Costs of providing documents pursuant to Section 236 of the Insolvency Act 1986 not recoverable from the insolvency estate as the duty is a ‘public duty’

Costs of providing documents pursuant to Section 236 of the Insolvency Act 1986 not recoverable from the insolvency estate as the duty is a ‘public duty’

All Insolvency

The High Court case of Harvest Finance Ltd (in liquidation) v Cannons Law Practice LLP and another [2014] EWHC 4327 (Ch) considered whether an order should be made that the costs incurred by a law firm in providing documents be met by the insolvent estate (the liquidator had applied for an order pursuant to section 236 of the Insolvency Act 1986 (“the Act”)).

The court considered Rule 9.6(4) of the Insolvency Rules 1986 which stipulates that the company in liquidation should pay a reasonable sum for examinee’s travelling expenses and “other costs falling on him at the court’s discretion.”

The court also considered Re Aveling Barford [1989] BCLC 122 where the High Court held that Rule 9.6(4) did extend to the production of documents as well as the judgment of Re Cloverbay Ltd [1990] BCC 229 whereby the High Court, without being referred to Barford held that it did not have the jurisdiction to make an order to pay costs that did not relate to an examination unless in exceptional circumstances.

The liquidator in Harvest had formed the view that property transactions were fraudulent. The liquidator had obtained an order pursuant to section 236(3) of the Act requiring Cannons Law Practice LLP (“Cannons”) to deliver up relevant files held on its computer system. Cannons had inherited these records from the company’s prior legal advisers and its costs in recovering these records were substantial.

Cannons sought a variation of the section 236(3) order that its costs be borne by the liquidation estate.

The court sided with the decision in Barford and decided that it did have jurisdiction to award costs.

It commented further that compliance with an officeholder under section 236 of the Act was effectively a public duty. The purpose of the provision was to assist the liquidator in his realisation and distribution of assets for the benefit of the liquidation creditors which was for the public good.

It follows that a party should not ordinarily expect to be compensated for fulfilling a public duty and accordingly it would be an unusual case where the court would allow recovery of the respondent’s costs in complying with the liquidator’s requests.

The court held that it would not be appropriate to allow the respondent to recover its costs from the liquidation estate and in particular the allegation of fraud lended a heavier burden on the respondent to comply with the liquidator’s requirement for delivery up. Cannons’ legal costs in responding to the application and attendance at the hearing were allowed as it would have been inequitable for it to have suffered a liability in performing its duty.

This decision is a welcome clarification on this issue. In practice the office holder should be mindful of the fact that the estate may have to bear the respondent’s legal costs if a section 236 application is defended, as was the case in Harvest.