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Court of Appeal clarifies the correct use of funds during insolvency proceedings

Court building Print publication

11/12/2018

The Court of Appeal has provided useful clarity for insolvency practitioners regarding the status of funds held in court as security for costs. It is clear from the judgment that the payer of the funds retains an interest in the money subject to the security interest. The case also reaffirms the ability of any subsequently appointed liquidator to apply to court for payment out of the funds held in court.

Background

The background to the case was that Peak Hotels & Resorts Limited (the Company) was engaged in some long running litigation proceedings. During the litigation the Company had paid money into court to provide security for costs. In October 2015 the Company got into financial difficulties and entered into a fixed fee arrangement with its solicitors, Candey Limited, for the Company’s past and future legal costs. The fee arrangement was supported by a legal charge over the Company’s assets.

The Company’s financial position didn’t improve and later that year it went into liquidation. Upon the Company’s liquidation, Candey demanded payment of its outstanding fees and sought to enforce its security. On receipt of the claim from Candey for payment of a secured debt, the liquidators applied to court for a determination as to whether the funds paid into court were the subject of the charge and if so, to what extent.

The high court judge ruled that the money was subject to the charge but that it was a floating charge, rather than fixed, because the deed didn’t contain sufficient restrictions on dealings to create a fixed charge. The joint liquidators of the Company appealed, arguing that once the money had been paid into court, the Company had lost its proprietary interest in the money and as a result it was no longer capable of being subject to a charge.

The Court of Appeal dismissed the appeal and confirmed that money paid into court on account of costs or cross-undertakings remained the payer’s property until the court has provided directions as to its distribution. Rimer LJ considered that a payer of money into court by way of security retained its interest: (i) subject to the security interest that the payment gives to the defendants; and (ii) the ultimate payment out is dependent on the making of a court order. It therefore followed that the Company always retained an interest and entitlement for the proper administration of the funds. As a matter of public policy, the Court of Appeal considered that this had to be the correct analysis.

WM comment

The decision provides useful clarity for practitioners as regards to the status of funds held in court paid in relation to security for costs. It is clear that the payer of funds retains an interest in them subject to the security interest of the defendant. This case also reaffirms the ability of the payer of the funds (or a subsequently-appointed insolvency office-holder) to apply to court for the payment out of the funds. For insolvency practitioners this may be a valuable asset for them to realise should the claimant become insolvent before the litigation is concluded.

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