Rohl v Bickland Ltd

This is the restored application for an administration order which comes back before me on the question of the costs of that application. On 12^th October 2011, at the invitation of the applicant, I dismissed the application for the appointment of an administrator by the Court because there had been an out of court appointment by a floating charge holder. The costs application could not be dealt with in the time, and on the materials available, so I adjourned that particular aspect to be heard on a date to be fixed. It has now been restored, and comes back before me.

The business of the company was running restaurants, and in particular Japanese restaurants. The two shareholders/directors were Mr Rohl (the applicant) and Ms Bennett. Unfortunately they fell into some sort of dispute, the details of which do not matter for my purposes.

The business was also in some difficulty. It is common ground that it is insolvent. Mr Rohl instructed accountants, namely Carter Backer Winter, to advise him. The result was a proposal for a pre-pack administration with a sale to Mr Rohl. A pre-pack is an arrangement under which a sale of the company’s business is provisionally arranged before an administration, with a view to an appointment of the arranging accountants as administrators and the more or less immediate sale of the business in accordance with those arrangements. They are a now common occurrence, though they have not been without their critics. Mr Rohl’s proposal was that he would buy the business for £140,000 plus extra moneys from an earnout at one of the restaurants, though there were foreseeable problems in relation to that because the lessee of that restaurant was Ms Bennett and the earnout would depend on whether it could be established that Ms Bennett held the lease on trust for the company.

Clydesdale Bank had a floating charge. It is not clear what, if any, contacts there were with Clydesdale about all this before the application was made to this Court. Whatever that position may be, Mr Rohl applied to this Court for an administration order on 9^th September 2011, claiming to be a creditor of the company. No issue has been taken as to his status in that respect.

Notice was given to Clydesdale Bank. Nothing was heard from them until 3^rd October 2011, which was two days before the proposed hearing of the administration application, when Clydesdale indicated that their charge had been satisfied. Very shortly afterwards it was revealed that it had been paid up by Ms Bennett who took an assignment of the charge. She was a guarantor of the bank’s debt; that may or may not have been why she apparently paid off the bank. On 4^th October she appointed administrators under the floating charge contained in that charge. Mr Rohl was informed of this on 5^th October just before the hearing of the administration application. It came before David Richards J on that day, and he adjourned it for a week so Mr Rohl could consider his position. Having done so it was restored to me on 19^th October, and Mr Rohl accepted that the appointment of administrators out of court by a floating charge holder, which he was not challenging, meant that he could not pursue his own application for an appointment. In those circumstances the application before me was not pursued and I made no order on that part of it which sought the appointment of an administrator.

However, Mr Rohl made an application that he be paid his costs of the administration application as an expense of the administration. That application was opposed, and it is that aspect of the matter which I adjourned.

The basic financial position in the administration is not promising. The administrators have arranged their own sale of the business, which has not yet been completed. Their sale price is also £140,000, but it is not clear that they have got the equivalent of the earnout provision that Mr Rohl was prepared to submit himself to. A sale will require very significant arrears of rent to be paid to a landlord of one of the premises. As well as the floating charge there is a fixed charge over certain of the assets. That charge will have to be paid first out of the net proceeds of sale (after the landlord has been paid off). If all that happens then it is likely that there will be enough to pay the landlord and to pay off the fixed charge, or some of it. But there will probably not be enough to pay all the fixed charge realisation costs. There have also been some floating charge realisations, which will be available for the payment of general administration expenses (irrespective of the position regarding the fixed charge) but it is clear that there will be a significant shortfall even ignoring Mr Rohl’s claim for costs. In the circumstances, and since Mr Rohl does not claim a degree of priority in the administration in respect of his costs which would outrank the fixed charge repayment and costs, his application that he be paid his costs in the administration seems somewhat academic. However, that was not apparent as at the date when he made his application and when it came before me, and the costs point has now been restored. The costs of that exercise have been incurred, and Mr Rohl is anxious that the point should be resolved in any event. Whether this is on a “just in case basis” or not I do not know.

There is, however, one point that I declined to deal with. As well as the costs of the administration application, Mr Rohl also claims his pre-administration costs (in the form of fees paid to CBW in respect of the pre-pack) as an expense of the administration too. These are likely to be even more academic than the costs of the administration application, and in the end the parties did not press me to deal with them. They have hitherto been somewhat muddled up with the costs of the administration application, not least because of the way that figures have been presented by Mr Rohl.

In the circumstances, the hearing before me related to the costs of the administration application only. They were put in the region of £15-20,000, depending on the treatment of certain accountancy costs. I am not concerned with quantum; I am concerned only with principle.

At the hearing before me Mr Rohl was represented by Mr David Peters. The technical respondent to the application was the company, which was not represented. Ms Bennett might also have appeared as a charge holder who might be affected, but she did not appear either. Solicitors acting for her sent a letter which focussed more on the pre-administration costs point than on the costs of the administration application itself. It did not assist me on the points which were taken. The case against Mr Rohl having his costs was advanced by the administrators, who represent the interests of creditors, and doubtless of themselves so far as any result favourable to Mr Rohl might impact on whether they themselves recover any remuneration. Mr James Barker represented them.

The issues arising out of this application are threefold:

Is there jurisdiction to order the costs of an administration application when an administration order is not made to be costs in an out of court administration?

If so, what determines the level of priority given to those costs?

So far as there is jurisdiction to do so, should the discretion be exercised in favour of Mr Rohl in this case?

Mr Peters points to the Insolvency Act 1986 Schedule B1, paragraph 13(1)(f) as being wide enough to give the court jurisdiction to make the order that his client seeks. The whole rule reads:

make the administration order sought;

dismiss the application;

adjourn the hearing conditionally or unconditionally;

make an interim order;

treat the application as a winding-up petition and make any order which the court could make under section 125;

make any other order which the court thinks appropriate.”

He accepts that there are no authorities precisely in point, but relies on inferences to be drawn from, and extensions from, three cases referred to below. He also points to anomalies which arise if Mr Rohl is not entitled to his costs. If this had been a winding-up petition which was dismissed on the making of an administration order, the petitioner would be entitled to ask for his costs – see Irish Reel Productions v Capital Films Limited[2010] EWHC 180 (Ch). If a floating charge holder, instead of appointing out of court under Schedule B1 paragraph 14, seeks to intervene in an existing administration application under paragraph 36(1) in order to have his own nominee appointed as administrator, the court may give the applicant for the order his costs under Insolvency Rules Rule 2.10(2). If the court did not have jurisdiction to give Mr Rohl his costs in the present circumstances, where the appointment was out of court, then that would be strange to the point of anomalous. The court ought to have jurisdiction, and paragraph 13(1)(f) provides the route.

If the costs are awarded, then they somehow have to be slotted into the system of priorities for expenses of the administration provided by Insolvency Rules Rule 2.67. None of the specifically identified categories of expenses plainly catches the costs that Mr Peters invites me to order, and he says that I should apply one or other of those categories by analogy. He relies on the fact that Rule 2.67(3) allows for an adjustment of the priorities of administration expenses.

Mr Barker submits there is no such jurisdiction. While he accepts, realistically, that the wording of paragraph 13(1)(f) is, linguistically speaking, wide enough to cover the order that Mr Rohl seeks, he says there must be some limits on that wording. The main determining factor against the existence of a jurisdiction to make the order sought by Mr Rohl is the fact that those costs simply cannot be slotted into the regime provided by Rule 2.67. There is no room for the analogous application of those rules. The categorisation in Rule 2.67 is intended to be exhaustive, and the fact that one cannot fit in the costs of this administration application in these circumstances demonstrates that they cannot become expenses of the liquidation, and therefore an order cannot be made under paragraph 13(1)(f). If one looks at the cases relied on by Mr Peters one can find an alternative explanation for them which does not involve a determination that paragraph 13(1)(f) is as wide as Mr Peters says it is. If that means that there is a lacuna in the costs regime, then there is a lacuna. It is not for this Court to fill it by making up a category of administration expenses.

There is no doubt that the wording of paragraph 13(1)(f) is wide. It also seems to me that in at least one of the authorities relied on, HH Judge Norris QC (as he then was) assumed that it was wide enough. Re SE Services Limited is an unreported decision of his, delivered on 9^th August 2006. Although there is no report, counsel’s note was available for use in the subsequent case of Re Kayley Vending Limited[2011] 1BCLC 114, and its contents are set out at pages 126-128 of that report. It appears that in that case Judge Norris made an administration order, and the question before him was whether the cost of the new form 2.2B could be ordered to be costs of the administration. There were costs of the proposed administrator, before his or her appointment, in considering and completing that form. Judge Norris noted that under the pre-Enterprise Act regime it was common for the court to order that the costs of the rather fuller rule 2.2 report be treated as a cost of the administration, but the position under the newer regime was one of some obscurity. Judge Norris was presented with two candidates for the jurisdiction which he was invited to invoke. The first was Rule 2.67(1)(c):

That statement is wide enough to justify the making of the order which Mr Peters invites me to make in the present case. However, Mr Barker points out that SE Services was a case in which an administration order was made, not a case in which an order was not made. In those circumstances, if one is looking for a Rule 2.67 slot into which those expenses can be put one finds it in (c), which I have set out above. The costs could be made to come within the opening category of costs of the applicant. So what that case shows is that an order can be made under paragraph 13(1)(f) because it can be allied to an existing head of expenses.

I do not think that that is a wholly satisfactory rationale for the decision of Judge Norris. What Judge Norris decided in that case was what jurisdiction there was to order the costs sought. He was faced with a choice between paragraph 13(1)(f) and Rule 2.67(c). He actually rejected the latter because it would mean:

The next case in the trilogy is Kayley. That was another pre-pack administration case in which the judge (HH Judge David Cooke) acceded to an invitation to give some guidance as to the exercise of the court’s discretion in approving an administration with a pre-pack. He duly did that. Then at paragraph 30 of his judgment he dealt with the facts of the application before him. At paragraph 31 he indicates that he made an order that the proposed administrator’s pre-appointment costs be treated as an expense of the administration. When he made his order the extended terms of Rule 2.67(1)(h), which now provide for such costs, did not exist. He made his order for costs under paragraph 13(1)(f) following the approach of Judge Norris in SE Services. At paragraph 32 he observed:

It seems to me that Kayley does not address the question that has been made to arise before me. I do not think that Mr Barker’s analysis of what Kayley decides is correct. It seems to proceed on the footing that there is a wide discretion under 13(1)(f), and does not reach the conclusion that that discretion exists by having Rule 2.67(1)(c) available as a permitted slot. The decision actually invokes a wide discretion. Like Judge Norris, Judge Cooke prefers that provision to the automatic invocation of Rule 2.67(1)(c). Again, therefore, this case is consistent with the wide discretion relied on by Mr Peters, though again it does not actually deal with the point now raised by Mr Barker. It simply does not address the problem which Mr Barker has identified.

The third case is Re Johnson Machine and Tool Co Ltd[2010] BCC 382. This was another pre-pack case, and this time the decision was of HH Judge Purle QC. Administrators were appointed, and again the question arose as to whether the pre-administration expenses of the accountants could and should be treated as expenses of the administration. Judge Purle applied the approach previously applied in SE Services and Kayley and declined to make an order. This was because he did not consider that the balance of the merits of the pre-pack was more in favour of the creditors than the former directors/purchasers. The case supports Mr Peters because the judge clearly thought that paragraph 13(1)(f) would have been wide enough to give him a discretion had he wished to exercise it. It also gives some support for Mr Barker in paragraph 8. In that paragraph Judge Purle is reflecting on how the pre-administration costs of the accountants were dealt with in out of court appointments. He could not see how that was ever proper. So far as Rule 2.67 is concerned he said:

I have referred above to the Irish Reel case. That is a case in which Briggs J was invited to consider the situation where a winding-up petition came first, and then an application for an administration order was made and acceded to. In accordance with the normal procedure the winding-up petition was dismissed. The petitioner sought an order that the costs of the petition be paid as an expense of the administration. The company’s counsel submitted that there was no jurisdiction to make such an order, albeit that there had been a practice in the Companies Court of making similar orders. Briggs J considered the various provisions of the Insolvency Rules and in particular the rules relating to the costs and expenses contained in Rules 4.218-4.220. He noted in paragraph 6:

He went on to hold that the answer to the problem in his case lay in a purposive reading of Rule 2.12 which allowed the court to provide that

In the light of those authorities I turn therefore to consider how they impact on the question that I have to decide.

The first point to observe is that the first three of the cases (SE Services, Kayley and Johnson) do not identify the difficulty that Mr Barker relies on and implicitly assume that there is none. Judge Norris held that paragraph 13(1)(f) was wide enough to confer the relevant discretion, and expressly rejected the possibility of the expenditure falling within Rule 2.67(1)(c). That rule would be the only candidate which would be capable of justifying the paragraph 13(1)(f) discretion on Mr Barker’s analysis. It is therefore implicit in Judge Norris’s reasoning, and in the two later cases which follow him, that the discretion can be exercised notwithstanding the fact that the matter cannot be brought within Rule 2.67. Had the expenditure been capable of falling within Rule 2.67(c), the discretion under paragraph 13(1)(f) would have been irrelevant.

In my view one of the important questions to be addressed is whether, and for what purposes, Rule 2.67 is to be treated as being a complete description of all the expenses in an administration. Briggs J and Judge Purle considered that it is. In re Toshouku Finance PLC[2002] 1WLR 671 Lord Hoffman held that the winding-up equivalent (Rule 4.218) did contain a complete enumeration of liquidation expenses. It seems to me that the same ought to apply to Rule 2.67, and I am prepared so to hold.

However, there was an important qualification to the overall effect of that determination in Toshouku. In that case the view which Lord Hoffman expressed as to the completeness of Rule 4.218 did not exclude the application of the “liquidation expenses” rule, under which the liquidators could and should, at the direction of the court, treat as liquidation expenses certain expenditure which strictly did not fall within the statutory categorisation but which it was right should be treated as expenses. He acknowledged that where that happened something had to be done to accommodate such expenses with the regime anticipated by Rule 4.218. The answer to that appears in his paragraph 38:

A principle similar to the “liquidation expenses” principle was applied to administrations in In re Atlantic Computer Systems PLC [1992] Chancery 505. In that case the Court of Appeal acknowledged that the court had power to direct administrators to treat items as administration expenses even if they might not be such expenses strictly so called.

The qualification he refers to relates to the rigour with which the principles would be applied, but it remains the case that an analogous principle applies. The availability of that principle seems to have been confirmed in Re Nortel GmbH (In Administration)[2011] EWCA Civ 1124; or at least that judgment assumes that it still survives.

That is an important point for present purposes because it demonstrates that, while Rule 2.67 may constitute a complete code as to what are strictly called expenses, there remains an avenue by which other items can be considered as if they were expenses (a distinction adverted to by Lord Hoffman in Toshouku). The extent to which the principle still applies does not have to be investigated in this case; it is sufficient that it deprives Mr Barker of one of the cornerstones of his case which is that there is no way in which the discretion under 13(1)(f) could be exercised because it is not possible to make the fruits of that discretion an expense of the administration. It would be possible to make those fruits payable as if they were an expense of the administration. That has the same effect. Just as Lord Hoffman acknowledged that the presence of the Lundy Granite principle required Rule 4.218 to be construed so as to bring the “expense” in, so the wording of Rule 2.67 falls to be similarly construed. This is how the analogous application, relied on by Mr Peters, can arise (though he did not put it that way).

That conclusion, of course, does not of itself mean that the wording of paragraph 13(1)(f) is wide enough, in its context, to allow an order of the kind sought by Mr Peters. It does no more than provide a mechanism for the introduction of the effects of such an order into the administration expenses regime. However, with a little hesitation, I have concluded that the wording should be taken to be wide enough to include the making of such an order. In that respect I agree with Judges Norris, Cooke and Purle in terms of the width of the discretion. It therefore follows that there is a discretion which is open to me to exercise.

There is probably another route to the same conclusion. In Re Gosscott (Groundworks) Limited[1988] BCLC 363, Mervin Davies J held that the court had jurisdiction to order that the costs of administration proceedings which had been overtaken by a compulsory liquidation could be ordered to be treated as costs in the winding-up. He reached that conclusion by applying section 51 of the Senior Courts Act 1981. The provisions of that section are so broad that it would probably be possible to make a refined order reproducing the effects of the order that Mr Peters seeks by a combination of making an order that the administrators pay the costs, but limiting the costs to assets in their hands as administrators and expressly defining a priority point at which they are to be taken out. However, in the light of my conclusion on the first route I do not need to develop that further.

I therefore have to consider whether or not to exercise the discretion. In support of his submission that I should exercise my discretion in favour of allowing the costs to be costs in the administration Mr Peters relied on the following factors in his skeleton argument:

The application was “manifestly in the best interests of the Respondent’s creditors as a whole, in that it would have led to a swift pre-pack sale of the Respondent’s business at an advantageous price.”

Ms Bennett did not oppose the administration application. Instead she sought to disrupt it by making her own paragraph 14 appointment.

The paragraph 14 appointment should not be regarded as an arm’s length appointment by a creditor seeking to protect its own interests.

If anything, the appointment by Ms Bennett appears likely to prejudice, not advance, the interests of the creditors.

Mr Peters went on to submit that I should allow the costs because they were incurred in good faith in a justifiable administration application, and not just for Mr Rohl’s own purposes. The “balance of advantage” as referred to by Judge Norris in SE Services, and later judges, was with the creditors and not with Mr Rohl personally. Had an administration order been made, the costs of the application would have been paid as a matter of course out of the administration. The fact that it was frustrated by a separate paragraph 14 appointment should not lead to a different consequence.

Mr Barker invited me to consider the basic question of whether or not the application was for the benefit of Mr Rohl or for the benefit of the creditors. He pointed out one or two respects in relation to which Mr Rohl’s pre-pack proposals were not as free from difficulty as Mr Rohl would suggest. Nonetheless, the stated position of the administrators (in a witness statement filed in connection with this application) was that they did not actively oppose the making of an order that the administration application costs be treated as expenses of the administration. While Mr Barker properly and helpfully drew jurisdictional points to my attention, the administrators did not adduce their own evidential case on discretion.

The order which I am invited to make is one which lies within my discretion. There is no semi-automatic result in a consideration of this matter. This is not a case in which one party has succeeded over another, which would generate the well-known presumption that the loser pays the winner’s costs. Not only is this a matter within my discretion, it is an application which seeks to throw the burden of costs of an application which has not succeeded on another person. In those circumstances it seems to me that the burden must be on Mr Rohl to justify that order. In SE Services Judge Norris had to consider pre-appointment costs. He considered that a relevant test was the extent to which the proposals that were made were made more for the benefit of the management (who wished to do a buyout) than for the creditors. He found that the IP had put together a form of administration that was plainly for the benefit of creditors and it seems he therefore made an order that the relevant costs be an expense in the administration. He did not have to consider the question which I have to consider, because he made an administration order. In Kayley Judge Cooke applied the same sort of test, again in relation to pre-administration costs, as did Judge Purle in Johnson. It seems to me that the same consideration is a relevant one in the present case. If Mr Rohl’s proposals were clearly for the benefit of creditors, and were not (or at least not preponderantly) proposed in order to secure his own interests, particularly against the background of his dispute with Ms Bennett, that would be a strong reason for allowing the costs to be an expense of the administration notwithstanding that an order was not made. Looking at the proposals, I think that they do have that quality. What the appointed administrators have managed to achieve (so far as they have got close to an agreement) is not sufficiently different to displace that conclusion. True it is that they have also managed to make some trading profits in the interim, and to that extent more money might be available for creditors, but the nature of the overall deal is not that dissimilar. It does not have the added benefit of potential additional sums from an earnout. Furthermore, in having to start negotiating afresh, the administrators risked not being able to do a deal at all, having lost Mr Rohl’s deal. All in all, it seems to me that Mr Rohl’s proposed deal can be presented as being as much in the interests of creditors as the deal currently proposed by the existing administrators.

That conclusion is strengthened by the fact that no-one has really sought to argue strenuously otherwise. Mr Barker pointed out some differences, but the administrators have not sought to criticise the pre-pack that Mr Rohl sought to put in place. Ms Bennett obviously did not want Mr Rohl’s administration to go ahead. That may have been for a variety of reasons. First, she may have thought that Mr Rohl was seeking to gain an illegitimate advantage. Second, she may have thought that it was not something that she was prepared to tolerate in the context of her dispute with him. Third, it is a possibility (theoretical because there is no evidence on the point) that she was merely motivated by irritation, rather than commerce, at the prospect of Mr Rohl picking up their joint business. Fourth, she may not have liked the identity of Mr Rohl’s administrators for some particular reason. Perhaps there are other potential motivations. All that the court has is a letter from her solicitors sent just before the costs hearing which opposes the payment of pre-administration costs out of the administration. Somewhat surprisingly, it suggests that she has not seen Mr Rohl’s evidence. If by that she means the evidence in support of the application, including evidence of the pre-pack, then it must follow that she appointed administrators without seeing details of that pre-pack. If that is right then it would support the inference that she appointed for her own reasons, and not in the interests of creditors. If the solicitors mean that they have not seen any additional material filed in respect of the costs application (which is perhaps more likely) then she has not taken the opportunity to pass comment on the merits of the original application (and pre-pack). However, the important point is that there is no positive evidence as to why she acted as she acted. She has not sought at any time to make a case that she was justified in stopping Mr Rohl’s appointment, whether in the interests of creditors or in the interests of herself. She did not have to oppose the making of the order by a reasoned opposition, because she could simply win by making her paragraph 14 appointment. However, neither she, nor, more significantly in the present context, the administrators have sought to argue that there was a good reason, in the interests of creditors, why Mr Rohl’s application should not have succeeded. If Ms Bennett did not wish to participate in order to make that point, then the administrators, who must have been privy to her thinking as part of their pre-appointment discussions, must have known of any good reasons. They have not put them forward.

In the circumstances it seems to me that I am faced with an application which, had it not been for the paragraph 14 appointment, would be likely to have succeeded. If it had succeeded Mr Rohl would have had his costs of the application as an expense of the administration. He did not succeed because, for reasons of her own which have not been articulated, Ms Bennett decided to make her own appointment. It is true, as Mr Barker pointed out, that at any time up to the appointment Mr Rohl was vulnerable to the floating charge creditor making such an appointment, and there is no evidence that he sought to clear the path from any such obstacle by sounding out at least Clydesdale (whom he knew about) before he made his application. Nonetheless, that risk is not determinative. It merely demonstrates a vulnerability. It does not mean that in all circumstances the applicant should be treated as taking the costs risk. It is just as likely that, in the circumstances, Ms Bennett appointed an administrator for her own tactical purposes, or even for her own purely personal purposes, as that she appointed one for good commercial reasons. I do not know which is the case.

Faced with that, the conclusion which I reach is that the application was one which can properly be described as being in the interests of creditors. It was frustrated by a step taken by a secured creditor, but that does not deprive the application of its proper characterisation. In those circumstances, and since no-one has suggested why the application, with its pre-pack, was to some material extent not in the interests of creditors, I shall continue so to treat it. That means that, in my view, the same result ought to follow so far as its costs are concerned as would have followed had the application been acceded to. On the evidence I have seen, I find it difficult to avoid the conclusion that the creditors are not materially better off under the administration than under Mr Rohl’s pre-pack. I think that in those circumstances the correct order is indeed that the costs of the administration application should be treated as if they were costs of the administration.

That means that I have to indicate where they ought to lie within the order of expenses within paragraph 2.67, in line with the speech of Lord Hoffman in Toshouku. As I have indicated, the numbers in this case make the exercise almost certainly academic, but in case it matters it would, in my view, be appropriate to give them the same level of priority as they would have obtained had an order been made on Mr Rohl’s petition, that is to say under head (c).

I shall therefore so order.