Directors ordered to pay petitioners’ costs of a winding up petition

Kingsley Napley is pleased to report the judgment of Mrs Justice Joanna Smith DBE in the case of Re MPB Developments Ltd [2025], which represents an excellent result for our client.  

We act for the petitioners in long running litigation. Two years ago, our clients presented a creditors’ winding up petition, together with a contributory’s winding up petition on the just and equitable basis and an unfair prejudice petition.

The creditors’ petition relied (unusually) on the argument that MPB Developments Limited (“the Company”) was balance sheet insolvent and as a consequence would be unable to repay substantial loans due for repayment on 31 December 2029. The majority of the board of directors caused the Company to defend the petition on the basis that whilst it was admitted the Company was balance sheet insolvent as at the date of its defence (18 October 2023), they expected it to be able to repay the Petitioners’ loans in December 2029 as a result of profits the Company expected to earn in the meantime.

In January 2025 the court heard the creditors’ petition as a preliminary issue. The directors (by then unrepresented) conceded the Company was insolvent on the first day of the trial and the Court made a winding up order.

We applied for an order that the directors pay our clients’ costs of the petition and that they should also personally bear the legal costs incurred by the Company in defending the creditors’ petition.  

Jurisdiction to award a NPCO

Because the Company was the substantive respondent, in coming to her ex tempore judgment, Joanna Smith J treated the application against the directors as akin to a non-party costs order (“NPCO”) application under s51(1) and (3) of the Senior Courts Act 1981 and CPR 44 and 46.2. The Judge relied upon the principles set out in Goknur Gida Maddeleri Enerji Imalet Ithalat Tiracet ve Sanayi AS v Aytacli [2021] (“Goknur”) which drew together the principles in the other leading cases (such as Gardiner v FX Music Limited [2000] and Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004]):

1. because a NPCO is exceptional it should only be made if just in all the circumstances of the case;
2. can the director be described as “the real party” to the litigation?;
3. whilst rare, in order to avoid the injustice of a director relying upon limited liability to defend litigation for his/her own purposes without risk, the court can order the director to pay costs where the company is insolvent and so cannot itself pay the costs;
4. in determining if the director was the real party, the court will look at whether the director controlled or funded the company’s defence but the key issue is whether the director benefitted personally from defending the petition, whether financially, reputationally or otherwise;
5. whether the director controlled or funded the litigation or benefitted personally are factors in determining if a NPCO is just, rather than being a checklist for every case;
6. it will commonly be necessary to show impropriety or bad faith on the part of the director where the litigation was pursued or defended for the benefit of the company; and
7. the impropriety or bad faith will need to be of a serious nature and probably linked to the applicant incurring the litigation costs.

It was concluded in Goknur that to obtain a NPCO against a director who controlled/funded the litigation the applicant will need to establish that the director sought to benefit personally from the position taken by the company or that he/she was guilty of impropriety or bad faith – one or other is enough to justify a NPCO.

In our case, Joanna Smith J referred to the fact that the jurisdiction to award a NPCO is exceptional but, as held in Dymocks Franchise Systems (NSW) Pty Ltd v Todd, that means it is outside the ordinary run of cases and the jurisdiction is highly fact specific. It must be exercised justly. The Judge was satisfied that the control of the defence by the two directors could not be contested and they were the real party to the litigation. There was ample evidence that they were acting in their own interests rather than the best interests of the Company and doing so with impropriety. The Judge also found that: (a) the directors never had an honest belief the Company’s debts would be paid but pursued a highly speculative defence which they did not believe; (b) the directors could have conceded the position two years earlier when the petition was presented, but continued to defend the Petition in order to draw large salaries; (c) the directors had approached settlement discussions on a self-interested basis, with their attitude throughout the negotiations being that they needed to benefit from any deal and continued to defend the Petition in the hope of concluding a deal; and (d) the directors should have withdrawn their defence earlier, rather than (i) forcing the petitioners to incur the costs of trial and (ii) allowing the Company’s assets to be eroded.

The majority directors were ordered to pay the Petitioners’ costs on an indemnity basis and to make a payment on account of £996,127 in 28 days plus a further £63,000 in respect of the costs of the application for the NPCO. The Judge also ordered the directors to pay the legal costs the Company had incurred in defending the petition.

The costs judgment can be found here. 

Conclusion

It is common for directors to cause companies faced with a claim or a winding up petition to buy some time to manoeuvre (or simply to delay the inevitable) by causing a company to defend a claim or petition when they know full well that the company has no proper defence/ is insolvent. Such a defence is often accompanied by without prejudice save as to costs correspondence in which the company’s lawyers argue there is no point in prosecuting the claim or petition because the claimants or petitioners will derive no benefit from a judgment or from a winding up order and that they are simply wasting time and money by paying their lawyers.

Claimants may well be advised in such cases that they can truncate the wait for a trial by applying for summary judgment but they may still have to wait for many months for a hearing of the application. Creditors pursuing a winding up petition will not usually have an opportunity to apply for summary judgment and so if the company files evidence in answer to the petition there will be a significant delay before the petition can be listed and heard. Petitioners will be concerned that in this period the company’s assets may be sold or otherwise disposed of so when a liquidator is eventually appointed the petitioner is left only with claims against the recipients and/or the directors who caused the assets to be disposed of. Such claims may well be uneconomic to pursue so that, notwithstanding the priority attached to the petitioners’ costs by Rule 7.108 of the Insolvency Rules 2016, the petitioners are left out of pocket and dissatisfied. 

In these circumstances the prospect of recovering the costs of the petition without delay from those who caused the costs to be incurred is attractive. The petition debt may not be paid but at least the petitioner is not left completely out of pocket.

FURTHER INFORMATION

For further information on the issues raised in this blog, please contact Nick Hughes or Lucy Edwards in our Restructuring and Insolvency team.

ABOUT THE AUTHORS 

Nick joined Kingsley Napley in 2023 and is a Partner in the Restructuring & Insolvency practice. He has specialised in insolvency work since 2001 and is primarily office holder focused.

Lucy is a Legal Director in Kingsley Napley’s Dispute Resolution team, based in London. Lucy has a wealth of experience in insolvency across numerous sectors in both contentious and non-contentious corporate and personal insolvency.