Lifting the interim moratorium: a new insight

Background

In TST Millbank LLC and another v Resolution Real Estate Ltd (8 February 2018) (unreported), the legal and beneficial owners of the head-lease of commercial property (C) brought a claim against their tenant (D) for unpaid service, to which D counterclaimed. D failed to provide security for costs and so, in autumn 2017, judgment was entered for C on the counterclaim. Over the next few months D made a number of hopeless applications, including one to adjourn trial, due to start in early February. On 31 January 2018, two clear days before the start of the trial window, D served a copy of a notice of intention to appoint an administrator (NOI), the effect of which was to impose an interim moratorium pursuant to paragraph 44 of Schedule B1 to the Insolvency Act 1986 (Schedule B1). D waited until 5 February 2018, the first day of the window, to serve the NOI on the qualifying floating charge holder (a connected BVI company), thereby precluding an appointment within the trial window at all. On 5 February 2018, C filed an application for permission, pursuant to paragraphs 44((5) and 43(6)(b) of Schedule B1, to proceed with the trial notwithstanding the moratorium. The application came before Nugee J on 7 February 2018, who granted D’s request for a 24 hour adjournment, simultaneously arranging for trial to be listed to start on 12 February 2018. On the adjourned hearing, the application was granted.

The guidance offered in in Re Atlantic Computer Systems Plc was of limited assistance in a claim such as the present, but did show that the task for the court was to balance the interests of C and D (and especially its creditors). It would only be in exceptional cases that permission would be granted in respect of a purely monetary claim: Re Nortel Networks UK Ltd. However, the stage the underlying proceedings had reached was an important factor and the nearer they were to a conclusion the weightier that factor would be: South Court Construction Ltd v Iverson Road Ltd. Here, the matter was already within the trial window so that a more advanced stage could scarcely be envisaged and most of the costs of trial had already been incurred. There was some doubt as to whether, without any determination from the court at any point, C would be able to prove for the costs they had expended on getting the matter to trial. Moreover, even accepting D’s figures (called into question by C, though the judge did not feel able to resolve those issues), C were the most significant unsecured creditors. C also raised a number of issues, including the conduct of D in the preceding two months, from which they invited the court to infer that the NOI was part of a ploy to derail the trial and, as such, an abuse of process. Whilst accepting those concerns were reasonable, the judge felt unable to resolve them. In all the circumstances, however, it was appropriate to grant the permission sought.

Commentary

This case raises two points of interest.

First, this is a rare and therefore significant example of a court granting permission to pursue a purely monetary claim subject to the statutory moratorium.

• In recent years the courts have become more alive to the potential abuse of process where a company facing litigation has filed a notice of intention to try to evade litigation and its consequences. Some, like South Court Construction Ltd v Iverson Road Ltd and more recently JCAM Commercial Real Estate Property XV Ltd v Davis Haulage Ltd, have involved a series of such notices, but it was no part of the reasoning of these cases that it was only in such circumstances that the court would be prepared to infer abuse. In the more recent case of Bernhard’s Sport Surfaces Ltd v Astrosoccer4U Ltd, Coulson J granted permission to enforce an arbitration award, having inferred that the single NOI was “entirely bogus” and “an abuse of the Insolvency rules”.
• In the present case, Nugee J could readily see why C had raised suspicions as to the NOI being a sham, but was conscious that D had not had much time in which to serve evidence; he therefore declined to form a definitive view on the point. Even absent findings of abusive conduct in relation to the NOI and notwithstanding that this was purely a money claim, having carried out the required balancing act, the judge came down in favour of granting permission.
• The most decisive factor was the advanced stage of the litigation: the NOI had been filed at the door of trial, when both sides had already incurred most of the costs of the trial. If permission had been refused, the issues would still needed to have been resolved: if no administrator had been appointed, a new and distant trial date would have had to have been found at considerable detriment to C; but even if an administrator had been appointed, considerable additional costs would have been needed to resolve the issues.
• Another important factor was that C were, on any view, the most significant creditor, so that allowing them to proceed with the trial would have had a comparatively small impact on other creditors.

The second point of note was the judge’s acceptance that that C might encounter difficulties in proving for their costs without a court determination (either before or after the commencement of the insolvency). The point was not fully argued before the judge, but although unable to “decide this issue or even express a view”, he was prepared to accept that the risk was one he could take into account as a factor.

The point deserves further consideration.

• The leading authority on point, Re Nortel GmbH, overturned a well-established line of cases, including Glenister v Rowe, which had held that, since litigation costs were in the court’s discretion, where no order for costs had been made prior to the insolvency of the paying party, such costs could not be provable in that party’s insolvency. That reasoning had been side-stepped in Day v Haine, which Nortel approved. The Supreme Court in Nortel explained that parties to litigation are ipso facto contingently liable for the costs of the other from the outset, so that an order for costs, when it comes (after the onset of insolvency), merely clarifies the sums that were always provable as a contingent debt within the meaning of what was then rule 13.12(1)(b) of the Insolvency Rules 1986 (IR 1986), the equivalent of what is now rule 14.1(3)(b) of the Insolvency (England and Wales) Rules 2016 (IR 2016). Lord Sumption (at paragraph 136) went further, observing:

“It is not a condition of the right to prove for a debt or liability which is contingent at the date when the company went into liquidation that the contingency should be bound to occur or that its occurrence should be determined by absolute rather than discretionary factors.”

• The reasoning does have practical consequences. Rule 14.14(1) of IR 2016 and section 322(3) of the Act (in relation to bankruptcies) require the office-holder to place a value on any contingent debt. Where the court, post-insolvency, makes an order for costs (as in Glenister v Rowe), this presents little problem; but in any other case this requires the office-holder to determine who should be liable for what cost and, effectively, summarily assess them. In certain circumstances, that could prove a big ask. It may be of small comfort that rule 14.14(2) of IR 2016 expressly allows for subsequent revisions (though there is no equivalent provision in section 322) and that references may be made to the court, either by the office-holder (under section 168(3)in compulsory liquidations or section 303(2) in bankruptcies) or by the creditor (sections 168(5) and 303(1)), and the court’s decision under sections 168 or 303 is deemed definitive (rule 14.14(4) of IR 2016 and section 322(4) of the Act, although there are no equivalent deeming provisions in the context of creditors’ voluntary liquidations (CVLs) and administrations). Moreover, the costs of proving (and prima facie of challenging rejections of proof) fall entirely on the creditor, even if the expenses of the office-holder in estimating the debt lie on the estate (rule 14.5 of IR 2016).
• Whilst Nortel clarifies that litigation costs that remain undetermined as at the date of insolvency represent a contingent debt provable in that insolvency, there remain grave practical problems facing the would-be creditor that Nortel did not address. Nortel was not itself a costs case and it remains to be seen what guidance the courts may be able to offer, specifically in relation to the determination of costs in difficult cases. In the meantime, the approach adopted by Nugee J in the instant case is to be welcomed.

This article was first published on Practical Law’s Dispute Resolution Blog.