MPB Developments Limited (“Company”) was subject to three winding up petitions; (1) a creditors’ petition presented on 5 May 2023 (“the Petition”) by Cresta Estates Limited ("Cresta") and Luxor Properties Limited ("Luxor"), (2) a contributory petition presented by the Company’s shareholder and director, Stanbreck Properties Limited ("Stanbreck"), on a just and equitable basis and (3) an unfair prejudice petition also presented by Stanbreck.
The short history between the respective parties is that Cresta and Luxor (“the Petitioners”) had loaned the Company £54,810,000 and £2,400,100 (“the Loans”) respectively pursuant to written loan agreements dated 7 November 2019. The Loans were unsecured and repayable with interest on 31 December 2029. The Petition was presented by the Petitioners as prospective creditors on the basis that the Company was unable to pay its debts within the meaning of Section 122(f) the Insolvency Act 1986 (“IA 1986”) because the value of the Company’s assets was less than the amount of its liabilities taking into account contingent and prospective liabilities, i.e. the Company was balance sheet insolvent.
The Company defended the Petition on the basis that the Company was solvent and an intended restructure would generate cash of £88.8m for the Company by December 2029 which would mean that the Company would be able to repay the Loans.
The question for the Court to determine was whether the Company could reasonably be expected to repay the Loans plus interest when they fell due for payment on 31 December 2029. At a hearing on 28 January 2025 Mrs Justice Joanna Smith determined that the Company was balance sheet insolvent and made a compulsory winding up order.
When a winding up order is made, the usual provision in respect of costs is that they be paid from the assets of the Company. However, in this case, the Petitioners sought a non-party costs order pursuant to section 51 of the Senior Courts Act 1981 for the costs of the Petition and the legal costs incurred by the Company in defending the Petition to be paid personally by the directors of the Company, Paul Hilton and Matthew Welsh (“the Directors”).
The relevant guidance when considering whether to make a non-party costs order is set out in the Court of Appeal’s decision in Goknur Gida Maddeleri Enerji Imalet Ithalat Ihracat Tiracet ve Sanayi AS v Cengiz Aytacli [2021] EWCA Civ 1037. The key question is who was the “real party to the litigation” and, in order to obtain a non-party costs order, it is necessary to establish:
It is therefore necessary to look at the facts of the case:
The Directors denied that they were seeking to benefit personally from the litigation and argued that they had a belief that the Company was solvent and that a negotiated settlement would preserve the Company as a going concern resulting in a better outcome for the Company than a sale by a liquidator of the Company.
However, when the matter came before the Court on 2 April 2025, J Smith found that the Directors:
Consequently, the Directors were ordered to pay not only the Petitioners’ costs of the Petition, the application and the Company’s costs of the Petition but also the costs of the other petitions which had become redundant. By making this order J Smith made it clear that it did not impinge on the principle of limited liability but was to avoid the injustice of the Directors hiding behind a corporate identity.
This is a welcome decision by insolvency litigation professionals who often encounter directors who seek to raise a disingenuous dispute of a winding up petition thereby leading to wasted time and costs with no guarantee of recovery. Whilst rare it is clear that, in certain circumstances, the Court can and will exercise this “exceptional jurisdiction”.
If you have any questions, please get in touch with Neena Jakhu, at neena.jakhu@howespercival.com.
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