number of applications in a case with a 'very convoluted history' (paragraph 1), but through which he felt able to 'short-circuit the procedural matters and to concentrate on the merits of the appeal itself' (paragraph 3). He was, in essence, asking himself whether permission to appeal would be granted (if all the procedural issues were resolved).

On this permission to appeal issue, he considering the debtor's challenge to the district judge's decision to impose an adverse inter parties costs order on the debtor, for the costs of the bankruptcy petition, following the bankruptcy petition being dismissed because the debtor paid off the bankruptcy debt. The debtor argued that he should not have been made subject to the impugned costs order, as he had earlier put forward an offer of security to the petitioner, which the petitioner could not reasonably refuse (but had). In essence, he'd had a good defence/opposition to the bankruptcy petition from a much earlier point in time (than when he paid the petition debt off), and so he should not be liable for the post offer petition costs. On the facts, this argument failed. The district judge had been entitled to find that a hypothetical reasonable creditor could have refused the debtor's offer of security. So the petitioner had not been wrong to continue to pursue the bankruptcy petition beyond the point the offer was made:

(1) it was accepted that the value of the land, offered to be subject to the security, had had sufficient equity in it (£200,000)(paragraph 15), to cover the petitioner debt (c.£10,740)(paragraphs 5 and 15);

But:

(2) the court had been '...entitled to take into account everything that had happened until the date when payment was eventually made, and I think that certainly at that stage it is perfectly justified to call it a long history.' (paragraph 20)

(3) the charge offered identified the wrong property (paragraph 19);

(4) the debtor had promised to pay off the petition debt within 10 weeks, but had not (paragraph 7). Indeed, a factor was that '...this debt was not paid for two years.' (paragraph 21)

(5) 'the most critical factor in this case is the complete failure to deal with the matter after the hearing on November 2014. It may well be that if the offer had been accepted and that that matter had been progressed, it would have been open to [the debtor] to say, “Ah, well, I made this offer before, and look, you have settled on exactly the same terms as I offered before”. But that is not what happened. What happened was that the trustee after November attempted to get security and [the debtor] did not respond. Now I am told that that was because of his mental problems, but I must look at this from the point of view of the reasonable creditor, and in my view a reasonable creditor faced with what happened on November 13 cannot be said to be unreasonable in refusing the offer. In fact, there is not a further offer, and this is a factor taken into account by the district judge in paragraph 30 of her judgment, and I have come to the clear conclusion that this is a case where it cannot begin to be said that the district judge got it wrong when she said that a reasonable creditor might as one of the options have refused the offer. There was more than enough material for her to form that view, and I as an appellate judge do not see how I can interfere.' (paragraph 21)

[12] In Oben v Blackman [1999] BCC 446, the deputy judge found, on the facts, that there was insufficient evidence to displace this usual order in relation to adjournments. He said, at 448

'I have too little information as to how the adjournments came to be granted, and at whose request, to be able to deal with those costs otherwise than on the usual basis.'

Note: the deputy judge also said the petitioner should be denied '...their costs of the service of the statutory demand, and of the drafting of the petition.' (447)