LM1 v Seacroft: Medway Oil, a Struck-Out Bill and No Costs Order [2026] EWHC 2212 (Ch)

Detailed Assessment — 2026-08-21

The High Court applied Medway Oil to costs confined to a counterclaim and examined the consequences of a bill wrongly claiming the costs of the whole action. Although LM1 successfully restrained a winding-up petition, its lack of urgency and transparency after the bill was struck out led to no order for costs.

Overview

Date: 21 August 2026

Judge: Her Honour Judge Kelly

Court: High Court of Justice, Chancery Division

Citation: [2026] EWHC 2212 (Ch)

Nature of Proceedings: Costs following a successful application to restrain presentation of a winding-up petition based on a disputed demand for repayment of a costs contribution

Key Issues:

The Medway Oil rule where a party is entitled only to the costs specifically referable to a counterclaim
The consequences of drawing a bill for the costs of the whole action when the entitlement is limited to counterclaim costs
The need to progress redrawn detailed assessment proceedings promptly and transparently
Whether the successful applicant should recover the costs of restraining a winding-up petition
The court's discretion to make no order for costs despite substantive success

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The Background

LM1 Limited v Seacroft Film Investments Limited, decided by the High Court in 2026, shows how a defective bill and poor conduct after strike-out can deprive a successful party of its costs. LM1 successfully prevented Seacroft from presenting a winding-up petition, but Her Honour Judge Kelly made no order for the costs of the application.

The dispute arose from a February 2024 settlement of County Court proceedings. Seacroft agreed to pay LM1 a £30,000 settlement sum, a £20,000 costs contribution and LM1's costs of its counterclaim on the standard basis, if not agreed, less the contribution. The settlement was incorporated into a Tomlin order.

LM1 served a bill in January 2025. Seacroft's points of dispute challenged, among other matters, the application of the indemnity principle, the absence of basic information about fee earners and counsel's fee notes, and the failure to apportion the costs correctly under Medway Oil and Storage Co Ltd v Continental Contractors Ltd [1929] AC 88.

After a provisional assessment identified a fundamental dispute about apportionment, District Judge Josling determined at a detailed assessment on 2 December 2025 that LM1 was entitled only to the additional costs specifically referable to its counterclaim. The original bill was struck out. LM1 was permitted to redraw it in accordance with Medway Oil and to recommence detailed assessment proceedings under CPR Part 47. LM1 was also ordered to pay Seacroft's costs of those proceedings, summarily assessed at £20,449.56 including VAT.

Seacroft then demanded repayment of the £20,000 costs contribution. It maintained that the struck-out bill had effectively been assessed at nil pending a proper replacement. LM1 disputed any immediate repayment obligation and said it remained entitled to redraw its bill. Seacroft served a statutory demand on 23 January 2026.

LM1 applied to restrain presentation of a winding-up petition. By the final hearing, Seacroft accepted that the revised bill and supporting evidence disclosed a substantial dispute about the debt. The only remaining issue was who should pay the costs of the application.

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The Medway Oil Problem

1. Counterclaim Costs Do Not Include All Overlapping Costs

The judgment records the principle derived from Medway Oil through the White Book commentary at paragraph 11:

> “the party who is awarded the costs of the counterclaim will, on assessment, be allowed only those costs which are specifically referable to the counterclaim.”

All other costs remain costs of the claim and are not apportioned merely because the same work or issues also assisted the counterclaim. A party awarded counterclaim costs may therefore recover much less than expected where the claim and counterclaim cover the same ground.

That was the difficulty for LM1. Judge Kelly found that its counterclaim was, in substance, a mirror of Seacroft's claim, subject to minor differences. It was therefore reasonable for Seacroft to consider that the additional costs specifically referable to the counterclaim would be limited.

The original bill did not reflect that restricted entitlement. The decisive finding at [41] was:

> “LM1 wrongly sought to claim the entirety of the costs of the whole action in the bill. That was impermissible.”

The bill's strike-out did not extinguish LM1's entitlement. District Judge Josling had expressly permitted a new bill and fresh assessment proceedings. It did, however, require LM1 to start again with a bill confined to the costs recoverable under the settlement and Medway Oil.

2. The Costs Contribution Created a Practical Repayment Dispute

The settlement required counterclaim costs to be assessed on the standard basis, less the £20,000 contribution. Once the first bill was struck out, Seacroft said the contribution should be repaid because no assessed counterclaim costs then supported LM1's retention of it. LM1 said the contribution remained part-payment of a continuing costs entitlement that had yet to be assessed.

The judgment did not finally determine the contractual repayment dispute or assess the replacement bill. Its relevance lies in the reasonableness of the parties' positions when the court exercised its costs discretion. Judge Kelly accepted that, because the counterclaim largely mirrored the claim, Seacroft reasonably believed that LM1's recoverable counterclaim costs would probably be modest. The court also rejected criticism of Seacroft's solicitors for having identified the settlement clause as the basis of the repayment demand.

The drafting lesson is that a settlement should state clearly whether a costs contribution is a payment on account, when any excess becomes repayable and what happens if a bill is struck out and redrawn. Ambiguity on those points can produce a further dispute before the underlying costs have been assessed.

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Delay and Lack of Transparency After Strike-Out

1. Permission to Redraw Required Prompt Action

LM1 was allowed to recommence detailed assessment proceedings in accordance with CPR Part 47. CPR 47.7 provides the ordinary three-month period for commencing detailed assessment, while CPR 47.8 specifies the consequences of delay.

Judge Kelly accepted that the December order did not specify a separate deadline. However, its reference to CPR Part 47 required the matter to be progressed within the ordinary procedural framework. LM1 did not prepare or serve a replacement bill within the three-month period discussed in the judgment. It provided the bill only after the court ordered evidence exhibiting it, and then on the final day for compliance, 31 March 2026.

Technical compliance with that later order did not resolve the conduct issue. At [45], the Judge noted that LM1 had given no useful information or explanation for the delay before service of the replacement bill.

2. The Creditor Was Entitled to Meaningful Information

After the first bill was struck out, LM1 did not tell Seacroft what counterclaim costs it expected to claim, when the new bill would be ready or what steps had been taken to progress it. Its first supporting statement, served about six weeks after strike-out, said only that a costs draftsman had been instructed and a bill was expected shortly. No replacement bill or meaningful estimate was available at the first hearing on 20 February 2026.

Judge Kelly rejected the argument that Seacroft's solicitors should be criticised for acting after waiting eight weeks. The correspondence already identified the settlement clause relied upon for repayment. Against the background of a bill wrongly claiming the whole action costs, the lack of a replacement bill or meaningful information made Seacroft's position understandable.

The court did not endorse using insolvency proceedings to decide a genuinely disputed debt. By the final hearing, Seacroft had accepted that the evidence disclosed a substantial dispute and the petition could not proceed. The point for costs was narrower: LM1's success did not erase the conduct that had contributed to the application becoming necessary and continuing.

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Why the Successful Applicant Recovered No Costs

CPR 44.2 starts from the general rule that the unsuccessful party pays the successful party's costs, but the court may make a different order after considering all the circumstances, including conduct and admissible settlement offers.

The judgment also applied the insolvency principle that a winding-up petition must not be used to determine a bona fide substantial dispute or to pressure a company into payment. A company must do more than assert a dispute, however. It must show a genuine dispute founded on substantial grounds.

LM1 had achieved the substantive result it sought because Seacroft could not present the petition based on the statutory demand. Seacroft therefore accepted that it needed to displace the ordinary costs rule. Judge Kelly concluded that it had done so.

The decisive circumstances were:

LM1's original bill impermissibly claimed the costs of the whole action despite an entitlement confined to counterclaim costs;
the counterclaim largely mirrored the claim, making Seacroft's view that the additional counterclaim costs would be modest reasonable;
LM1 did not pursue the replacement assessment with urgency or transparency;
it failed to provide a meaningful estimate, timetable or explanation after strike-out;
the replacement bill appeared only after a court order and on the last day allowed; and
Seacroft's solicitors had already explained the contractual basis on which repayment of the contribution was sought.

The conclusion at [39] and [46] was not that Seacroft should recover its costs. It was that each side should bear its own costs of the application. LM1's application succeeded, but its earlier bill and subsequent conduct justified a departure from the normal order.

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Practical Implications

For Costs Lawyers

1. Apply Medway Oil before drawing the bill. Where the order awards only counterclaim costs, include only work specifically referable to the counterclaim. Shared work does not become recoverable counterclaim work merely because it assisted both sides of the pleading.

2. Read the exact wording of the costs entitlement. A right to “costs of the counterclaim” is materially narrower than a right to the costs of the action. The bill must follow the order or settlement, not the receiving party's view of the overall merits.

3. Treat strike-out as requiring immediate repair. If permission is given to redraw and recommence assessment, prepare a compliant bill promptly, explain the timetable and comply with CPR Part 47.

4. Provide meaningful information while the bill is being redrawn. A paying party should be told the likely amount, the basis of the revised claim and when the bill will be served. A bare statement that a draftsman has been instructed may carry little weight.

5. Do not confuse permission to redraw with success on assessment. The replacement bill remains subject to points of dispute and detailed assessment. A costs contribution may also have to be reconciled against the amount eventually allowed.

For Litigation Practitioners

1. Draft costs contributions expressly. State whether the contribution is a payment on account, whether any excess is repayable and when reconciliation occurs. Address what happens if assessment proceedings are delayed or a bill must be redrawn.

2. Do not use insolvency proceedings to try a costs dispute. A statutory demand and threatened winding-up petition are inappropriate where the alleged debt is genuinely disputed on substantial grounds.

3. Substantive success does not guarantee costs. CPR 44.2 permits the court to consider the history leading to the application. Conduct elsewhere in the dispute can justify no order even where the requested injunction is obtained.

4. Frame accusations against solicitors carefully. The court noted that an allegation of a deliberately false statement is serious and should be properly particularised so that it can be answered.

5. Use correspondence to narrow the real issue. Clear requests for the revised amount, timetable and contractual basis can expose whether the dispute concerns entitlement, quantum, repayment of an interim contribution or delay.

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Conclusion

LM1 v Seacroft is a direct warning against drawing a bill more broadly than the underlying costs order permits. The Medway Oil rule can leave a party entitled to counterclaim costs with only the additional costs specifically referable to that counterclaim. Where the claim and counterclaim mirror each other, that recovery may be modest.

The judgment is equally important on conduct after a defective bill is struck out. Permission to redraw is an opportunity to correct the claim, not a licence to leave the paying party without a figure, explanation or timetable. Prompt and transparent compliance with CPR Part 47 may affect not only the detailed assessment but also later costs decisions.

LM1 obtained the protection it sought from the winding-up petition, but recovered none of the costs of doing so. The result illustrates the breadth of CPR 44.2 and the practical cost of failing to align the bill, the evidence and the procedural timetable with the actual entitlement.

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Publisher: Mackenzie Costs

Citation: LM1 Limited v Seacroft Film Investments Limited [2026] EWHC 2212 (Ch)

Full judgment available at: The National Archives

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