Brook v Reed

This second appeal raises an important point of principle as regards the costs and remuneration of a trustee in bankruptcy. What relation should the costs and remuneration bear to the circumstances, and in particular the size, of the bankruptcy? This arises in circumstances where neither of the courts below was referred to The Practice Statement: The Fixing and Approval of the Remuneration of Appointees (2004). Disposal of the appeal requires both a consideration of its history and development and guidance as to its future application.

At first instance, the district judge fixed the trustee’s costs and remuneration at £20,354, with additional disbursements of £2,890, and assessed his solicitors’ costs at £23,086, together with a very small amount for disbursements. His Honour Judge Behrens, sitting with two assessors, allowed an appeal by the bankrupt and fixed the trustee’s costs and remuneration, excluding disbursements, at £9,929 and assessed the solicitors’ costs at £10,038. The trustee’s disbursements and most of the solicitors’ disbursements were also allowed. The trustee was unhappy with this result but took a commercial decision not to seek to appeal.

The bankrupt considered that both sets of costs should have been reduced to much lower figures and applied for permission to appeal. As a second appeal, it required the permission of the Court of Appeal. Lloyd LJ refused permission as regards the solicitors’ costs, and refused permission as regards the trustees’ costs on any of the grounds as advanced by the bankrupt who was appearing in person. Lloyd LJ considered however that there was a proper ground of appeal and gave permission limited to that ground, as follows:

“Judge Behrens was wrong in law not to reduce the amount of the trustee in bankruptcy’s costs and disbursements to a sum substantially lower than £12,820.50 (costs of £9,929.75 and disbursements of £2,890.75) because that figure is disproportionately high in relation to the circumstances of the bankruptcy (which involved only two creditors with debts of less than £20,000 in all and two assets, a modest retail business and a share in a matrimonial home) especially when taken together with the amount allowable in respect of the costs of the trustee in bankruptcy’s solicitors. That figure does not have regard to the Practice Statement: The Fixing and Approval of the Remuneration of Appointees 2004, and in particular to the principle that the remuneration of the trustee in bankruptcy should reflect and be fixed so as to reward the value of the service rendered by him, not simply to reimburse him in respect of time expended and cost incurred, nor does it take properly into account the status of the trustee in bankruptcy as a fiduciary.”

In order to deal with this ground of appeal, it is necessary to set out the relevant legal framework and the approach which has been adopted by the courts in relation to the remuneration of trustees in bankruptcy and other office-holders. It is convenient to do so before looking in detail at the facts of the case under appeal.

The development of the law and practice in this area has to be seen against a background of public concern as to the levels sometimes reached by office-holders’ fees and remuneration, together with a public interest in seeing that office-holders’ duties are competently and properly carried out.

Public concern in this area is nothing new. The fictional case of Jarndyce v Jarndyce was Charles Dickens’ response to a real problem that the costs of administering an estate could significantly deplete or even exhaust the estate. In more recent times, the costs associated with the insolvent estate of Robert Maxwell attracted both Parliamentary and judicial criticism. A report of the House of Commons Select Committee on Social Security, whose primary concern was the steps taken to recover misappropriated pension assets, published a highly critical report in March 1994. In Mirror Group Newspapers plc v Maxwell (No 2) [1998] 1 BCLC 638 (Maxwell), Ferris J considered the principles applicable to fixing the remuneration of receivers of the estate of Robert Maxwell appointed by the court under s.37 of the Supreme Court Act 1981 (now the Senior Courts Act 1981). Their total recoveries before their remuneration and legal fees amounted to £1,672,500. The total of their remuneration (£744,289), legal fees (£705,283) and other disbursements was £1,628,572, most of which was calculated on a time basis. Ferris J, who has played a leading role in the development of the relevant principles, described these figures in his judgment as “profoundly shocking” and the result of the receivership as “shameful” (p.645).

More recently still, concerns have been raised in the report on the Insolvency Service published in July 2009 by the House of Commons Business and Enterprise Select Committee and in the study of the Office of Fair Trading on the market for corporate insolvency practitioners published in June 2010. In February 2011 the Insolvency Service published a consultation paper on reforms to the regulation of insolvency practitioners, which includes proposals for strengthening control of their remuneration.

Until relatively recently, the remuneration of office-holders had in general been determined as a percentage of realisations and distributions. Under the Bankruptcy Act 1914, which governed the law of bankruptcy until replaced by the Insolvency Act 1986, this was the only basis of remuneration for trustees in bankruptcy: s.82 (1). In the case of the compulsory liquidations of companies, successive Winding-up Rules provided for remuneration on the same basis, although under successive Companies Acts the court had power to fix remuneration on some other basis. Nonetheless the court would generally consider a percentage basis to be appropriate and there was a prevailing scepticism about time spent as a proper basis. In Re Carton Ltd (1923) 39 TLR 194, which concerned the remuneration of a liquidator in a voluntary liquidation, P.O.Lawrence J refused to authorise remuneration at an unusually generous percentage rate, which had been approved by the committee of inspection, on the grounds that the amount of work undertaken did not justify a rate higher than the rate usually applied. He also said this of a time-basis:

Remuneration on the basis of a percentage of realisations and distributions had the merit of being a payment by results, but it was criticised for leading in the case of easily realised assets to disproportionately high remuneration and in a complex case to poor recompense in relation to the amount of work involved: para 998 of the Report on Insolvency Law and Practice (1982 Cmnd. 8558) (the Cork Committee Report).

The remuneration of office-holders is not dealt with in the Insolvency Act 1986 but in the Insolvency Rules 1986 (as amended) made pursuant to the Act. There are different sets of provisions for each type of office-holder (administrator, liquidator, trustee in bankruptcy) but they are broadly the same. I shall take those which apply to a trustee in bankruptcy, which are contained in rules 6.138-6.142C. Some amendments and extensive additions were made with effect from 6 April 2010 which do not apply to the present case, but they do not in any event fundamentally change the regime as to remuneration.

Rule 6.138(1) provides that the trustee is entitled to receive remuneration for his services as such and rule 6.138(2) provided in its un-amended form:

“(2)

The remuneration shall be fixed either –

(a)

as a percentage of the value of the assets in the bankrupt’s estate which are realised or distributed, or of the one value and the other in combination, or

(b)

by reference to the time properly given by the insolvency practitioner (as trustee) and his staff in attending to matters arising in the bankruptcy. ”

The substantial change to the pre-1986 law was to permit remuneration to be determined on a time basis as an alternative to a percentage of realisations and distributions.

The decision as to whether paragraph (a) or (b) was to apply was to be made by the creditors’ committee or by a resolution of a meeting of creditors: rule 6.138(3) and (5). Rule 6.138(4) provides guidance as to how the decision should be made:

“(4)

In arriving at that determination, the committee shall have regard to the following matters-

(a)

the complexity (or otherwise) of the case,

(b)

any respects in which, in connection with the administration of the estate, there falls on the insolvency practitioner (as trustee) any responsibility of an exceptional kind or degree,

(c)

the effectiveness with which the insolvency practitioner appears to be carrying out, or to have carried out, his duties as trustee, and

(d)

the value and nature of the assets in the estate with which the trustee has to deal.”

This sub-rule applies equally if the decision is made by a meeting of creditors: rule 6.138(5). These criteria, together with the amount of time spent by the office-holder and his staff, reflect the recommendation in para 895 of the Cork Committee Report.

In default of a decision by the creditors’ committee or a meeting of creditors, the trustee is entitled to remuneration by reference to percentages on realisations and distributions as set out in Schedule 6 to the Rules: rules 6.138(6) and 6.138A. The Rules provide for recourse to the court by the trustee, if he considers that the remuneration is too low or by creditors if they think it is too high: rules 6.141 and 6.142. The wording of rule 6.142, both before and after the amendments made in 2010, enable the court either to vary the basis or reduce the amount of the trustee’s remuneration on an application by creditors. The Rules do not, however, make any direct provision by way of guidance or otherwise as to how the court should exercise the powers conferred by these two rules. That is not to say that there are no principles applicable to the exercise of those powers, but such principles derive from existing case law and are left to be developed by the courts, taking due account of the statutory framework.

Perhaps surprisingly, the Rules made no provision for a challenge by the bankrupt, even in a case where there would be a surplus of assets available to him after the payment in full of all debts admitted to proof and reasonable costs and remuneration. Such provision had been made in s.82(2) of the Bankruptcy Act 1914 and is now, since 5 April 2010, made in rule 6.142, subject to a requirement for the court’s permission, and also in r.6.207A in conjunction with an annulment application. It was, however, established that even without express provision, the bankrupt could challenge a trustee’s remuneration under s.363 of the Insolvency Act.

The first reported case after 1986 in which relevant principles were discussed was Maxwell. Although it concerned the fixing of remuneration for a court-appointed receiver, Ferris J examined also the position of office-holders under the insolvency legislation and his consideration of the general principles was treated by him, and has since been treated by other judges, as applicable to those office-holders.

Ferris J referred at p.647 to a fairly general perception in recent years that costs in insolvency cases had reached an unacceptably high level and that there was little by way of controls or effective supervision. As regards controls, he regarded the Rules and other regulations as “somewhat sketchy, ill-expressed and consequently liable to be misunderstood” but he took the view that “if the matter is approached from the standpoint of general principle…a much firmer picture emerges”. He continued:

“The essential point which requires constantly to be borne in mind is that office-holders are fiduciaries charged with the duty of protecting, getting in, realising and ultimately passing on to others assets and property which belong not to themselves but to creditors or beneficiaries of one kind or another. They are appointed because of their professional skills and experience and they are expected to exercise proper commercial judgment in the carrying out of their duties. Their fundamental obligation is, however, a duty to account, both for the way in which they exercise their powers and for the property which they deal with.”

It was a feature of the fiduciary duty to account that it was for the office-holder who seeks remuneration at a particular level to justify his claim. Ferris J identified three consequences as following from this general equitable principle:

“First, office-holders must expect to give full particulars in order to justify the amount of any claim for remuneration. If they seek to be remunerated upon, or partly upon, the basis of time spent in the performance of their duties they must do significantly more than list the total number of hours spent by them or other fee-earning members of their staff and multiply this total by a sum claimed to be the charging rate of the individual whose time was spent. They must explain the nature of each main task undertaken, the considerations which led them to embark upon that task and, if the task proved more difficult or expensive to perform than at first expected, to persevere in it. The time spent needs to be linked to this explanation, so that it can be seen what time was devoted to each task. The amount of detail which needs to be provided will, however, be proportionate to the case.

The charging rate claimed must also be proved by evidence; and what is relevant is not the charging rate of the particular individual but the broad average or general rate charged by persons of the relevant status and qualifications who carry out this kind of work (cf in relation to solicitors’ charges Jones v Secretary of State for Wales [1997] 2 All ER 507, [1997] 1 WLR 1008 and the cases there referred to).

Second, office-holders must keep proper records of what they have done and why they have done it. Without contemporaneous records of this kind they will be in difficulty in discharging their duty to account. While a retrospective reconstruction of what has happened may have to be looked at if there is no better source of information, it is unlikely to be as reliable as a contemporaneous record. Office-holders whose records are inadequate are liable to find that doubts are resolved against them because they are unable to fulfil their duty to account for what they have received and to justify their claim to retain part of it for themselves by way of remuneration.

Third, the test of whether office-holders have acted properly in undertaking particular tasks at a particular cost in expenses or time spent must be whether a reasonably prudent man, faced with the same circumstances in relation to his own affairs, would lay out or hazard his own money in doing what the office-holders have done. It is not sufficient, in my view, for office-holders to say that what they have done is within the scope of the duties or powers conferred upon them. They are expected to deploy commercial judgment, not to act regardless of expense. This is not to say that a transaction carried out at a high cost in relation to the benefit received, or even an expensive failure, will automatically result in the disallowance of expenses or remuneration. But it is to be expected that transactions having these characteristics will be subject to close scrutiny. ”

The aim, if the court is fixing the remuneration, is to reward the value of the services rendered by the office-holder. This does not necessarily equate to time spent, as to which Ferris J said at p.652:

“In my judgment it is vital to recognise three things in this field. First, time spent represents a measure not of the value of the service rendered but of the cost of rendering it. Remuneration should be fixed so as to reward value, not so as to indemnify against cost. Second, time spent is only one of a number of relevant factors, the others being, as I have said, those which find expression in r 2.47 and similar rules. The giving of proper weight to these factors is an essential part of the process of assessing the value, as distinct from the cost, of what has been done. Third, it follows from the first two points that, as the task is to assess value rather than cost, the tribunal which fixes remuneration needs to be supplied with full information on all the factors which I have mentioned.”

A vivid illustration of the excessive remuneration which can arise from an office-holder’s uncritical reliance on time spent can be seen in Re Cabletel Installations Ltd [2005] BPIR 28 at [24] where work was carried out at too senior level and where there were more and lengthier meetings and excessive reviews than the administration warranted.

Ferris J also considered as relevant to the court’s task the matters listed in r.6 138(4). Although in terms applicable to the creditors’ committee or meeting of creditors in their decision as to remuneration, Ferris J considered it as inevitable that the court would also have regard to them. In my judgment, he was right to take that view. Rule 6.138(4) and the similar rules as regards other office-holders are the closest the Rules get to any statement of principles.

Before hearing Maxwell, Ferris J had been appointed by the then Vice-Chancellor, Sir Richard Scott, to chair a working party on the remuneration of office-holders, with a remit which included considering and making recommendations as to the basis on which and the procedures by which the remuneration of office-holders should be fixed or determined by the court. The other members of the working party were Registrar Simmonds, Mr Desmond Flynn, Deputy Inspector General of the Insolvency Service, succeeded as a member by Mr Peter Joyce, Inspector General and Chief Executive of the Insolvency Service, Mr Murdoch McKillop, chartered accountant and President of the Society of Practitioners of Insolvency, and Mr Peter Totty, solicitor and partner in Allen and Overy.

The working party’s report (the Ferris Report) was published by the Lord Chancellor in July 1998. The report notes the judgment of Ferris J in Maxwell and records the agreement of the other members with the general matters dealt with in it.

The report contains a number of important and relevant observations. Para 4.2 states the need for the fair and efficient administration of the insolvent estate in accordance with the relevant legal regime by office-holders with the necessary skill and integrity. This was in the public interest as well as in the interests of those directly affected:

“In all cases it is in the interests of those ultimately entitled to the assets, whether as creditors or beneficiaries or owners in some other capacity, as well as being in the public interest in general, that the office-holder shall carry out his duties with proper skill and care. These duties include the carrying out of certain investigations and the recognition of the public interest element as well as the administration of the assets. These factors in turn require that persons having proper qualifications, experience, skill and integrity shall be available to perform the duties of office-holders. In the long term this will only be so if such persons can expect to receive reasonable remuneration for their services as office-holders. The lowest rate of remuneration will not necessarily be the most advantageous.”

Paragraph 4.3 emphasises the need both for proportionality and for sufficient evidence to be available to justify the office-holder’s charges:

“An important matter which we have endeavoured to keep in mind and which needs to be kept in mind by every court or body which has to fix or approve the remuneration or disbursements of an office-holder is the need for what, in the absence of a better term, we describe as “proportionality”. The administrations undertaken by office-holders are of almost unlimited range of size and complexity. Mega-insolvencies, or even medium sized insolvencies where the remuneration claimed is large in cash terms or as a proportion of the value of assets dealt with, justify and require a higher degree of evaluation and justification than small and straightforward cases where the suggested remuneration is comparatively modest. This makes it impossible to prescribe, except in general terms, a universal approach applicable to all cases. It would be counter-productive if, for example, an office-holder were to feel that he has to explain and prove every element which goes to make up what is self-evidently a modest charge in a simple case, regardless of the expense he incurs in doing so and hopes to recover from the estate which he is administering. Over-zealous recording of the minutiae and exact timing of an office-holder’s activities is a waste of the office-holder’s time and the creditors’ money. What is, however, needed (and thus required by the principle of proportionality) is the provision of sufficient information to enable creditors or the court to have a clear view of what the office-holder has done or intends to do and of the value he has protected for the creditors. ”

The report discusses a number of bases on which an office-holder could be remunerated. One was, of course, by way of percentage of assets realised and distributed. At that time, rules 4.127(6) and 6.137(6) of the Insolvency Rules provided as the default position that the remuneration of a liquidator or trustee would be on the scale laid down for the Official Receiver by general regulations. The report notes that it would assist if a way could be found of recognising within the scale of percentage charges the costs of regulatory compliance and similar necessary costs which do not themselves involve or result in a realisation or distribution of assets. The report at para 5.15 contained this recommendation:

“We see much attraction in the promulgation of a new scale of charging which, in smaller cases, would replace the Official Receiver’s scale as a basis of remuneration where the office-holder is engaged in private practice. Such a scale, if it can be devised, would go a long way towards enabling the office-holder to know how he is to be remunerated and the creditor to be satisfied that the office-holder’s charges are objectively justifiable. It could therefore be expected to be adopted in a wider range of cases, which nevertheless fall into the category of smaller cases, than those in which the Official Receiver’s scale is now applied. This would reduce the areas of dispute and criticism concerning the remuneration payable to the office-holder. Even in cases where it is not adopted it would provide a useful bench mark. Office-holders who claim remuneration which is more generous than that allowed under the new scale would need to justify their claim. Likewise creditors who allege that the scale provides remuneration that is too generous in their case would have to show why this is so.”

In para 5.16, this recommendation was qualified in two respects. First, it was recognised that the promulgation of a satisfactory scale might prove difficult. Secondly, any such scale would need to be regularly brought up to date in recognition of inflation and other cost increases. The revision of rules 4.127(6) and 6.137(6) to their present form and the introduction of rules 4.127A and 6.138A and schedule 6 in 2004 would appear to have been in response to this recommendation. I record the fact that the scale has not since then been amended, but cannot comment on whether circumstances have changed sufficiently to make it appropriate to do so. Plainly it should be regularly reviewed.

As to charging on a time basis, the report states in para 5.21:

“The main problem which is perceived to have arisen from the application of the quantum meruit basis in the recent past is that the figure which can be arrived at by the application of current charging rates to recorded hours may be a very large one, not obviously linked to the value of the services rendered. The main remedy for this problem is, of course, the refinement of the concept of “value” and its appraisal, on which some comments are made below.”

There are further observations on the relevance of time spent:

“6.9

We think we should say something more about the weight which is to be given to time spent. … We have a good deal of anxiety about what appears to have become the modern tendency for office-holders to charge mainly, or even solely, by reference to hourly rates. To do so assumes that whatever time was in fact spent on a particular task was necessarily and properly spent by a person of the seniority and experience of the person who actually carried out that task. Although in an ideal world this would be the case, it is foolish to suppose that this ideal is invariably, or perhaps even frequently, achieved. We emphasise strongly the need for the body which fixes the remuneration of an office-holder to take account of all the factors stated in the PL [provisional liquidator] formula. Where the assessment of the other factors indicates that the overall results of the office-holder’s activity are mediocre or disappointing this may cast doubt upon the effectiveness of the time spent.

6.10

A corollary of this is that it must be part of the office-holder’s duties, when preparing and presenting his claim for remuneration, to take a look back over the general performance of his duties and to ask himself conscientiously whether, if he is remunerated as he proposes, he can say that he has given value for money. We do not shrink from the further corollary that, in a case where the office-holder has performed particularly efficiently and attained a specially good outcome, he may be able to claim a rate of remuneration which represents more than his standard charging rate for the time he has spent. We hasten to add that, where such a claim is made, it is for the office-holder to substantiate it.”

As to the criteria which should be applied when fixing remuneration, it was recommended in the report that they should essentially be the five criteria set out in Rule 4.30(1) as applicable when the court fixes the remuneration of a provisional liquidator. They in turn are the four criteria contained in Rule 6.138(4), quoted earlier in this judgment, together with a fifth: “the time properly given by [the office-holder] and his staff in attending to the company’s affairs”. Obviously in the context of a bankruptcy, a reference to “the bankruptcy” would be substituted for “the company’s affairs”.

As regards the records to be kept by office-holders to support a claim for remuneration, the practice then prevailing of keeping a record of time spent which was not linked to any record of activity was not adequate. Better records, aided by computer systems, were needed.

Ferris J was again required to consider office-holders’ remuneration in Re Independent Insurance Co Ltd (No 2) [2003] 1 BCLC 640. He was assisted by a solicitor with wide insolvency experience, whose report sets out the general principles then accepted by the insolvency profession as the yardstick for claiming remuneration in insolvency proceedings: para 1.5 on p.651 and para 3 on pp 652-655. Those principles drew on the Insolvency Rules, Maxwell and the Ferris Report.

In Re Cabletel Installations Ltd [2005] BPIR 28, decided in July 2004, Chief Registrar Baister, after referring to the Insolvency Rules, Maxwell and Re Independent Insurance Co Ltd, set out the approach he would adopt to fixing the applicant administrators’ remuneration:

“I shall examine the main work streams and some of their subcategories and consider the time spent and whether it was justified; I shall have regard, insofar as I can, to the level at which work has been done; I shall consider the benefit of the work done and, to any extent appropriate, whether it was necessary. I shall then look at the larger picture and consider the case in terms of value. In doing so I shall have regard to the factors set out in the rules and to other factors peculiar to this case. I shall bear in mind that time spent is a measure not of the value of the service rendered but of the cost of rendering it. I do not propose, therefore, to allow myself to be influenced to any real extent by the final figures which the administrators claim, since, it seems to me that, prima facie, they reflect the cost of time rather than the value of the service provided. I shall resolve any doubts I have against the administrators.”

One of the recommendations in the Ferris Report was the revival of an Insolvency Court Users Committee with membership drawn from the judiciary, the Insolvency Service, insolvency practitioners, solicitors and the Bar, to act as a focal point for consideration and consultation on matters of concern, including in particular remuneration. The committee was in due course revived and sits under the chairmanship of the Chancellor of the High Court.

It was a working party of the revived Insolvency Court Users Committee which was given the task of preparing a practice statement, which would conveniently bring together in one document both the principles relevant to the fixing of office-holder’s remuneration and the procedure and practice which the court generally adopted in relation to the various matters likely to arise on such applications, including the information to be provided by office-holders. The working party included Neuberger J (as he then was), Chief Registrar James, Costs Judge Campbell, and representatives of insolvency practitioners, solicitors, and the Bar, including Mr Davies QC who appears as counsel for the respondent on this appeal.

The Practice Statement: The Fixing and Approval of the Remuneration ofAppointees (2004) (the Practice Statement) was issued on 15 July 2004 by Chief Registrar Baister and was expressed to come into force on 1 October 2004. It was published in the White Book (see now 3E-117 in vol.2 of the 2011 edition) and at [2004] BCC 912. It is available on HM Courts Service website and in all or most published collections of insolvency legislation. Para 3.2 states its objective:

“The objective of this Practice Statement is to ensure that the remuneration of an appointee which is fixed and approved by the court is fair, reasonable and commensurate with the nature and extent of the work properly undertaken by the appointee in any given case and is fixed and approved by reference to a process which is consistent and predictable.”

The Practice Statement covers three principal topics. First, it sets out the “guiding principles” which the court will apply to remuneration applications. Secondly, it deals in paragraph 4 with the judicial level at which remuneration applications will be heard and the use of assessors. Thirdly, para 5 deals with the evidence to be provided by an office-holder, subject to the court’s directions. The content of this evidence is driven by the guiding principles.

It applies to the various categories of office-holders (called appointees in the Practice Statement) appointed under the Insolvency Act 1986, including liquidators and trustees in bankruptcy. Save to the extent and as may otherwise be ordered by the Court, it is stated in para 2.1 to apply to any application to the court by an appointee either to fix and approve his remuneration where it has not already been fixed and approved, for example by a creditors’ committee or a meeting of creditors, or to increase his remuneration as previously so fixed, or to:

“any application by a person who may be permitted to apply under the Insolvency Act, the Insolvency Rules, or otherwise including by reference to the jurisdiction of the court to supervise the conduct of one of its officers and the inherent jurisdiction of the Supreme Court and is dissatisfied with the remuneration of an appointee that has otherwise been fixed and approved on the basis that such remuneration is excessive.”

Paragraph 3.3 refers to:

“the guiding principles by reference to which applications for the fixing and approval of the remuneration of appointees are to be considered both by applicants, in the preparation and presentation of their application, and by the court which is required to determine such applications.”

Paragraph 3.4 sets out the guiding principles:

“(1)

‘Justification’: It is for the appointee who seeks to be remunerated at a particular level and/or in a particular manner to justify his claim and in order to do so the appointee should be prepared to provide full particulars of the basis for and the nature of his claim for remuneration.

(2)

‘The benefit of the doubt’: The corollary of guiding principle (1) is that on any application for the fixing and approval of the remuneration of an appointee, if after considering the evidence before it and after having regard to the guiding principles (in particular guiding principle (3)), the matters contained in paragraph 5.2 (in particular paragraph 5.2(10) and the matters referred to in paragraph 5.3 (as appropriate) there remains any element of doubt as to the appropriateness, fairness or reasonableness of the amount sought to be fixed and approved (whether arising from a lack of particularity as to the basis for and the nature of the appointee’s claim to remuneration or otherwise) such element of doubt should be resolved by the court against the appointee.

(3)

‘Professional integrity’: The court should give weight to the fact that the appointee is a member of a regulated profession (where such is the case) and as such is subject to rules and guidance as to professional conduct and (where such is the case) the fact that the appointee is an officer of the court.

(4)

‘The value of the service rendered’: The remuneration of an appointee should reflect and should be fixed and approved so as to reward the value of the service rendered by the appointee, not simply to reimburse the appointee in respect of time expended and cost incurred.

(5)

‘Fair and reasonable’: The amount of the remuneration to be fixed and approved by the court should be fair and reasonable and represent fair and reasonable remuneration for the work properly undertaken or to be undertaken.

(6)

‘Proportionality’

(i)

‘proportionality of information’: in considering the nature and extent of the information which should be provided by an appointee in respect of an application for the fixing and approval of his remuneration the court, the appointee and any other parties to the application shall have regard to what is proportionate by reference to the amount of remuneration to be fixed and approved, the nature, complexity and extent of the work to be completed (where the application relates to future remuneration) or that has been completed by the appointee and the value and nature of the assets and liabilities with which the appointee will have to deal or has had to deal;

(ii)

‘proportionality of remuneration’: the amount of remuneration to be fixed and approved by the court should be proportional to the nature, complexity and extent of the work to be completed (where the application relates to future remuneration) or that has been completed by the appointee and the value and nature of the assets and/or potential assets and the liabilities and/or potential liabilities with which the appointee will have to deal or has had to deal, the nature and degree of the responsibility to which the appointee has been subject in any given case, the nature and extent of the risk (if any) assumed by the appointee and the efficiency (in respect of both time and cost) with which the appointee has completed the work undertaken;

(7)

‘Professional guidance’: In respect of an application for the fixing and approval of the remuneration of an appointee, the appointee may have regard to the relevant and current statements of practice promulgated by any relevant regulatory and professional bodies in relation to the fixing and approval of the remuneration of an appointee. In considering an application for the fixing or approval of the remuneration of an appointee, the court may also have regard to such statements of practice and the extent of compliance with such statements of practice by the appointee.

(8)

‘Impracticability’: where the appointee has not, either upon or shortly after the commencement of his appointment, sought to have the basis upon which his remuneration is to be fixed approved by the members of the partnership or the company, the creditors’ committee, the liquidation committee or the general body of creditors (as appropriate) and in circumstances where the appointee considers that it will be impracticable to have his remuneration fixed and/or approved in such a manner, he may, as soon as reasonably practicable after his appointment, apply to the court to have the basis upon which he is to be remunerated fixed and for directions as to the manner in which his remuneration is to be approved (which may include provision for payments to be made on account). In circumstances where such an application is not made but the appointee subsequently makes an application to the court for the fixing and approval of the whole or any part of his remuneration, an explanation as to why no earlier application was made shall be provided to the court.”

Paragraph 5 sets out in detail the information which an office-holder must provide on any application for the fixing and approval of remuneration.

Mr Davies, for the trustee, raised the issue as to whether and, if so, to what extent the Practice Statement applied to the assessment of remuneration in this case. He pointed out that para 2.1 provides for it to apply in two distinct situations, where the office-holder applies to the court to fix remuneration which would not otherwise be payable (para 2.1(1) and (2)) and where a creditor or the debtor challenges remuneration already authorised in accordance with the Insolvency Rules (para 2(3)).

Mr Davies accepts, as he must, that the Practice Statement itself provides that it is to apply to the second situation, where there is a challenge to the office-holder’s remuneration, but he suggests that the procedure in such a case is likely to be different. With that suggestion I entirely agree, and it is recognised in the opening words of para 2.1 providing that the Practice Statement applies “save to the extent and as may otherwise be ordered by the court”.

This may most obviously be demonstrated in the directions which the court gives as to the evidence to be put before the court. While the full range of information required by para 5.2 may normally be required on an application by the office-holder to fix his own remuneration, the information required on a challenge will vary according to the circumstances. If the office-holder has already provided sufficient detail to enable a well-informed challenge to be made, there may be little or nothing to be added by him save in response to the detailed challenge.

In other cases, while recognising that overall the remuneration is sufficiently high to raise questions, the court may consider that further evidence is required before the creditor or debtor can be expected to serve points of dispute. It is important that the costs of preparation of such evidence should not be disproportionate to the sums involved. The evidence should not go further than is necessary to enable a proper challenge to be made. If the office-holder is in doubt as to the areas to cover or the detail required, he should ask for the court’s directions.

Although the guiding principles are expressed to apply to applications for fixing and approving remuneration, it is clear from paragraph 2.1 that they will be applied also to a challenge, no doubt taking into account that the remuneration or its basis has been duly fixed under the Insolvency Rules by a relevant body, such as a creditors’ committee or meeting of creditors. It is to be remembered that the creditors are unlikely to have fixed the amount of the remuneration. Normally, as in this case, they will have fixed only the basis of remuneration. The importance that the creditors or their committee have authorised remuneration or a basis of remuneration may be somewhat less in those cases where it is always clear that there will be a surplus after creditors have been paid in full. In such a case, as observed by Rimer J in Upton v Taylor and Colley [1999] BPIR 168 at 181, the creditors have little or no commercial interest in the remuneration.

The Practice Statement was made in 2004 during the period between the Civil Procedure Act 1997 and the Constitutional Reform Act 2005, when the courts retained their inherent power to make practice directions and practice statements, as explained by this court in Boivale v Secretary of State for the Communities and Local Government [2009] EWCA Civ 171 at [13] – [19]. There was no question of the Practice Statement conflicting with any existing rule or Practice Direction, since none related to these applications. Indeed, insolvency proceedings are governed not by the CPR but by the Insolvency Rules except to the extent that the latter incorporate the former, as they do in rule 7.51A (previously r.7.51).

The Practice Statement of itself cannot make law on substantive issues or require courts to apply the guiding principles stated in it. But the Practice Statement is not an attempt to create a new set of principles, but a convenient means of gathering together in one place the principles to be derived from the Insolvency Rules and authority, including the most recent at that time, the judgment of Ferris J in Maxwell.

The Practice Statement acquires authority as a statement of guiding principles if it is expressly approved and applied as such in judgments at an appropriate level. In at least two reported cases, it has been approved and applied by High Court Judges: Simion v Brown [2007] BPIR 412 and Hunt v Yearwood-Grazette [2009] BPIR 810.

The great majority of applications relating to office-holders’ remuneration are heard by the Registrars at the Royal Courts of Justice and by district judges in the Chancery Division District Registries and in those county courts having insolvency jurisdiction. It is apparent from reported decisions of the Registrars that they apply the Practice Statement: see for example Re UIC Insurance Co Ltd [2007] BPIR 494 and 589, Barker v Bajjon [2008] BPIR 771, Freeburn v Hunt [2010] BPIR 325 and Re Super Aguri F1 Ltd [2011] BPIR 256. District judges do likewise, as can be seen from the judgment in Hunt v Yearwood-Grazette.

The Statement has also been referred to with approval by courts in other common law jurisdictions: see Korda, Re Clynton Court Pty Ltd [2005] FCA 543 (Finkelstein J, Federal Court of Australia), Flynn v McCallum, Re Roslea Path Ltd [2009] NZHC 2318 (Heath and Venning JJ, High Court of New Zealand).

I consider that the stage has been reached where a court hearing an application to fix or to challenge the remuneration of an office-holder should proceed on the basis that the Practice Statement is to be applied, except in so far as in the circumstances of the particular case the party objecting to its application shows that it would be wrong in principle to do so. In my judgment, the statement of guiding principles in the Practice Statement is a correct statement of the principles generally applicable to issues relating to the remuneration of office-holders, although the particular circumstances of a case might call for the formulation of a further principle.

The real task for the court in any particular case is to balance these principles in their application to the facts and circumstances of the case. In Simion v Brown at [27] I said:

“The task for the court is to arrive at a level of remuneration which balances the various criteria of the value of the service rendered, the proportionality of remuneration and a fair and reasonable remuneration for the work properly undertaken, as these criteria are explained in the Practice Statement. The result must resolve the conflict which may in a particular case exist between these criteria. The conflict is likely to be the more acute in cases such as the present, where substantial costs have been incurred in relation to a relatively small estate.”

In Hunt v Yearwood-Grazette at [9], a decision cited by Lloyd LJ when giving permission to appeal in the present case, Proudman J said:

“The court’s task is to balance all the various criteria, resolving any conflict between them arising in the particular case, in order to arrive at the proper level of remuneration. In doing so, it is settled law that the court has to reward the value and benefits of the services rendered rather than the cost of rendering such services. Thus, in fixing the remuneration, time spent is less relevant than value provided. I was referred to the judgment of Ferris J in Mirror Group Newspapers plc v Maxwell and Others (No 2) [1998] 1 BCLC 638, [1998] BCC 324 and also Cooper v The Official Receiver [2005] NICh 1. The onus of demonstrating such value or benefit is on the applicant and the court must resolve any element of doubt in favour of the estate.”

The ground of appeal in the present case asks whether the remuneration allowed was “disproportionately high in relation to the circumstances of the bankruptcy”. The word “circumstances” is important. The duties of an office-holder are not confined to the realisation and distribution of assets. There are statutory duties which must be performed, such as communicating with creditors and reporting on the events leading to the insolvency, with particular regard to the conduct of the bankrupt or directors of an insolvent company. The office-holder may need to investigate the existence of possible assets or the merits of possible claims, which may in the event not lead to assets available for distribution, although in all cases the office-holder will be expected to exercise commercial judgment in pursuing such matters. Dealing with particular claims of creditors may be time-consuming and there may be other activities, such as the disclaimer of onerous leases and other property, which do not increase the assets for distribution. An example of costs incurred as a result of disclaimers is Freeburn v Hunt at [26] to [38]. A further factor which can be seen in the reported cases as sometimes leading to a justifiable increase in remuneration is the conduct of particular creditors or of the debtor: see Barker v Bajjon at [14] and Freeburn v Hunt at [54] to [55].

Thus the value of the office-holder’s services, which has rightly been emphasised as the touchstone for an office-holder’s remuneration and which is not measured by a mechanical totting-up of hours multiplied by charge-out rates, denotes more than the realisation and distribution of assets. They are features of central importance, but it is all the circumstances of the insolvency which have to be considered.

The ground of appeal refers also to the fiduciary status of a trustee in bankruptcy. This underpins the proper approach to the remuneration of a trustee or other office-holder. They have no entitlement to any remuneration or other benefit from their position as office-holder, save to the extent expressly permitted by law. This right to remuneration is governed by the Insolvency Rules. In seeking remuneration or claiming it on the basis allowed to them, they are under a duty to be frank with the court and creditors, and not to advance a claim for any payment beyond that to which they conscientiously consider themselves entitled. It is part of their duty to avoid the incurring of unreasonable costs, whether by reference to the task undertaken or the grade of employee who undertakes it.

It is because of their fiduciary position that the onus lies on them to justify their claim: see Maxwell at p648 d-h. Even where the issue comes before the court on a challenge to remuneration drawn on a previously approved basis, it will be for the office-holder to provide a sufficient and proportionate level of information to explain the remuneration and to enable the objector to identify with reasonable precision his points of dispute.

I agree.

I also agree.