Neumans LLP (A Firm) v Andrew Andronikou & Ors

An application by a firm of solicitors for payment of their legal fees and disbursements as an expense of an out of court administration has raised a jurisdictional point on a priorities issue in the corporate insolvency of Portsmouth City Football Club Limited (the Company).

The appellants Neumans LLP acted for the Company in connection with its opposition to a winding up petition presented by Her Majesty’s Revenue and Customs (HMRC). Neumans claim priority for payment, as an administration expense, of certain professional fees and disbursements (referred to as “solicitors’ fees” in this judgment, as they were below) owed by the Company for those services. The Company eventually went into insolvent liquidation, but only after joint administrators had been appointed out of court and a creditors’ voluntary arrangement (CVA) had failed.

Neumans wish to establish that the solicitors’ fees are an administration expense because, on the completion of the administration, there were no funds left for the administrators to hand over to the liquidators. Neumans are unlikely to receive anything in the liquidation, if they fail in their primary contention that the solicitors’ fees are an administration expense and can only claim them as a liquidation expense. At present Neumans have no more than a recently notified possibility of a dividend in the liquidation.

A jurisdictional objection was successfully taken before Morgan J by the respondents, who were the former joint administrators of the Company. Their objection was that the court has no jurisdiction to order payment of the solicitors’ fees as an expense of the out of court administration of the Company. In the circumstances of this case, the court only has jurisdiction to allow the solicitors’ fees as an expense in the subsequent liquidation of the Company. The respondents successfully argued that express provisions in the Insolvency Rules 1986 (the 1986 Rules) for payment priorities are exhaustive of those items properly payable as expenses of an out of court administration.

Neumans contend that the result is anomalous. If the administrators were appointed by the court, there would be no problem with payment of the solicitors’ fees as an expense in the administration. It is often the case with administrations out of court that there is no further insolvency procedure, so that there would be no liquidation in which payment of the solicitors’ fees could be made as an expense of the liquidation. In those circumstances it made sense that the solicitors’ should be payable as an expense of the administration.

The broad approach advocated by Neumans is that, if a petition for a winding up order is suspended by the intervention of another type of corporate insolvency process [e.g. an administration out of court], the company’s costs of defending the winding up proceedings that would be an expense of the winding up are, or should be treated as, an expense of the intervening process.

The administrators’ response is that, in the case of administrators appointed out of court, the Company’s costs of defending the winding up proceedings are not entitled to priority as costs properly payable as an administration expense, as the 1986 Rules make no express provision for that. The express provision in the 1986 Rules is for those costs to be paid as an expense in a liquidation: rule 4.218(3)(h).The policy, structure and content of the 1986 Rules indicate that in the case of an administration out of court the solicitors’ fees are treated on the same footing as other unsecured claims in the administration.

The administrators point out that there is no injustice to solicitors rendering legal services in resistance to a winding up petition against a corporate client: they can protect their position by obtaining funding or indemnities from third parties standing behind the company, such its owners or their associates. If the 1986 Rules are productive of injustice in the case of an out of court administration, the answer lies in democratic correction by Rule change, not in-filling a lacuna by judicial decision.

The administrators accept that (a) the court can usually order that solicitors’ fees incurred in the unsuccessful defence of a winding up petition be paid as a liquidation expense; and (b) if a winding up petition is overtaken by a court application for an administration order, the court can order that the costs of the petition be paid as an administration expense ahead of unsecured creditors as expressly authorised in the 1986 Rules, in particular rule 2.67. What is missing from the 1986 Rules is an express provision covering solicitors’ fees as an administration expense in the case of administrators appointed out of court.

This appeal is from the order made by Morgan J dated 2 November 2012 ([2012] EWHC 3088 (Ch); [2013] Bus. LR 374). He accepted the administrators’ contention that the court has no jurisdiction to make an order that the solicitors’ fees be paid as an expense of the Company’s out of court administration. In this appeal by Neumans from that ruling, the liquidators of the Company have taken no part. They took no part in the hearing before Morgan J.

Neumans acted for the Company from 15 December 2009 to 12 February 2010. During that period the Company defended the winding up petition presented by HMRC on 23 December 2009 on the ground of its inability to pay its debts, in this case a massive liability for unpaid VAT. The Company made an unsuccessful application to strike out the petition on the basis that it disputed the debt on substantial grounds. Morgan J found that those directing the Company at the time considered that it was in the best interests of the Company to oppose the petition in the way and on the grounds that it did and that the work done by Neumans was in the best interests of the Company.

Pending an appeal from the dismissal of the strike out application, for which Newey J gave permission, a new owner (a secured creditor) appointed administrators out of court on 26 February 2010. That resulted in the automatic suspension of the winding up petition: paragraph 40(1)(b) of Schedule B1 to the Insolvency Act 1986. The firms retainer was terminated. Neumans did not act for the Company or for the administrators in the course of the out of court administration. On the subsequent formal hearing following suspension of the petition in March 2010 Neumans were granted liberty to apply in respect of their costs.

The administrators proposed a CVA to compromise the claims of the Company’s unsecured creditors, who approved it in May 2010. Neumans were not given notice of the meeting to approve the CVA, which did not deal with their claim and did not bind them. Neumans did not claim to be unsecured creditors of the Company, their position throughout being that the solicitors’ fees should be paid as an expense in the administration of the Company, alternatively as an expense in the liquidation.

The administrators ran the football club until they sold it in September 2010. They were appointed supervisors of a CVA. As no agreement was reached between Neumans and the administrators, Neumans made an application to the court for payment of the solicitors’ fees as an expense of the out of court administration. The court made an order in February 2011 terminating the administration and ordering the Company to be wound up on the original HMRC petition. Neumans’ application for payment of their solicitors’ fees was preserved and pursued.

Very substantial sums were paid to the administrators in respect of their fees and disbursements in the administration. The costs of the out of court administration devoured the Company’s assets. Not even the administrators’ solicitors have been fully paid their fees. No monies from which Neumans’ fees and disbursements could be paid as an expense of the liquidation were handed over to the liquidators.

The result is that Neumans’ claim for solicitors’ fees totalling about £267,000 has not been paid in any of the insolvency proceedings. The order sought by them from Morgan J was that the Company’s costs in relation to the winding up petition be paid by the Company from its assets in the hands of the administrators as an expense of the administration.

The essence of Morgan J’s comprehensive judgment was that the 1986 Rules did not provide for the payment of solicitors’ costs of defending the winding up petition as an expense in an out of court administration. Particular costs items incurred by the Company in defending the winding up petition were payable as an expense in the liquidation.

On the fullest possible consideration of submissions advanced by counsel the judge reached conclusions which I will state briefly.

First, as a matter of the general law, there was no jurisdiction under s.51 of the Senior Courts Act 1981 (the 1981 Act) to make an order for payment of the solicitors’ fees by the Company from its assets in the hands of the administrators as an expense of the out of court administration. Under s. 51 the “costs” of and incidental to all proceedings in the High Court are in the discretion of the court, which has full power to determine by whom and to what extent the costs are to be paid. Morgan J held that solicitors’ fees were not, within the meaning of s.51, “costs” incurred in connection with the winding up petition: they were fees claimed by the firm against the Company. They were not payable as a “necessary disbursement” under rule 2.67(1)(f) of the 1986 Rules. The court had no jurisdiction under s.51 to order the payment of the solicitors’ fees by the Company or by the administrators. If s.51 applied at all it, it could only be in relation to costs incurred by the Company. Even if it were open to Neumans to apply for an order under s.51, it made no sense to require the Company to pay its own costs to itself. An order under s.51 would not lead to the administrators making payment to Neumans, who were in effect seeking an order that the administrators give the solicitors’ fees a priority as an administration expense when they were not in the permissible class of administration expenses. The court had no power under s.51 to make an order indirectly turning the solicitors’ fees into such expenses.

Secondly, in the absence of provision in the 1986 Rules for payment of the solicitors’ fees as an expense of an out of court administration, the court had no power to direct the administrators to treat the solicitors’ fees as an expense of that administration. The Court had no inherent jurisdiction to direct payment of the solicitors’ fees as if they were an expense in an out of court administration. The retainer of Neumans by the Company was terminated before the Company entered into administration. Neumans had not been retained by the administrators for the benefit of the administration. Payment of the solicitors’ fees would adversely affect the position of unsecured creditors and other persons entitled to be paid expenses of the administration.

Thirdly, certain items of the solicitors’ fees were payable as an expense of the liquidation pursuant to rule 4.218 (3)(h) of the 1986 Rules. Even though the application to strike out the winding up petition had not succeeded, those directing the affairs of the Company had considered that it was in the best interests of the Company to oppose the petition and to apply to strike it out.

The grounds of appeal are that the judge was wrong in holding that there was no jurisdiction to make the order sought by Neumans. He could have made it on any one of three grounds. He should have done so.

Mr Snowden QC put at the forefront of his submissions the public policy clearly reflected in the statutory regime and the case law: costs incurred in relation to a winding up petition, even if unsuccessful, should be paid as an expense of the subsequent insolvency procedure: see, in particular, Record Tennis Centres [1991] 1 WLR 1003. It was not in the public interest that solicitors, who had carried out work in relation to a contemplated insolvency process by giving proper and often urgent advice and representation likely to benefit the company and, if insolvent, the insolvent estate and its creditors, should be treated on the same basis as ordinary unsecured creditors.

That policy was recognised in the 1986 Rules by rule 4.128 (1) (h) (in relation to the expenses of winding up) and by rule 2.12 (costs on an administration application) and rule 2.67(1) (c) (costs of an administration order), which provided in the list of administration expenses that the costs of a winding up petition should be paid as an expense in the administration where the winding up petition had been overtaken by an application for an administration order: see Irish Reel Productions Ltd v. Capitol Films Limited [2010] Bus LR 854. (petitioner’s costs of winding up petition paid as an administration expense.)

Mr Snowden QC argued that, on principle, reason and justice, the same should apply where the winding up petition was overtaken by another type of insolvency process, such as an out-of-court appointment which now accounts for most administrations; but he had to accept that there was no express provision for that situation in the 1986 Rules, which, he said, was almost certainly an oversight.

He criticised the judgment of Morgan J for leaving an obvious, unjustifiable and serious lacuna in the insolvency costs regime. The law did not compel an anomalous treatment of an out-of-court administration, particularly when, since it was introduced by the Enterprise Act 2002, it is the procedure followed for the initiation of most administrations. It is usually the terminal insolvency process without moving into liquidation. A purposive approach to construction should be adopted to fill the gap exposed by Morgan J’s judgment and to give effect to the plain policy of priority for solicitors’ fees on an insolvency, such as had been done by Mann J in relation to creditors’ costs on an administration application overtaken by an out of court appointment: Rohl v. Bickland Ltd [2012] EWHC 706 (Ch).

The court undoubtedly has a very wide discretion to deal with costs conferred by s. 51 of the 1981 Act. It extends to orders regarding the appropriate fund from which costs should be paid. It applies to costs to be paid from funds held by officers of the court. It was, Mr Snowden QC submitted, broad enough to permit the court to make an order on the petition that the Company’s costs of opposing the petition be paid by the administrators as an expense of the administration. The solicitors’ fees were a liability of the Company. The court could order the Company via its administrators to pay the solicitors’ fees. In that case the payment could be made by the administrators as a necessary disbursement in the course of administration. Morgan J was wrong to hold that the solicitors’ fees were not “costs” within the meaning of s.51. The costs were in the discretion of the court. An order could be made that they be paid by the Company out of the assets in the hands of the administrator. The section was not limited to the case of ordering payment of costs to the Company nor was it limited to an application by the Company for payment of costs. As the Company’s former solicitors Neumans had standing to make the application for a costs order under s.51.

The solicitors’ fees could properly be treated as expenses of the administration on the basis that they were incurred in anticipation of an insolvency process and conferred a benefit on that process.

The court has jurisdiction either under the Insolvency Act 1986 paras 65 or 66 of Schedule B1 or in its supervisory inherent jurisdiction to order that a claim which would not otherwise be regarded as an expense should be paid as such.

Morgan J’s order that particular items of the solicitors’ fees were expenses in the liquidation did not satisfy the policy or cure the anomaly: in this case the assets had been dissipated in the administration. In other cases there might be no subsequent liquidation.

In many cases the jurisdiction of this court under CPR Part 52 is a modest one. In this case it is limited to a review of the decision appealed: was Morgan J’s decision wrong for any of the reasons canvassed by Neumans?

The court below and this court have received detailed submissions from each side on that question. Morgan J commented that counsel’s submissions to him “were elaborate and thorough.” So were the submissions in this court. Morgan J said that to do justice to them he needed to explain his reasons at “what had become considerable length.” Does this court need to do the same all over again?

In my judgment, the order made by Morgan J on the basis of 140 paragraphs of exposition and explanation is “dead on” for the reasons given by him. He set out in meticulous detail all the relevant facts, the legal materials, the rival submissions and the reasons for the conclusions reached by him on every point taken by Neumans.

As a matter of the construction of the 1981 Act and the 1986 Rules the judge was right in law to rule that the solicitors’ fees in relation to the Company’s defence of the HMRC winding up petition and particularised by him were payable as an expense of the liquidation of the Company, and that they were not payable as an expense in the out of court administration of the Company. He correctly dismissed the argument that solicitors acting for the Company should not be treated on the same footing as unsecured creditors in the case of appointment of administrators out of court. It is open to solicitors acting for an insolvent or potentially insolvent company to protect their position, as any other unsecured creditor can, by seeking to arrange for indemnities or third party funding from those behind the company or associated with it.

If there is in fact a lacuna or an anomaly in the 1986 Rules, then the point should be addressed by express amendment of the legislation or of the Rules. There is no case for judicial legislation dressed up as benevolent statutory interpretation of either the 1986 Rules or s.51 of the 1981 Act. The case does not fall within the priorities set in the Rules for expenses of an out of court administration. It does not fall within s.51, because what Neumans is claiming was not an order for payment of “costs” incurred by it, as it has incurred none, but an order for payment of its fees, which have not been paid, out of the assets of the administration and as an expense of the administration, which enjoys priority over other unsecured claims, but which the administrators have not caused to be incurred.

What sensible purpose could be served by this court repeating in its judgments detailed discussions of every point raised in the grounds of appeal and the skeleton arguments when they have already been dealt with correctly and in detail in the judgment under appeal? No purpose at all, in my view.

This is a case in which this court is justified in following the excellent lead of Lord Wilberforce in Brumby v. Milner (1975) 51 TC 583. In a one page tax opinion, with which the other members of the Appellate Committee agreed with only minor additions, Lord Wilberforce said that he would not attempt a detailed analysis or refer to such authorities as might, possibly, be relevant, since that had been done to his complete satisfaction by the Court of Appeal affirming the judgment of Walton J. He concluded at p.612 that:-

It has been said, more in jest than with justice, that “officials create work for other officials” and that bureaucracies generate work to justify their continued existence. Judges are not officials. The judiciary is not a bureaucracy. Nor is it in the business of earning by churning. The proper administration of justice does not require this court to create work for itself, for other judges, for practitioners and for the public by producing yet another long and complicated judgment only to repeat what has already been fully explained in a sound judgment under appeal. If the judgment in the court below is correct, this court can legitimately adopt and affirm it without any obligation to say the same things over again in different words. The losing party will be told exactly why the appeal was dismissed: there was nothing wrong with the decision appealed or the reasons for it.

I am content to adopt, without reservation, the judgment of Morgan J, to affirm his order and to dismiss the appeal from his decision. Partly out of admiration for the input lavished on the outstanding legal submissions with Appendix (divided, for instance, into 11 Main Parts, then sub-divided into 100 paragraphs with some of them sub-sub-divided into .1, .2 and so on) and partly as an aid to practitioners and courts in future cases, I would propose that this court pieces together a brief summary of the main points, as described at length by Morgan J. It can do so, as in an old style judgment, by setting out short legal propositions relevant to this case and the conclusions reached by applying them in this case. It does not begin to attempt to cover all the law on administration and liquidation expenses. That would not be a proper exercise in a judgment.

One aim is to stem the soaring costs of litigants when their advisers have to spend too long working out what the law is. They may be faced with a multiplicity of separate, complex, discursive and (increasingly, imitating the style of subordinate legislation) cross-referential judicial pronouncements at different levels of decision, or at the same level of decision, but sometimes leading to the same overall result.

I would summarise the legal position here as follows:-

Fees owing to solicitors by a company, for which they have acted in unsuccessfully opposing a winding up petition against it, may be payable as an expense of the subsequent liquidation of the company.

There is no general principle of law or statutory provision making those fees payable as an expense of the administration of that company out of court.

The Insolvency Rules 1986 are the source of the provisions permitting payment in full of certain liquidation expenses and certain administration expenses ahead of the payment of ordinary unsecured creditors.

They expressly provide that, where the court makes an administration order, the costs of the applicant and the costs of any person appearing that are allowed by the court are payable as an expense in the administration: rule 2.12(3).

They do not provide that solicitors’ fees for acting in connection with the opposition of a client company to a winding up petition are payable as an expense of an out of court administration of the company that may precede its ultimate insolvent liquidation. Those fees may be payable as an expense of the liquidation of the company: rule 4.218(3)(h).

The matters listed as administration expenses in rule 2.67 of the 1986 Rules are a complete list of the expenses allowed in the case of an administration by administrators appointed out of court. The solicitors’ fees in dispute do not fall under the list of administration expenses and costs in rule 2.67 of the 1986 Rules.

The court has no power to direct the administrators to “treat” those solicitors’ fees as an administration expense. Those solicitors’ fees were not incurred in connection with the performance of the administrators’ functions. Payment of them would not be necessary or incidental to the performance of their duties within paragraph 13 of Schedule 1 to the Act nor were they for the purpose of the administration, being directed at preventing the company from being wound up compulsorily: see paragraph 66 of Schedule B1 to the Act.

The court has an inherent jurisdiction to give directions to administrators as officers of the court, but it would not be a correct exercise of that jurisdiction to direct the administrators to pay those solicitors’ fees as an expense of the administration. That would be inconsistent with the 1986 Rules listing those items that are payable as expenses of an out of court administration. Solicitors’ fees are not in that list.

The court has no power under s. 51 of the Senior Courts Act 1981 to make an order that would, either directly or indirectly, result in the payment of the solicitors’ fees as an expense of an out of court administration of the company. The solicitors’ fees are not “costs” within s. 51: they are unpaid fees owed by the company and the claim by the solicitors is for them to be paid as expenses of the insolvency process of liquidation and/or administration. The court has no power under s. 51 to order either the company or the administrators to pay the solicitors’ fees as expenses of an out of court administration.

In any event the court would not exercise jurisdiction to direct administrators to pay the solicitors’ fees in this case as if they were an expense of the administration: the retainer of the firm had been terminated prior to the administration, and payment of the expense would not benefit the administration process and would adversely affect the position of unsecured creditors or of others with claims for expenses of the administration.

The court has express power to allow certain solicitors’ fees as expenses of the liquidation within rule 4.218(3)(h) of the 1986 Rules.

The court may exercise that power to allow payment of particular items of solicitors’ fees as expenses of the liquidation, whether they were incurred by the company in unsuccessfully opposing the winding up petition or in unsuccessfully seeking to strike it out.

For all the above reasons I would dismiss this appeal.

I agree.

I also agree.