Can an unpaid costs order be used to bankrupt a party before judgment in the main action?

In the case Cohen -v- TSB Bank plc, decided on 20th November 2001, the Court looked at the question of whether an unpaid costs order made during the course of proceedings can be used to bankrupt a party to the proceedings before judgment has been delivered in the main action.

The petitioners (who were defendants in the main proceedings) argued that the Court should give effect to the policy set out in the Civil Procedure Rules, namely that a party should be entitled to recover summarily assessed costs without delay, and irrespective of the outcome of the trial. The applicant who had been served with the statutory demand (who was the claimant in the main proceedings), argued that the statutory demand against him ought to be set aside until after judgment had been delivered in the main proceedings, as the judgment would affect the result intended by the Judge in ordering payment of the costs.

The Court ordered the statutory demand to be set aside until after judgment in the main action, on the basis that it was unacceptable for a debtor to be made bankrupt in circumstances where it was likely that the petitioning creditor would be the net debtor.

This case appears to erode the principle enshrined in the CPR that a party should be entitled to payment of summarily assessed costs without delay, and whatever the outcome of the proceedings, in order to deter parties to litigation from making unmeritorious and costly applications. It is probably significant, however, that in this particular case, by the time the application to set aside the statutory demand came before the Court, the trial had already concluded although judgment was awaited.

For further information on this decision, please contact Sophie Elboz at [email protected] on +44 (0)20 7367 2958.