Hellas Telecommunications (Luxembourg) II SCA, Joint Liquidators of v Slaughter and May (a firm)

The principal issue (“Issue 1”) on this appeal is whether, where a firm of solicitors provides legal services to a company in administration, Hellas Telecommunications (Luxembourg) II SCA (“the Company”), and the firm and the administrators agree the amount of their fees, subsequently appointed liquidators of the company can ask the companies court to assess, that is, determine the amount of, those costs, either under Rule 7.34 (as in force at the date relevant to these proceedings) of the Insolvency Rules 1986 (“IR”) or under the inherent jurisdiction of the companies court. There is a subsidiary issue (“Issue 2”) whether the answer is different if the agreement took place after the administration terminated.

What the appellant liquidators (“the liquidators”) want to obtain in this appeal is a ruling that they can ask the court to order a detailed assessment (that is, a determination of the amount due by a costs judge) of the legal costs agreed between the administrators and Slaughter and May. On this appeal, Slaughter and May, who are the respondents, contend that the administrators can agree and pay legal costs incurred during the administration, even if they have not completed this task before the administration ends, and that subsequently appointed liquidators cannot ask the court to order a detailed assessment of those costs.

In a thorough judgment dated 12 November 2013, Registrar Jones decided that administrators could agree and pay the fees of solicitors engaged by them, and if they did so, the companies court had no power under IR 7.34 to order an assessment of them. The liquidators appealed to the High Court.

In his again thorough judgment dated 13 June 2014, HHJ David Cooke, sitting as a Judge of the High Court of Justice, Chancery Division, dismissed the appeal on Issue 1 but held on Issue 2 that the former administrators could not agree the fees of solicitors engaged by them after they had ceased to hold office. If there had been any inherent jurisdiction he held that there were no grounds on which he could set aside the exercise of discretion by the registrar.

This will be a short judgment as, in my judgment, for the reasons given below, the answers turn on the true interpretation of the applicable legislation.

For the reasons given below, I would answer both Issue 1 and Issue 2: No. In my judgment, the administrators could agree to pay and pay the fees of Slaughter and May both before and after the end of the administration. If the liquidators do not agree with the fees that have been paid, they can bring misfeasance proceedings against the administrators. The Insolvency Act 1986 (“IA 86”) and IR thus provide ways in which liquidators can challenge the decision of an administrator to pay legal fees, but as I see they do not provide a means by which liquidators can require the assessment of costs paid in an earlier administration.

My conclusion is one based solely on the legislation at the relevant time. IR 7.34 was the relevant IR at the time, and I have set it out in the annex to this judgment. IR 7.33 (to which the registrar referred in his judgment) and IR 7.34 have ceased to have effect for administrations commencing after 6 April 2010 and new IR 7.33A and IR 7.34A have been inserted into the IR. I will not refer to the new IR not only because they do not apply in this case but also because the court cannot use the new IR to help it interpret IR 7.34.

In the light of my conclusions, there can be no inherent jurisdiction to be invoked. Without intending any discourtesy, I therefore do not address in this judgment the arguments raised on this appeal on inherent jurisdiction or on the exercise by the registrar of his discretion, or Slaughter and May’s respondent’s notice (which raised additional grounds for affirming the decision on discretion) or summarise the parts of the judgments below which are relevant to discretion.

Before I proceed further, I need to set out the context in which these issues have arisen, which is unusual. I will then summarise the key submissions of the parties and move to my detailed conclusions.

The administrators (respondents to this appeal) are the successors to the administrators of the Company appointed by the companies court pursuant to the IA 86 on 26 November 2009.

During the administration the administrators sold the business of the Company and one of the terms of this sale was that the sum of €10m would be placed in an account (“the Account”) to be used to pay the costs and expenses of the administrators of the entire administration. On 30 November 2011, Sales J held that the administrators were entitled to use this Account for this purpose until it was exhausted, in preference to any assets of the Company. The Account was held on trust to discharge the costs of the administration and any subsequent liquidation. Once these costs had been paid, any balance had to be returned to the buyer.

The administrators employed Slaughter and May as their solicitors and agreed their fees amounting during the administration totalling some €2.76m.

There was only one creditor in the administration. The administrators could not, therefore, set up a creditors’ committee under IA 86, schedule B1, paragraph 57. Instead they set up an informal committee (“the committee”) of persons interested in the debts owed by the Company to the sole creditor. The committee was aware of the payment of fees to Slaughter and May.

All fees paid to Slaughter and May were paid out of the Account.

Pursuant to directions given by Sales J on 30 November 2011, the administrators applied to the companies court for an order winding up the Company and the Company was ordered to be wound up in December 2011. The administrators were discharged 28 days after filing their final report.

The appellants became the liquidators of the Company with effect from 5 December 2011.

The administration came to an end on 1 December 2011. The administrators retained the Account.

In January 2012 the administrators approved the final invoice (“the December invoice”) for Slaughter and May’s fees, which was dated 22 December 2011 and was for £830,935.09.

The registrar held that because the fees had been agreed there was neither power under IR 7.34 nor inherent jurisdiction for the companies court to order a detailed assessment of costs. For this purpose he held that IR 7.34(1) must apply to administrators as well as liquidators. Therefore it was appropriate to read IR 7.34(1)(a) as if the word “including” had been inserted before the words “as an expense of the liquidation.” In [55] of his judgment, he gave 6 reasons for this interpretation:

(i)

Rule 7.33 which identifies an intention for the CPR costs rules to apply to “all insolvency proceedings”;

(ii)

the description of the insolvency practitioner in Rule 7.34(1) as being “the responsible insolvency practitioner” which would be unnecessary if it could only be the liquidator;

(iii)

the fact that Rule 7.34(2) plainly refers to costs, charges or expenses in all insolvency proceedings (it expressly excludes administrative receiverships) and intends them to be the same costs, charges or expenses as those with which Rule 7.34(1) is concerned (because it expressly describes them as “any such costs, charges or expenses” – “such” referring back to Rule 7.34(1));

(iv)

that Rule 7.34(3) is also concerned with all insolvency proceedings;

(v)

that otherwise there will be a lacuna because whilst most costs, charges or expenses will be agreed by an administrator, that will not necessarily be the case and the ordinary meaning construction will prevent them from being assessed under Rule 7.34(1) if that does not occur before the appointment ends; and

(vi)

the fact that it would be inconsistent with the Insolvency Rules as originally drafted when the purpose of the amendment to the Applicable Rules [of the IR] was only to bring the Rules in line with the Civil Procedure Rules.

Both the registrar and the judge held that IR 7.34(4) applied only to costs incurred in or incidental to legal proceedings before the court (Judgment of the registrar [60(i)], Judgment of the judge [28]). No one has argued otherwise on this appeal.

The judge agreed with the order made by the registrar save that he held that the registrar was wrong to consider that the December invoice was governed by r.7.34(4) or had been validly agreed by the administrators (paras 35, 41). He held that, applying the definition of “responsible insolvency practitioner” in IR 13.9, the administrators were the (only) “responsible insolvency practitioners” of the Company for the purposes of IR 7.34(1) (Judgment, [24]). He rejected the argument that the liquidators could retake the decisions already taken by the administrators on those costs.

By the time of the appeal, it was common ground that IR 7.34(1) applied to the administrators so that the judge did not revisit that question.

Before the judge Issue 2 was raised for the first time. Because IR 7.34(1) applied to administrators, it was necessary to consider whether IR 7.34 applied to former administrators. The applicable definition was that of “responsible insolvency practitioner” in IR 13.9, the relevant part of which read “the person... acting in a company insolvency… as administrator….” The judge held that this did not include former administrators (Judgment, [35]). So the December invoice had not been properly approved and would have to be approved by the liquidators. The judge allowed the appeal with respect to the December invoice but otherwise dismissed the appeal. Both parties then appealed to this Court.

Mr Stephen Davies QC, for the liquidators, contends that it is important to have external controls and supervisory procedures to keep the costs and expenses of an administration in check. He submits that it is contrary to principle that such agreement can prevent review by the companies court.

Mr Davies relied on the statutory predecessors of IR 7.34 both under the IR and earlier enactments. His point is that in the past there was provision in a compulsory liquidation for costs to be taxed. It is not necessary to set out all the versions to which he referred us. The best example to support this argument was shown to us by the respondent: Rule 195(2) in the Companies (Winding-up) Rules 1949 (“WUR”). This provided that in a winding up by the court all solicitors’ bills of costs (as well as other professional fees) had to be taxed before payment. WUR 195(2) read as follows:

“(2)

No payments in respect of bills of costs, charges or expenses of solicitors, managers, accountants, auctioneers, brokers or other persons shall be allowed out of the assets of the company unless they have been duly taxed and allowed by the Taxing Office, except…”

Furthermore, submits Mr Davies, the recommendations of the Report of the Review Committee on Insolvency Law and Practice (1982) Cmnd 8558 (chair: Sir Kenneth Cork) (“the Cork Report”), which were implemented by the IA 86, recommended that the taxation (now called assessment) of legal costs should continue but at the option of the court or the liquidator (or other insolvency office holder). The relevant part of the Cork Report read:

Taxation of costs

797.

This is another matter where the rules relating to different insolvency proceedings vary and where, in our view, they should be harmonised. In bankruptcy and in compulsory winding up, all bills and charges of ‘any solicitor, manager, accountant, auctioneer, broker or other person’ are required to be taxed before payment. In a voluntary winding up, however, there is no taxation unless required by the liquidator, and we have been informed that this works satisfactorily.

798.

It has been suggested to us that all bills of costs, together with appropriate information, should be submitted to the committee, and if approved by them, should be paid without taxation. We agree that it is unnecessary to require taxation in every case, but we see no reason to impose on the committee the task of approving all bills of costs.

799.

We therefore recommend that there should be no requirement for the taxation of costs in any insolvency proceedings unless ordered by the Court or required by the liquidator, the trustee, the administrator, or the committee.

Mr Davies submits that the registrar was wrong to interpret IR 7.34 as meaning that an agreement by the administrator with a solicitor as to his costs could pre-empt any review by the court requested by the liquidators. This is because, on Mr Davies’ submission, where an administration is succeeded by liquidation, the liquidator becomes the “responsible insolvency practitioner” for the purpose of IR 7.34(1) so that the liquidator can, as recommended by the Cork Report, challenge the costs previously agreed and paid by the administrator. If the creditors’ committee was able to require an assessment of the costs, the liquidators ought likewise to be able to do so.

He submits that there is only one estate consisting of the company’s assets, so that the fact that there are successive insolvency office holders should mean that the insolvency office holder in office at any particular time has the powers of his predecessors.

Mr Davies emphasises that, so far as the liquidators are concerned, it is not enough that they can bring misfeasance proceedings against a former administrator under IA 86 schedule B1 paragraph 75 since they would have to show a breach of duty to challenge an exercise by the administrators of their discretion. Mr Davies submits that, if the creditors’ committee can cause fees to be reviewed, so can a liquidator. In this case there was no committee with power to agree bills of costs.

As to the December invoice, Mr Davies submits that the administrators had been discharged and could not agree fees or initiate an assessment of them under the Solicitors Act 1974, s 70.

Ms Hilary Stonefrost, for the appellant firm, presents a “catastrophic consequences argument”, that if the administrator cannot make a binding agreement with prospective suppliers of goods and services, no third party, such as a valuer or a broker, would contract with an administrator.

Ms Stonefrost submits that once an expense has been agreed under IR 7.34(1), it is too late for the creditors’ committee to require an assessment under IR 7.34(2). She submits that the Cork Committee did not contemplate that there could be an assessment after a fee was agreed. Moreover, the procedure for administration is less costly and timelier and so there is no need for any reopening of agreements by the liquidator or requirement for assessment of costs.

Under IA 86, schedule B1, paragraph 99, once administration comes to an end, there is a statutory charge in favour of “the former administrators” (defined in paragraph 99(2) as (in summary) the outgoing administrator) to protect the administrator’s outstanding remuneration and costs. Paragraph 99 does not say how the charge is to be enforced, nor has that question yet been the subject of a full decision (cf Walker v National Westminster Bank plc [2016] EWHC 315 Ch). If there is a period in which the assets are otherwise to be returned following an administration to the directors, the administrator may need to apply to the court for the appointment of a receiver: see re MK Airlines Ltd [2013] 1 BCLC 9, [26].

Ms Stonefrost submits that the special definition of “the former administrator” in paragraph 99 means that the term “administrator” when used in the IR must also include a former administrator.

In any event, she submits that “the responsible insolvency practitioner” in IR 13.9 must mean, in relation to the administration in this case, the administrators alone.

Ms Stonefrost further submits that, after an administration terminates, the administrator can continue to agree (with the creditors’ committee if there is one) the costs payable as expenses of the administration and his own remuneration. She further submits that it is sensible that this task is performed by him since he is familiar with the administration.

In my judgment, the IA 86 and the IR (as then in force) apply to Slaughter and May’s fees as follows:

In reaching these conclusions, I have interpreted the words “such expenses” in IR 7.34(3) to mean the expenses of the relevant insolvency proceedings. That sub-rule uses the expression “responsible insolvency practitioner” which is defined in IR 13.9 as meaning, so far as relevant, “in relation to any insolvency proceedings” the person acting as administrator or liquidator. I accept Ms Stonefrost’s submission that the clear intention of those words is that he should act as such in relation to the particular insolvency proceeding which is relevant. In the case of the administration in this case, those persons are the administrators and not the liquidators.

Under my interpretation, there is no need to stretch the wording of this sub-rule, as Mr Davies submits that the court should, and to hold that a liquidator becomes “the responsible insolvency practitioner” for the administration in order that he can apply for costs paid in the administration to be assessed. It follows that I reject Mr Davies’ submission that the liquidators can fasten on to IR 7.34(3) (or indeed IR 7.34(2)) to seek a detailed assessment of the legal fees which administrators have agreed to pay. I add that I am not unhappy to reach that conclusion since it seems to me to be contrary to principle that the liquidators should be able to reopen contractual arrangements whether or not they have been properly made.

As I see it, the administrators will be responsible for finalising the costs and expenses payable under their statutory charge, but the liquidator may seek to say that the administrator was at fault in completing that task.

In my judgment, as already stated, despite the common ground between the parties and the judgment of the registrar, the administrators are not within IR 7.34(1). I say that for the following reasons:

In those circumstances it is, as I see it, contrary to well-established principles of statutory construction to rewrite IR 7.34(1) so that it includes administration.

I would respectfully differ from the 6 reasons given by the registrar for the contrary conclusion, which Ms Stonefrost has sought to uphold:

My conclusion depends entirely on the interpretation of the IA 86 and IR. In my judgment it is unnecessary to go back to the WUR, and in any event the position in voluntary liquidation was different and fees could be fixed by creditors’ committees (see for example, Companies Act 1948, s 296). The interpretation of “such expenses” in IR 7.34(2) given above (paragraph 38) is clearly justified as that sub-Rule, unlike sub-Rule (1) must apply to administrations since it expressly applies to all insolvency proceedings.

The interpretation which I have described above avoids the necessity of rewriting sub-rule (1) or of stretching the wording of sub-rule (3). It also obviates the need to consider whether a former administrator is within IR 7.34(1).

Even without going into the question whether the recommendations of the Cork Report were accepted without any qualification, my conclusions are consistent with the paragraphs from the Cork Report on which Mr Davies relied (see paragraph 26 above). I read the Cork Report as recommending that the insolvency practitioner for the purposes of the relevant insolvency proceeding should be able to require assessment of costs, not that a liquidator should be able to do so for the costs of an earlier administration.

The principles for which Mr Davies vigorously argued do not need to be considered further because they cannot alter the meaning of the relevant legislation which in my judgment is clear.

As already stated, it follows from my conclusion that the service provider would not in general be affected by any subsequent proceedings against the administrator under section 168(3) IA 86. The position would of course be different if they had agreed that they would repay fees in the event of proceedings under that section or if there was any impropriety in the agreement for fees justifying the setting aside of the agreement with the service provider (neither of these possibilities has been suggested here). Ms Stonefrost’s “catastrophic consequences” argument is misconceived because a creditor who acts properly need have no fear of having to repay any amount paid to him.

As to inherent jurisdiction to direct a detailed assessment, in my judgment no such jurisdiction can exist in the circumstances arising on this appeal. IR 7.34 makes it clear that the persons who may proceed to such an assessment are in the case of an administration the administrators. The liquidators have other remedies against the administrators if they fail to proceed to a detailed assessment when they ought to have done so. That is the structure of remedies that Parliament has enacted and there is no basis for the court altering that scheme just because it is less easy for the liquidators to recover damages or compensation from the administrators than it is to argue that a bill should be reduced on taxation.

If my Lords agree, then in my judgment the appeal of the liquidators, the liquidators’ respondent’s notice dealing with the December invoice and Slaughter and May’s respondent’s notice must be dismissed, and the appeal of Slaughter and May in relation to the December invoice must be allowed.

I agree.

I also agree.