Public Duty in insolvency

Costs: Section 236 of the Insolvency Act Compliance

Costs: Section 236 of the Insolvency Act Compliance. In Re Harvest Finance Ltd (In Liquidation); Jackson and another v Cannons Law Practice LLP and others [2014] EWHC 4237 (Ch), [2014] All ER (D) 216 (Dec) at paragraphs [44] and [46] of the decision it was held that someone performing a public duty for an officeholder is not necessarily entitled to the costs of compliance.


It was noted that the Court at paragraph [59.1] appeared not to endorse the conduct of a firm of solicitors who in the performance of its duties appeared to have adopted an “unhelpful” approach without perhaps appreciating their public duty and notably commented at paragraph [59.2] on the Respondents’ failure to assist (notwithstanding its suggested cooperation) with the alternative of substantial cost. Mr Registrar Jones appears to suggest at paragraph [59.6] that the respondents were “wrong” to focus on costs of compliance in addressing the liquidator’s pre action correspondence.


Additionally in Re Harvest Finance Ltd at paragraph [47.3] the question of access to the information was considered and appears to suggest that merely because it might not be easily accessible due to the way it has been retained and maintained, that such a position would not necessarily be a cost visited upon the liquidation: “The Liquidation should not have to bear the financial burden resulting from the fact that the records are not easy to access…”.


The implication from the judgment is that the Court appeared to suggest that the notion of duty might be incompatible with an order for compliance costs to be met. Relevant extracts from the judgment are set out below:


19. The starting point is to recognise that the provision of information to an office holder, albeit under compulsion, is “a public duty in aid of the administration of justice” (see Re Aveling Barford(p.366 F). Office holders need to be in a position to identify and collect existing assets, to discharge liabilities, to discover the history and past activities of the company and to consider misdemeanours that might lead to claims or (in the public interest) disqualification proceedings. Private examinations under section 236 are an important tool for that process and were described as “… frequently indispensable for the efficient administration by the trustee or liquidator” in the “Cork Report”, The Review Committee on Insolvency Law and Practice, (1982) Cmnd 8558.

20. A public duty to provide information for such (amongst other) purposes therefore exists in order that: (a) office holders can perform their statutory duties; and (b) there is an effective insolvency process within this jurisdiction. Those with relevant knowledge should assist as a matter of public duty (see further in Re John T. Rhodes Ltd (1986) BCC 99.284 per Harman J., referred to in Re Cloverbay Limited above at page 738).

22. The existence of such a duty is potentially incompatible with the existence of an order to pay the costs of compliance. Rule 9.6(4), however, provides for payment of travelling expenses and“other costs falling upon him … at the court’s discretion”.

44. I make my decision in circumstances of the existence of a public duty which arises in respect of information needed by the Liquidators for the purposes of carrying out their statutory duties. There is no doubt from all the authorities that this duty creates a strong reason for not awarding costs of compliance. Its strength is evidenced by the approach of Mr Justice Warrington in Re Appleton, French & Scrafton Ltd (above) following the Court of Appeal in Ex parte Waddell. One of the reasons for referring to his judgment in such detail is that it provides forthright guidance upon this issue. If ordinarily examinees are not entitled to the costs of instructing lawyers whilst being examined, there is much to be said by analogy that Mr Cannon should not normally receive even his non-profit costs for his time charged as a lawyer of locating and delivering up/transferring the electronic files.

45. Its strength is further evidenced by the decisions and approaches of both Mr Justice Vinelott and Mr Justice Harman. Mr Justice Hoffmann has emphasised the existence and importance of the public duty in Re John T. Rhodes Ltd (above). In Re Aveling Barford Ltd (above) he considered the examination more analogous to a subpoena duces tecum or ad testificandum for which costs of compliance are not normally awarded, than a Norwich Pharmacal order where they are. This in circumstances where the position of examinees is different to witnesses because they are under a public, as opposed to being subject to orders in private litigation.

46. In this case, albeit as an innocent party, the Respondents had control of the files relevant to the transactions in issue. Their public duty required them to provide the files and relevant information to the Liquidators subject to the issue of legal privilege. Their difficulties were identifying the relevant files and achieving transfer but in my judgment (whether applying the approach of Mr Justice Vinelott or Mr Justice Hoffmann) I should not in the exercise of my discretion permit them to charge for the time incurred whether as solicitors or not.

47. My particularised reasons (individually and cumulatively) for that decision are:-

47.1 The existence of the public duty which is of particular importance in this context of a suspicion of fraud
47.2 Payment for the cost of Mr Cannon’s services would transform their public duty into a professional service, albeit that time may have been taken up in alternative, profitable business and the costs are non-profit costs
47.3 The liquidation should not have to bear the financial burden resulting from the fact that the records are not easy to access (as explained by Mr Cannon in his first witness statement within section
47.4 As a result of the 10 sample files and the decision delivered on 27 September 2013, the Respondents did not need to peruse the files to identify documents for which third parties may claim legal privilege before their transfer.
47.5 If the Respondents met with any particular difficulty concerning the identification or transfer of files, they should have raised that difficulty with the liquidators or the court before incurring costs.
48. I have not been taken during the hearing to the items specifically claimed in the costs totalling £40,381 excluding VAT. My understanding from submissions is that Mr Cannon’s fees are the major contributing item. I have not heard any submissions in respect of other items. I therefore cannot deal with other items but indicate that it is more likely the discretion may be exercised favourably for payments the Respondents have had to make to third parties. I do so because I anticipate that costs of further argument are likely to be disproportionate and the parties should be sensible and reach an accord.
51. The first question is whether the Respondents should pay the costs of the Application.
52. Rule 9.6(1) expressly refers to “the costs of the examination” in contrast with the other sub-paragraphs of the Rule (see paragraph 12 above). However, whilst that language appears to limit its application, its approach of limiting the circumstances in which costs may be awarded against a respondent is to be borne in mind as guidance when considering the exercise of discretion whether under Rule 9.6(4) or section 51, to award legal costs.
53. That approach is applicable where a respondent performed a public duty. It is not to be expected that the public duty includes an obligation to pay the office holder’s legal costs unless unreasonable conduct otherwise justifies it. In the circumstances set out at paragraph 49 above, this should be the position for the Respondents subject to considering the correspondence and the costs of the hearing on 19 November 2014.
54. The second question is whether the Applicants should pay the Respondents’ costs.
55. The statutory scheme includes a discretionary jurisdiction to award costs against the office holder in appropriate circumstances, for example when an application under subsection 236(3) failed, whether applying Rule 9.6(4) or section 51. However, subject to considering the correspondence, in my judgment there is no cause to require the Liquidators to pay the legal costs of the Respondents. They have been successful to date. They required the orders sought and were right to issue and proceed with the Application. They succeeded in opposing recovery of the costs of compliance.
56. The third question is whether the Respondents’ legal costs should be an expense of the liquidation. Rule 9.6(4) or section 51 provide a wide enough discretionary jurisdiction to make that order but it is to be remembered that, as an expense, the legal costs will rank ahead of other expenses including the liquidators’ remuneration (see section 176ZA of the Act and Rule 4.218(3)). This may therefore have an adverse effect upon others which needs to be taken into account.
57. Nevertheless in my judgment there is a case for finding they should be an expense insofar as those legal costs were reasonably incurred in fulfilling the Respondents’ public duty to the extent that sub-paragraphs 49.3 – 49.4 above apply. This too follows from the principle that the duty to assist does not necessarily include an obligation to incur liability. Whether that is the case, however, must depend upon further consideration of the correspondence and the costs of and occasioned by the hearing on 19 November 2014.
58. The fourth question is whether the Applicants’ costs should be an expense of the liquidation. In my judgment they should pursuant to Rule 9.6(3).
59. My conclusions from the exhibited correspondence (which necessarily summarise their contents and also do not feature the section 234 points because they do not alter my overall view) are:
59.1 The process began with an unhelpful approach from the Respondents (see their letter 22 May 2012) and proceeded without the Respondents appreciating their public duty (see their letter 11 June 2012).
59.2 Instead of assisting by providing useful information, the Respondents sought to cast the onus of identification upon the Liquidators or offered the alternative of substantial cost (see the Respondents’ letter 19 June 2012). The co-operation to be reasonably expected was not forthcoming.
59.3 Following the pre-application letter dated 31 August 2012, there was some movement towards co-operation but still requiring payment (see the Respondents’ letter 6 September 2012)
59.4 The offer of £500 for delivery of files is noted as an approach by the Liquidators similar to the outcome of this judgment concerning payment for compliance (see 20 September 2012 letter on behalf of the Liquidators).
59.5 Subsequently there are indications of co-operation within the context of providing further information subject to the difficulty in procuring the files but still with the issue of non-profit time costs being the sticking point (see 28 September and 5 October 2012 letters from the Respondents)
59.6 A second, detailed pre-application letter was sent dated 21 December 2012. Costs of and time for compliance were issues in response as opposed to a denial of the obligation to co-operate (see 11 January 2013 letters from the Respondents). Whilst it can be said that the Respondents have lost on those issues and therefore were wrong to take them, this was at a stage prior to disclosure of the 10 sample files and the decision concerning privilege. The position was more opaque and I have found it was necessary for the Application to be made without criticising the conduct of the Respondents (see paragraph 49.3 above)
59.7 The Liquidators offered to attend the Respondents’ offices to inspect or assist in collating the information sought (see letter 18 January 2013). In response the Respondents concentrated upon costs, whilst continuing to state their willingness to assist (see letter 23 January 2013). The offer to attend was repeated (see letter 23 January 2013). Logistical problems were raised in respect of the offer but the key issue remained costs and the approach still did not accord with their public duty (see letter 24 January 2013)
59.8 Nevertheless the position was not straight forward and it is apparent that even with full co-operation it would still have been reasonable for the Respondents to ask the Court to consider the matter and make directions. Whilst that was not precisely the approach taken at the first hearing, I have decided the effect was the same (see paragraph 49.4 above)
59.9 It must be borne in mind in particular that the Application had to be made to deal with the question of providing inspection in circumstances where files contained documents potentially subject to third party legal privilege and there was a need to resolve how this should be dealt with other than by the Respondents having to review each file. I appreciate privilege did not feature in the correspondence but it falls within the problem the Respondents identified, namely time for compliance.
The aforesaid is not legal advice and is not to be relied upon as such. No liability is accepted by the writer for any reliance placed on the same. 
If you have a specific query then you should seek independent legal advice on the same.

Costs of Section 236 Compliance

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