Director Ordered To Pay Creditor's Costs Personally Despite Rule 3.4 In Failed Administration Application

The Insolvency and Companies Court ordered a director to pay a creditor’s costs personally following a failed pre-pack administration application, holding that IR 2016 rule 3.4 does not prevent personal costs orders where the director knowingly misled the court.

SETTLE V SANDSTONE LEGAL LIMITED & OTHERS [2025] EWHC 2771 (Ch)

In Settle v Sandstone Legal Ltd [2025] EWHC 2771 (Ch), ICC Judge Barber ordered a director to pay a creditor’s costs personally in an administration application, despite rule 3.4 of the Insolvency (England and Wales) Rules 2016 treating the application as made by the company. Mr Settle applied for an administration order seeking a pre-pack sale to his own company. The court rejected this at the first hearing, finding he had knowingly included material, self-serving untruths in his witness statements. An administration order was later granted with different office-holders. On costs, the court held that rule 3.12(2) IR 2016 did not preclude judicial discretion, which remained under section 51 of the Senior Courts Act 1981 and CPR 44.2 (applied via rule 12.41). Mr Settle’s costs were capped at the issue fee. Critically, the court held rule 3.4 did not prevent a personal costs order where the director was the “real party” conducting litigation on knowingly false evidence for personal benefit. Mr Settle was ordered to pay Seven Stars’ costs personally up to the first hearing, with later costs payable as an administration expense.

In my judgment, rule 3.4 must be read subject to section 51 of the Senior Courts Act and paragraph 13(1)(f) of Schedule B1. Even if Mr Settle is treated as a 'non-party' on the issue of costs by virtue of rule 3.4, in my judgment it is just to make a 'non-party' personal costs order against him in respect of Seven Star's costs up to and including the hearing of 7 February 2025. On the evidence before me Mr Settle was plainly the 'real party' over that period, seeking to benefit personally from his proposed pre-pack administration and conducting the litigation on self-serving evidence which he knew to be materially false, without proper regard for the interests of the Company or the creditors as a whole.

Citations

Irish Reel Productions Ltd v Capitol Films Ltd [2010] EWHC 180 (Ch) Confirmed that a winding-up petitioner may recover costs as an expense of the administration when an administration order is made and the petition is dismissed at the same time. Johnson Machine and Tool Co Ltd [2010] EWHC 582 (Ch) Considered the definition of pre-administration costs and supported judicial clarity for expenses incurred before appointment as administrator. Med-Gourmet Restaurants Ltd v Ostuni Investments Ltd [2010] EWHC 2834 Addressed whether a director’s advocacy for particular administrators, even amid misleading information, precluded recovery of costs as an administration expense. Ardawa v Uppall [2019] EWHC 1663 (Ch) Held that provisions on costs being payable out of the estate do not remove the court’s role in determining responsibility for legal costs under general principles. Bank of Tokyo-Mitsubishi Ufi Ltd v Baskn Gida Sanayi Ve Pazzarlama [2009] EWHC 1696 (Ch) Established that dishonesty alone does not automatically displace the general rule that costs follow the event; the broader context must be evaluated. Hutchinson v Neale [2012] EWCA Civ 345 Confirmed that the relevance, effect, and cost consequences of a party’s misconduct should be considered when determining costs, rather than applying a blanket rule. Re Japanese Koi Co Ltd (unreported, 13 July 2016) Demonstrated that the court has discretion to cap an applicant’s costs where their unreasonable behaviour contributes to the complexity or inefficiency of the proceedings.

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Key Points

Where an administration order is made, the court retains a discretion as to the quantum of the applicant’s costs payable as an expense of the administration, notwithstanding the terms of rule 3.12(2) of the Insolvency (England and Wales) Rules 2016. This discretion is derived from section 51 of the Senior Courts Act 1981, paragraph 13(1)(f) of Schedule B1 to the Insolvency Act 1986, and is engaged by the application of CPR r.44.2 via rule 12.41 of the Insolvency Rules 2016. [30-34, 36]
The general rule that costs follow the event applies to administration applications, and the court may treat a party who successfully opposes the applicant’s proposed course of action and secures the appointment of its preferred administrators as the successful party for the purposes of CPR r.44.2. [36, 38-39]
A personal costs order may be made against a director who made an administration application on behalf of a company, notwithstanding rule 3.4 of the Insolvency (England and Wales) Rules 2016, where the director is found to be the ‘real party’ conducting the litigation for his own personal benefit and in a manner involving misconduct. [54-55]
The costs of a winding-up petition, including the costs of hearings adjourned pending the determination of an administration application, may be ordered to be paid as an expense of the administration under rule 3.12(2) of the Insolvency (England and Wales) Rules 2016 where the court thinks it fit to do so. [25]
Costs incurred by an insolvency practitioner whilst acting as an interim manager may be treated as pre-administration expenses payable under rule 3.52 of the Insolvency (England and Wales) Rules 2016, provided a sufficiently direct and appropriate connection is demonstrated between the work carried out and the achievement of the ultimate administration. [26-27]

"Having considered all the parties' submissions on this issue with some care, I reject Ms Doran's submission that, when an administration order is made, the court has no discretion on the issue of the applicant's costs by virtue of rule 3.12(2) IR 2016. In my judgment, that rule must be read subject to section 51 of the Senior Courts Act and paragraph 13(1)(f) of Schedule B1. Moreover, by operation of rule 12.41 IR 2016, CPR r.44.2 is plainly engaged. I am fortified in that conclusion by the approach adopted by Roth J in Ardawa v Uppall..."

Key Findings In The Case

Mr Settle knowingly included material, self-serving untruths in his first and second witness statements in support of the administration application, which misled the court and ultimately rendered it inappropriate to award him more than the court issue fee in costs as an expense of the administration [44].
Seven Stars Legal Limited was held to be the successful party under CPR r.44.2, having successfully opposed Mr Settle’s pre-pack proposal and secured the appointment of its preferred administrators; accordingly, Seven Stars’ costs from 8 February 2025 onwards were to be paid as an expense of the administration, with its pre–8 February 2025 costs payable personally by Mr Settle [39, 56-57].
The petitioner’s (Medical-Legal Appointments Ltd) costs of and occasioned by the winding-up petition and administration application were properly payable as an expense of the administration, due to the petition’s close involvement in and triggering of the administration process and the absence of opposition to such an order [25].
The Administrators’ costs incurred in their capacity as interim managers prior to the formal administration order were treated as pre-administration expenses within rule 3.52 IR 2016, as they were sufficiently connected to the achievement of the administration and had been the subject of a prior creditors’ approval [26-27].
The court rejected the argument that rule 3.4 IR 2016 prevented a personal costs order against Mr Settle, finding he was the ‘real party’ litigating for personal gain; his conduct justified a personal costs order in favour of Seven Stars in respect of costs up to 7 February 2025 [54-56].

"Had Mr Settle engaged constructively and transparently with the Company's creditors and put in place a proper marketing process for the Company's business following presentation of the winding up petition in December 2024, in my judgment the administration application could easily have been dealt with in one hearing. The Company was plainly insolvent and there was unanimous appetite for an administration. Ultimately, the administration application took two hearings rather than one as a result of Mr Settle's own conduct, in seeking to engineer an outcome for his own personal benefit rather than acting in the interests of the Company and its creditors as a whole."

This costs judgment in Settle v Sandstone Legal Limited [2025] EWHC 2771 (Ch) provides a modern example of a director being held personally liable for an opposing creditor’s costs in an administration application, following findings that he knowingly misled the court with false witness evidence.

Background

On 31 January 2025, Mr Andrew Settle (sole director of Sandstone Legal Limited) applied for an administration order seeking appointment of his chosen nominees to facilitate a pre-pack sale to his new company, Precision. At the first hearing on 7 February 2025, ICC Judge Barber rejected the pre-pack as the consideration was so low it failed even the third limb of paragraph 11(b) of Schedule B1 to the Insolvency Act 1986. The court adjourned the application and appointed Phillippa Smith and Jessica Thomas as interim managers.

At the resumed hearing on 21 February 2025, the court granted an administration order but appointed Ms Smith and Ms Thomas as administrators—rejecting Mr Settle’s original nominees. In a judgment reported at [2025] EWHC 742 (Ch), ICC Judge Barber found Mr Settle had knowingly included “material, self-serving untruths likely to mislead the Court” in his first and second witness statements. All employees had been made redundant and lease break clauses exercised by 31 January 2025—yet Mr Settle’s evidence portrayed the company as a going concern requiring urgent pre-pack administration.

Costs were reserved to a hearing on 18 June 2025, with judgment handed down on 30 October 2025.

Costs Issues

The court determined four key costs issues:

- - Petitioning creditor’s costs: Whether Medical-Legal Appointments Limited’s costs of its winding-up petition should be payable as an administration expense
  - Administrators’ pre-administration costs: Whether the interim managers’ costs qualified as pre-administration expenses under rule 3.52 IR 2016
  - Applicant’s costs: Whether Mr Settle’s costs were automatically payable as an expense under rule 3.12(2) IR 2016
  - Personal costs order: Whether Seven Stars Legal Limited could recover costs directly from Mr Settle despite rule 3.4 IR 2016 (which treats a director’s application as made by the company)

Decision

1. Petitioning Creditor’s Costs

The court ordered that the petitioning creditor’s costs of both the winding-up petition and administration application be paid as an administration expense. Applying Irish Reel Productions Ltd v Capitol Films Ltd [2010] EWHC 180 (Ch), the court held that rule 3.12(2)’s phrase “any person whose costs are allowed by the court” encompasses costs of a winding-up petition dismissed at the same time as an administration order is made. No party opposed this order.

2. Administrators’ Pre-Administration Costs

The court declared the interim managers’ costs were pre-administration expenses under rule 3.52 IR 2016. ICC Judge Barber held that “so long as a sufficiently direct and appropriate connection can be demonstrated between the work carried out by an insolvency practitioner pre-administration and the achievement of the ultimate administration itself,” such costs qualify as pre-administration expenses. The interim managers were found to have been “highly effective in their work, in extremely challenging conditions” and their work “was all directed to the enablement of the administration that followed.”

However, the court refused the application to re-prioritise these expenses under rule 3.51(3) without a properly evidenced formal application on notice to affected parties.

3. Applicant’s Costs | No Automatic Right Under Rule 3.12(2)

Mr Settle argued that rule 3.12(2) IR 2016—which states “the costs of the applicant… are payable as an expense of the administration“—gave the court no discretion to deny his costs. The court emphatically rejected this submission.

ICC Judge Barber held that rule 3.12(2) “must be read subject to section 51 of the Senior Courts Act and paragraph 13(1)(f) of Schedule B1.” By operation of rule 12.41 IR 2016, CPR r.44.2 was “plainly engaged.” The court was “fortified in that conclusion” by Ardawa v Uppall [2019] EWHC 1663 (Ch).

Applying the “costs follow the event” principle under CPR 44.2, the court found Mr Settle was not the successful party. His pre-pack application had been “roundly rejected” and different administrators appointed. The court held Seven Stars was “in substance the successful party” as it had successfully opposed the pre-pack and secured appointment of its chosen nominees.

Mr Settle’s recoverable costs were capped at the issue fee only. The court acknowledged his application achieved a “short reprieve” for the company, but held “the fact that the Company was not ultimately wound up… was not down to Mr Settle… but rather to the hard work of Seven Stars, supported by the Petitioner, the interim managers and the solicitor manager.“

4. Personal Costs Order | When Rule 3.4 Doesn’t Protect Directors

Seven Stars sought a personal costs order against Mr Settle under section 51 of the Senior Courts Act 1981. Mr Settle resisted, arguing rule 3.4 IR 2016 precluded this—rule 3.4 provides that once filed, a director’s administration application “is to be treated for all purposes as an application by the company.”

The court rejected this defence, holding that “rule 3.4 must be read subject to section 51 of the Senior Courts Act and paragraph 13(1)(f) of Schedule B1.”

Even if rule 3.4 made Mr Settle a “non-party” for costs purposes, the court held it was just to make a personal costs order because “Mr Settle was plainly the ‘real party’ over that period, seeking to benefit personally from his proposed pre-pack administration and conducting the litigation on self-serving evidence which he knew to be materially false, without proper regard for the interests of the Company or the creditors as a whole.”

The court found the circumstances exceptional. Mr Settle’s knowingly false evidence “tainted and distorted the whole of the first hearing, which ran late into the evening.” He had acted without transparency, failed to respond to creditors’ information requests, and “put arrangements in place to set up Precision and to line up a short, covert, purported marketing process” using insolvency practitioners he had previously used for another pre-pack. “Had Mr Settle engaged constructively and transparently with the Company’s creditors and put in place a proper marketing process… the administration application could easily have been dealt with in one hearing.”

Mr Settle was ordered to pay Seven Stars’ costs up to and including the 7 February 2025 hearing personally, without recourse to the insolvent estate, subject to detailed assessment if not agreed.

The court declined to make a personal order for costs after 7 February 2025, recognising Mr Settle’s neutral stance at the resumed hearing and that he corrected the false evidence in his third witness statement (albeit without apology or adequate explanation). Those later costs were ordered as an administration expense.

The court distinguished Med-Gourmet Restaurants Ltd v Ostuni Investments Ltd [2013] BCC 47 (where both sides’ costs were allowed as expenses despite misleading information), noting “there appears to have been little or no debate on costs” in that case and emphasising that “judicial rulings on costs are highly fact-specific.“

Key Takeaways for Practitioners

1. Directors’ personal exposure persists: Rule 3.4 IR 2016 does not shield directors from personal costs orders under section 51 SCA 1981 where they are the “real party” pursuing the litigation for personal benefit with dishonest evidence. This applies even though the application is formally treated as made by the company.

2. Rule 3.12(2) is not automatic: Courts retain discretion to deny or cap applicant’s costs as administration expenses. Rule 3.12(2) must be read subject to section 51 SCA and CPR 44.2 applies via rule 12.41. Applicants who fail to achieve their sought relief (particularly failed pre-packs) risk recovering only nominal costs.

3. Conduct matters significantly: Knowingly false witness evidence justifies exceptional costs sanctions including personal liability, even where the substantive application is initially well-founded. Lack of transparency, covert pre-pack arrangements, and failure to engage constructively with creditors will compound costs exposure.

4. Pre-administration costs require direct connection: Interim managers’ costs qualify as pre-administration expenses under rule 3.52 where “sufficiently direct and appropriate connection” exists to the eventual administration. However, re-prioritising such expenses under rule 3.51(3) requires formal application with proper evidence—creditors’ approval alone is insufficient.

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