Liquidators Not Personally Liable for Costs Despite Erroneous Admission of Foleys' Proof of Debt.

SANROSE INVESTMENT LIMITED v FOLEY & ORS AND FWJ LEGAL LIMITED v COURTMAN & RAIKUNDALIA [2025] EWHC 1071 (Ch)

Sanrose Investment Limited v Lawrence Foley & Ors [2025] EWHC 1071 (Ch), an insolvency costs dispute arising from the liquidation of Saville Foley LLP, centered on the Liquidators’ decision to admit the Foleys’ proof of debt and the subsequent applications challenging this determination. The judgment comprehensively addressed the costs principles governing liquidators’ decision-making processes, specifically focusing on potential personal costs orders against office-holders. The court examined the threshold for imposing personal costs liability on liquidators under rule 14.9(2) of the Insolvency Rules 2016, emphasizing that something more than merely unsuccessful resistance of an appeal is required. Critically, the court held that while the Liquidators’ decision was ultimately incorrect, their conduct did not warrant a personal costs order. The judgment underscored that liquidators acting in good faith and exercising professional judgment should not be punished for reasonable errors, particularly when navigating complex factual scenarios without the benefit of hindsight or comprehensive evidence available during subsequent court proceedings. The court specifically rejected allegations of impropriety against the Liquidators, finding that Mr. Courtman’s meeting with Mr. Foley and subsequent proof admission process were not fundamentally unfair or irrational. Notably, the judgment emphasized the quasi-judicial nature of liquidators’ roles, requiring a careful balance between critical examination of proofs and maintaining procedural fairness, without imposing unduly stringent court-like procedural requirements.

"...for the reasons given, the Liquidators’ decision to accept the Foleys’ proof (and indeed, a fortiori, their decision to reject FWJ’s proof, which also depended on a contentious issue of contractual interpretation) was not unreasonable or irrational, and there was no evidence of bias; the claim accepted was not a claim formulated by Mr Courtman himself; it was the claim understood by the Liquidators to have been advanced by the Foleys. Although in my judgment, their decision was wrong, it was reached by means of a process which was itself neither unfair nor irrational, and it took into account the evidence. There is therefore no basis upon which to order that the Liquidators be personally liable for the costs of the decision-making process, or indeed, of these proceedings. That is not of course to say that there might not be a challenge to the amount of those costs, and their remuneration; that is a different matter."

Citations

Re Menastar Finance Ltd [2003] BCC 404 A liquidator’s power in admitting or rejecting proofs of debt is quasi-judicial and mirrors that of the court; the liquidator may go behind a judgment to determine whether the debt is truly due. Re Burnden Group Ltd [2017] EWHC 247 (Ch) On appeal from a liquidator’s decision to admit or reject a proof, the court must determine de novo whether the claim is valid on the evidence then available. Re Farrer Construction Ltd [2022] EWHC 24 (Ch) In a challenge to a rejected proof of debt, the burden of proof falls on the applicant to prove the debt on the balance of probabilities; in a challenge to an admitted proof, the burden lies with the creditor whose proof was admitted. Seldon v Davidson [1968] 1 WLR 1083 In absence of an agreement to the contrary, a payment by one party to another is presumed to be a loan, giving rise to a debt recoverable on demand. Lee v Neuchatel Asphalte Co (1889) 41 Ch D 1 Capital contributions made by members of a company or LLP are not debts; repayment of capital is only available after satisfaction of all other liabilities. Re Van Laun, Ex parte Chatterton [1907] 2 KB 23 (CA) A liquidator is not bound by estoppel or judgment and may examine whether a claimed debt reflects a real liability, regardless of how it was recorded or agreed by the debtor. Re Home and Colonial Insurance Co [1930] 1 Ch 102 An office-holder has a duty to examine each proof of debt carefully and assess the validity and legitimacy of the debt being claimed. Re Fraser, Ex parte Central Bank of London [1892] 2 QB 633 A liquidator must demand satisfactory evidence when assessing whether a debt truly exists; judgments or acknowledgements are not conclusive. Bott & Co Solicitors Ltd v Ryanair DAC [2023] AC 635 A solicitor has an equitable lien over a fund where their services contributed to its recovery or preservation, but only where there is a sufficient connection between the solicitor’s services and the fund in question. Re Capitol Films Ltd [2011] BPIR 334 An office-holder may be personally liable for costs where their conduct involved misconduct, a serious mistake, or irrationality in a costs assessment context. Nimat-Halal Food Ltd v Nimesh Patel [2020] EWHC 734 (Ch) A liquidator will not ordinarily be personally liable for costs of an appeal unless their conduct was unreasonable, irrational, or in personal pursuit of a particular outcome.

Track allocation housing disrepair CPR 46.13 settlement sum costs restriction SCCO

MRO fee markup cap 25% detailed assessment personal injury Senior Courts Costs Office

Security for costs refused CPR 25.27 very high probability success excessive estimate King's Bench

IPEC scale costs transfer Patents Court PD 30 para 9.2 costs caps Court of Appeal

Costs budget variation CPR 3.15A promptness significant development unfair prejudice Chancery Division

Costs budgeting inter partes proportionality high hourly rates AI disclosure Patents Court CPR 3E

Beneficiary personal liability section 71(3) Solicitors Act 1974 indemnity costs VAT self-supply SCCO

Summary assessment indemnity costs unless order payment on account disclosure default Chancery Division

Provisional assessment set aside CPR 3.1(7) points of dispute filing duty PD 47 para 14.3 SCCO

Fixed recoverable costs police claims CPR 26.9(10)(e) intentional tort exemption

Key Points

A liquidator will not ordinarily be personally liable for the costs of a successful appeal against their adjudication of a proof of debt unless the court orders otherwise on grounds of improper conduct. [116–117]
Something more than a mere error or an unsuccessful defence of a claim is required before a costs order will be made against a liquidator personally; the conduct must be unreasonable, irrational, or carried out for personal advantage. [117.3, 139]
The court will consider whether a liquidator acted fairly, in good faith, and with appropriate professional judgment when assessing whether personal liability for costs should be imposed. [120, 127]
In adjudicating a proof of debt, a liquidator performs a quasi-judicial function and is under a duty to investigate the proof critically and independently, even where it is based on a judgment or formal documentation. [46, 117.3, 118]
Where a party seeks a personal costs order against a liquidator, the burden lies on the applicant to demonstrate serious misconduct or material procedural unfairness justifying a departure from the default cost protection afforded by rule 14.9(2). [123, 139]

"Mr Courtman gave evidence that he had considered the Foleys' proof "in conjunction with" his lawyers. Although privilege was not waived, and no detail of that advice was provided (or of any instructions given) that evidence was not directly challenged. It was not a decisive point, and I would reach the same conclusion in respect of this costs issue in any event, but I would assume that the Liquidators did not act contrary to legal advice."

Key Findings In The Case

The judge found that the debt claimed by Mr and Mrs Foley in their proof of debt was not owed to them personally but to Foley Investments Limited (FIL), as it had been agreed on 16 August 2012 that the transfer of the property to Saville Foley LLP was made by the Foleys but treated as a contribution to FIL’s capital in the LLP, such that the Foleys had no direct continuing interest in the LLP following that transfer [93–97, 106].
The court held that FIL was, on the balance of probabilities, entitled to claim as a creditor of the LLP in liquidation in the amount of £450,000, and as a member entitled to share in surplus assets post-payment of creditors, based on consistent entries in the LLP Accounts, undisputed correspondence from the LLP’s accountant, and admissions in evidence previously made by Mr Foley [97–103].
The court found FWJ Legal Limited to be a valid assignee of FIL’s right to payment in the LLP’s liquidation pursuant to the January 2021 Deed of Assignment (DOA), which was construed to operate in the circumstances of a compulsory liquidation, and not only in a members’ voluntary winding up, as had been contended by the Liquidators [110–112].
The Liquidators’ decision to admit the Foleys’ personal proof of debt was reversed, but the court found that the process by which the decision was made was not improper, nor was it so unreasonable or irrational as to justify a personal costs order; the Liquidators had acted fairly and in good faith, investigated the proof critically, and reached their conclusions using professional judgment [124–131, 135–139].
The court held that Mr Courtman, in considering the Foleys’ proof, had not formulated or improperly inserted a new claim on their behalf, nor acted for personal advantage, but merely exercised discretion in acknowledging that they might have a claim requiring adjudication; thus, his conduct did not meet the threshold of misconduct or procedural unfairness needed to justify a personal costs order under rule 14.9(2) [122–124, 130–132].

"In conclusion, to displace the default position that an office-holder will not be personally liable for the costs of a successful appellant, something more than merely unsuccessfully resisting an appeal (or being reversed on appeal) is required; that something will depend on the office-holder's conduct in the circumstances of the case; something more than a mere mistake is required; something serious."

Background

This matter concerns the liquidation of Saville Foley LLP (“the LLP”), involving two primary applications. The first application was submitted by Sanrose Investment Limited (“Sanrose”) on 3 August 2023, seeking the reversal of the decision by the LLP’s joint liquidators, Tyrone Courtman and Deviesh Raikundalia (“the Liquidators”) to admit the proof of debt submitted by Lawrence Foley and Jennifer Foley (“the Foleys”) for £502,428. Additionally, Sanrose sought a personal costs order against the Liquidators in case their application succeeded. The second application, dated 6 September 2023, was made by FWJ Legal Limited (“FWJ”), seeking the reversal or variation of the Liquidators’ decision to reject FWJ’s proof of debt dated 10 August 2023.

To provide context, the LLP was incorporated on 8 June 2011 to develop a property in Chelmsford, Essex (“the Property”). The initial members were the Foleys and the Savilles, with Foley Investments Limited (“FIL”), owned by the Foleys, eventually becoming one of the two designated members alongside Sanrose, owned by the Savilles. Despite numerous planning applications and agreements, the development was never completed, leading to significant discord and eventually to the winding-up of the LLP on 13 January 2021, ordered on Sanrose’s contributory petition.

The Liquidators, who were appointed on 1 February 2021, had to deal with the complexities arising from the claims submitted by the parties involved. These included Sanrose’s accepted loan proof of £450,000, FIL’s rejected proof of £450,000, and the Foleys’ accepted proof of £502,428. The dispute largely stemmed from the intricate financial interactions and contributions towards the aborted development project. Against this backdrop, the court was invited to determine the validity and accuracy of the Liquidators’ decisions regarding these proofs and the overall handling of costs incurred in these proceedings.

Costs Issues Before the Court

The court faced several key cost-related questions. Primarily, whether the Liquidators’ decision to accept the Foleys’ proof of debt was correct, which would determine whether Sanrose’s application to reverse that decision should succeed. Additionally, the validity of the Liquidators’ rejection of FWJ’s proof of debt, which depended significantly on the interpretation of the Deed of Assignment and Charge (“DOA”) between FWJ and FIL, was scrutinized. Finally, the issue of whether a personal costs order against the Liquidators was warranted, based on their conduct during the decision-making process, also needed to be resolved.

The Parties’ Positions

Sanrose, represented by Mr Nathan Webb, argued that the Liquidators had erred in admitting the Foleys’ proof of debt. They contended that the proof in question was not properly substantiated and that the evidence overwhelmingly supported the view that any outstanding sums were owed to FIL, not the Foleys personally. They suggested that inconsistencies and errors in financial documentation further supported this position, and they sought to have the decision reversed and costs awarded against the Liquidators personally for procedural failings.

The Foleys, representing themselves, struggled to clearly articulate their claim but appeared to assert that they were personally owed a debt due to their initial property contribution and other associated costs. They maintained that various payments and transactions with the Savilles equaled a legitimate personal investment in the LLP, qualifying them for such a debt.

FWJ, represented by Mr Adam Deacock, submitted that their claim should be recognised by virtue of the DOA with FIL, which they contended assigned FIL’s rights in the LLP’s liquidation to FWJ. They argued that the intent of the DOA encompassed any liquidation scenario, not limited to a member’s voluntary liquidation, raising questions about contractual interpretation.

The Liquidators, though adopting a largely neutral stance, defended their process and substantive rationality of the decisions made, particularly the acceptance of the Foleys’ proof of debt. They explained this was based on viewing the contributions made by the Foleys as loans and personal investments, aligning with the evidence available in various financial records and correspondence.

The Court’s Decision

In its analysis, the court determined that the Liquidators’ decision to admit the Foleys’ proof of debt must be reversed. The evidence suggested that any ongoing financial claim was more properly ascribed to FIL, not the Foleys personally. This conclusion was supported by the historical accounts, contractual documents, and previous legal positions stated by the parties. Consequently, the court ruled that FIL was the proper creditor, entitled to a debt of £450,000, and therefore should participate in the distribution of the LLP’s assets in liquidation.

Regarding FWJ’s claim, the court reasoned that the DOA between FWJ and FIL effectively assigned FIL’s rights in the LLP’s liquidation to FWJ, despite the specific reference to a member’s voluntary liquidation. By interpreting the DOA within its broader context and the factual backdrop of the compulsory liquidation, the court recognised FWJ’s entitlement to prove in the liquidation based on their rights under the DOA.

On the question of a personal costs order against the Liquidators, the court found no evidence of bad faith or irrational conduct. It was noted that the Liquidators acted in a quasi-judicial capacity and made decisions based on their professional judgment and available evidence. The procedural approach, including the meeting with Mr. Foley, was not deemed improper or indicative of bias. As such, a personal costs order against the Liquidators was not warranted.

In summary, the court’s decisions clarified the proper allocation of debts among the parties involved, affirming the rights of FIL and FWJ within the liquidation process while exonerating the Liquidators from personal costs liability due to the absence of misconduct or unreasonable behavior on their part.`

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