High Court: Debtor must pay costs of creditor’s bankruptcy petition despite discharging underlying debt

About this case:

• Citation:
  [2022] IEHC 694
• Judgment:
  External link
• Court:
  High Court
• Judge:
  Mr Justice Mark Sanfey

Delivering judgment in the case, Mr Justice Mark Sanfey outlined the general principles which applied to cases where a petitioner withdrew a petition due to the underlying debt being satisfied. The court held that a debt which was discharged should be presumed to be valid and owing, meaning that the “usual order” would be a costs order against the debt. As such, the court awarded the costs of the proceedings to the petitioner.

Background

The petitioner in the case was the Collector General of the Revenue Commissioners. The debtor was a solicitor from Athlone. The petitioner had previously obtained judgments against the debtor in July 2016 and November 2017 in the amounts of approximately €196,000 and €64,000.

Following the failure to discharge the debt, the petitioner issued a bankruptcy summons in October 2019. A petition was presented in April 2020. In response to the petition, the debtor alleged certain technical defects in the papers and claimed that the petition should be dismissed. The debt also alleged that the Revenue had targeted him for an audit in 2012 after he was successful in a Supreme Court case and that he was subject to harassment by the official conducting the audit.

These claims were rejected by the petitioner, who outlined that the debtor had a history of entering proposals to address his tax arrears before reneging at a later point. The debtor issued certain applications seeking to dismiss the petition, to cross-examine the petitioner and for discovery of documents.

Ultimately, the parties adjourned the matter throughout 2022 while the debtor made efforts to pay the debt. The debtor was discharged and an issue arose in respect of the petitioner’s costs. The court directed a hearing on the application for costs after it was outlined that other judges presiding in the bankruptcy list took the view that a bankruptcy application was not an inter partes matter to which costs could follow. It was reasoned that, under the legislation, a creditor brought a petition on behalf of all creditors, rather than just itself.

The petitioner’s submissions centred on the decision in Re MCR Personnel Limited [2011] 3 IR 341, which dealt with a winding up petition brought by a petitioner which had a money judgment. The petition was withdrawn after the monies were discharged. It was determined that a debtor company was required to pay the costs of the petition, noting that a debtor should not be able to get off “scot-free” when a petition was presented for a debt to which the petitioner was clearly entitled.

High Court

Mr Justice Sanfey outlined that, in most cases, a petitioning creditor will have obtained a money judgment prior to presenting the petition. As such, the petition was usually a last resort for the creditor where other efforts for repayment of the debt had failed.

Further, the court noted that a bankruptcy petition was different to a winding up petition insofar as a bankruptcy petition is not advertised and the name of parties are anonymised. As such, the matter was solely between the petitioner and the debtor, whereas other creditors could apply to be substituted as petitioner in winding up cases.

The court accepted that, under the Bankrupt and Insolvent Act 1857, it had a discretion on the award of costs in bankruptcy cases but that this jurisdiction was not carried over into the 1988 Act. However, the court noted that the Bankruptcy Law Committee Report from 1962 outlined that the High Court had inherent power to award costs and so the jurisdiction under the 1857 Act was unnecessary.

The court held that a bankruptcy petition was clearly a “civil proceeding” within the meaning of section 168 of the LSR Act 2015. As such, the principle that costs follow the event was applicable to the present case.

The court held that it was not necessary to consider the debtor’s objections to the petition in light of the discharge of the debt and the withdrawal of the petition. The court also noted that the debtor complained that the petitioner refused to engage in alternative dispute resolution. However, section 169 of the 2015 Act stated that the court could only take this refusal into account if the court had “invited” the parties to settle the claim. In this case, there was no such invitation and it was doubtful that a court would ever invite a petitioner to compromise a bankruptcy claim made on foot of a judgment debt, the court said.

It was held that a debtor would face no penalty for delaying bankruptcy cases or defending proceedings which caused substantial costs to incur if the court did not award costs in the case. Similarly, if the debtor had successfully defended the matter, then he would have been entitled to his costs against the petitioner.

The court held that the decision in MCR Personnel was directly analogous to the case and the discharge of a debt was an “event” after which costs followed. The court noted that the petition was not prosecuted because the petitioner had achieved the purpose of payment of the debt and “by any objective standard” had won the day.

The court set out the general principles which applied to the costs of bankruptcy cases. The overriding principle was that the court retained a discretion on costs, but the discharge of a debt would usually result in a costs order against the debtor for the petition.

If a petition was based on a judgment debt, the court held that it would not normally entertain submissions that the judgment debt was invalid. Further, the discharge of a petition debt would lead to the presumption that the debt was validly due and owing, the court said. Disputed averments or submissions unsupported by evidence would not displace the usual order as to costs against the debtor.

Conclusion

The court held that the petitioner was entitled to a costs order against the debtor in the case. The petition was struck out on the basis that the underlying debt had been discharged.

Howley v. Lohan [2022] IEHC 694