Judgement on DAG costs out

Conclusion as to DAG's Costs

[30] I have therefore come to the conclusion that DAG's costs should, in principle, be paid out of the assets of KSFIOM. I accept that there is a strong argument that this Order, which is that sought by Treasury, runs counter to Treasury's avowed claim during the course of this case that their sole motivation is to assist the general body of creditors and that such an Order will inevitably diminish the amount available to the general body of creditors. However, I believe I must take into account that it must surely be the case that DAG's costs will not be so significant as to make any material difference to the amount available for distribution to the general body of creditors. Unfortunately, I was provided with no information whatsoever as to the quantum of DAG's costs but I would find it incredible if those costs were so significant as to make any such material difference.

[31] Nevertheless, I do consider that the Order which I will make in relation to DAG's costs should not be unduly restrictive. It was submitted by Mr. Caine that I should restrict any pre-preferential costs orders to the costs of opposing the Scheme of Arrangement Petition dated 2nd April 2009 at the hearing on 9th April 2009 alone. He further submitted that any costs incurred by DAG in urging the Treasury to improve the terms of the Scheme so as to make it sufficiently attractive to creditors, organising and addressing meetings of DAG members to comment upon the benefits of the Scheme, and to report upon approaches to the Treasury to improve the terms of the Scheme, or to arrange for proxy votes to be held and voted upon at the Scheme meetings, should not be allowed.

[32] I do not accept that DAG's costs should be constrained in this way. My general impression throughout this case is that, while understandably DAG were seeking to improve the deal being offered to them by Treasury, their input into the Court's consideration of the Scheme was extremely valuable in testing the strengths and weaknesses of the Scheme and in particular their input into the difficult matter of the correct classes which should be demarcated in this particular case, was extremely valuable to all concerned, in particular the Court. It must be remembered that the Scheme documentation was a fiendishly complex piece of work. It would in my view be unfair to restrict the costs recoverable by DAG to those of and incidental to the Scheme hearing on the 9th April. It will of course be a matter for the costs assessor to determine whether any particular item of work falls properly within the terms of the Order which I am going to make in this case but, subject to any further representations from Counsel as to precise wording, I intend to make an Order to the effect that the costs of DAG of and occasioned by the proposed Scheme of Arrangement should be paid out of the assets of KSFIOM as pre-preferential costs. Those costs would of course be assessed on the standard basis in default of agreement. I reiterate that it is not surprising that much time, effort and costs were expended on trying to penetrate the fearsomely complex wording of the Scheme and its Explanatory Statement in respect of which it seems perfectly fair that legal advice should have been taken, as well as dealing with issues such as the preservation of claims against third parties and the parental guarantee. I would add that I also see no need for the costs order to be limited in a temporal way. As Mr. Chambers points out, the Scheme was "in the air" for a considerable time, since around November 2008. It was however only in mid-February 2009 that the DAG could take an informed view of the merits of the Scheme from which date they opposed it. It seems to me that DAG's Scheme costs should therefore be properly claimable from 27th November 2008, when the idea of a Scheme was first ventilated in Court.

[33] Mr. Chambers said that the vast majority of DAG's costs were referable to the Scheme of Arrangement. It is, however, necessary for me to make a similar Order in relation to the relatively modest costs of the Winding-Up Petition. There is no doubt in my mind that, as in the Esal case, one was the mirror image of the other. The Scheme was promoted by Treasury and opposed by DAG. The winding-up was promoted largely by DAG and opposed by Treasury. The two were very closely inter-linked and as a matter of practicality, it might in fact be extremely difficult for a costs assessor to differentiate between work done in relation to the Winding-Up Petition and that done in relation to the Scheme. I have no doubt that various adjournments of the Winding-Up Petition were caused by the desire to promote the Scheme. I have already held that there was no misconduct in relation to the promotion of the Scheme and I therefore rule that the normal Order should apply in relation to winding-up petitions, namely that a successful supporting creditor in the position of DAG should have its costs paid out of the assets of the Company, as a pre-preferential debt, those costs to be assessed on the standard basis in default of agreement.

The Costs of the JLPs

[34] As to the application made by DAG, that the costs of the Liquidators Provisional in relation to the Scheme and the Winding-Up Petition should be paid by the Treasury, it follows that I am not prepared to make such an Order in circumstances where I have not made such an Order in favour of DAG. Furthermore, it would be most unusual, if not unprecedented, for me to make an Order in favour of a party who has not asked for such an Order. It is the case, as Mr. Caine made quite plain during the hearing on 23rd June, that his clients have instructed him not to make any such claim against Treasury. I have no doubt that the Liquidators Provisional have incurred very considerable costs which, if not reimbursed by the promoters of the unsuccessful Scheme, will inevitably lead to possibly a quite material diminution in the assets available for distribution. The Liquidators Provisional were of course specifically empowered by Court Orders of 29th January 2009 and 19th February 2009 to conduct such work, but this would not prevent them from seeking an Order that their costs thereof be paid otherwise than out of KSFIOM. Nevertheless, the Liquidators Provisional have made a firm decision that they will not seek an Order against Treasury for the reimbursement of those costs in whole or in part. In those circumstances I take the view that this must be a matter for the Liquidators Provisional and perhaps the creditors who may, as Mr. Chambers submitted, take the view that the Liquidators Provisional have acted in dereliction of duty in failing to pursue such an Order. I express no view whatsoever as to whether this would be a reasonable course of action. Certainly so far as the JLPs are concerned, they do not seek a costs order against Treasury and consider that the Scheme Petition was properly brought. I do not consider that it would be a proper exercise of judicial discretion to make an Order against Treasury in those circumstances.

[35] The effect of my decision therefore is that the costs of the Liquidators Provisional of and incidental to the Scheme and the Winding-Up proceedings will be paid out of the assets of the Company in the usual way.

The Costs of the Company

[36] As to the costs of the Company in its role as Joint Petitioner in the Winding-Up Petition, as Mr. Clucas, who appeared for the Company, pointed out, there is in fact now no issue as to these. Those costs will be paid out of the assets of the Company in the usual way.

Bathampton Orders

[37] The issue of a Bathampton Order did not assume much significance at the hearing on 23rd June. As Mr. Chambers pointed out in his reply skeleton argument dated 19th June, the Bathampton jurisprudence only becomes relevant in relation to the liquidators' costs of the winding-up petition. However, given that the Liquidators now say that their costs of the Winding-Up Petition are "minimal", the debate about a Bathampton Order is "probably academic".

[38] I would however comment that it seems to me that it is unlikely that the Court needs to rely nowadays on the Bathampton line of authorities because it is now well-established that orders for costs against third parties (such as an alter ego of an insolvent company) are a more appropriate way of proceeding. Nevertheless, I must express the view that I do not consider in any event that there is any basis for the Court to make a Bathampton Order in this case. It seems to me that such an Order, the effect of which is to postpone payment of the Company's own costs until after the unsecured creditors are paid, would require me to find that there had been misconduct by the Provisional Liquidators or the Company and I find myself wholly unable to find any such misconduct. It is certainly a case far away from the facts of the Esal case. Similarly, I can see no basis for adopting the course which Harman J took in Esal, when he made no order as to the company's costs incurred in relation to the failed scheme. If I were to adopt this course, it would mean disallowing the liquidators' costs of the Scheme. In my view the JLPs have adopted a proper approach to the work which they have done in relation to the Scheme and there is no merit in DAG's suggestion that their costs be, in effect, disallowed.

Summary

[39] It seems to me therefore that the end result of my determinations is that there will be an Order that DAG's costs of and occasioned by the proposed Scheme of Arrangement and of and incidental to the Petition dated 9th October 2008 should be paid out of the assets of the Company as pre-preferential costs. In relation to both the Scheme and the Winding-Up Petition of 9th October 2008, I consider that DAG's costs should be paid as and from 27th November 2008 which was the first date on which the Winding-Up Petition was adjourned because of the formulation of the Scheme of Arrangement, in other words the first date at which the normal course of the winding-up proceedings was interrupted.

[40] The costs of the Joint Liquidators Provisional in relation to both the Scheme and the Winding-Up Petition will be paid out of the assets of the Company, again as pre-preferential costs. The costs of the Company as Joint Petitioner in the Winding-Up Petition should also be paid out of the assets of the Company in the same way.

Other Costs Issues

[41] I consider that there should be no Order as to the costs of the hearing on the 23rd June 2009 because, while it is right that DAG have failed in their primary submission that Treasury should pay its costs, I consider that their submissions were not without foundation and that they should not be penalised in costs. I understand also that DAG wish to pursue the question of the alleged wasted costs of the hearing on the 27th May 2009 when it was originally intended to deal with the question of costs. I agree with Mr. Gough that, on reflection, it would not have been right for the Court to deal with what have turned out to be complex issues of costs either on the 27th May or without the benefit of a later skeleton argument from the Treasury and indeed a supplemental skeleton from DAG. In those circumstances DAG's costs on the 27th May 2009 will also be ordered to be paid out of the assets of the Company rather than by the Treasury.

Postscript

[42] I wish to add one brief postscript to this judgment. During the course of his submissions, Mr. Gough commented that Treasury had been doing its best to work within the statutory framework of insolvency legislation in the Isle of Man. I remarked to him that the out-of-date legislation with which the Court and the parties have to work is of course the responsibility of the Treasury in that it is certainly my understanding that insolvency legislation is promoted and drafted by Treasury. It is self-evident that the Island's insolvency legislation (both corporate and personal) is in urgent need of review. This is not the first time that this issue has been raised and I very much hope that priority will be given to such a task in the near future. The Island's reputation as an international finance centre will only suffer if it is not.

[43] I would seek Counsel's assistance in the drawing up of a suitable Order.