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Neumans LLP (a firm) v Andronikou & Ors
Factual and Procedural Background
This application arises from the insolvency of Company A, which faced a winding up petition presented by HM Revenue and Customs ("HMRC") on 23rd December 2009. Prior to this, between 15th December 2009 and 12th February 2010, Company A instructed Solicitors to act on its behalf in connection with the threatened petition and subsequent legal proceedings, including an unsuccessful application to dismiss the petition and a permission to appeal which was later overtaken by events. On 26th February 2010, administrators were appointed out of court by a qualifying floating charge holder, suspending the winding up petition. The administrators proposed and Company A entered into a company voluntary arrangement (CVA), supervised by the administrators, which was challenged by HMRC but upheld by the court. Subsequently, creditors resolved to end the administration by compulsory liquidation, and on 24th February 2011, the company was wound up pursuant to the original petition, ending the administration. Liquidators were appointed on 25th February 2011.
The solicitors claim unpaid fees and disbursements totaling £462,599.21 for work done before 12th February 2010, seeking a determination that these amounts be treated as an expense of the administration, alternatively as an expense of the liquidation or the CVA. The administrators oppose the claim being an expense of the administration, arguing no statutory basis or jurisdiction exists for such a determination. The liquidators do not oppose the claim being an expense of the liquidation but did not appear at the hearing. The core dispute is thus between the solicitors and the administrators.
Legal Issues Presented
- Whether the solicitors' fees and disbursements incurred before the administration should be treated as an expense of the administration.
- Whether the court has jurisdiction under section 51 of the Senior Courts Act 1981 or otherwise to order the administrators to pay the solicitors' fees as administration expenses.
- Whether the solicitors' fees should be treated as an expense of the CVA.
- Whether the solicitors' fees should be allowed as an expense of the liquidation pursuant to the Insolvency Rules 1986.
Arguments of the Parties
Solicitors' Arguments
- Solicitors contend that their fees incurred in connection with opposing the winding up petition should be paid as an expense of the administration or, alternatively, the liquidation or CVA.
- They rely on section 51 of the Senior Courts Act 1981, asserting the court has full power to order the company's costs to be paid by the administrators, which would render such payments necessary disbursements and thus administration expenses under rule 2.67.
- They submit the court can "treat" the solicitors' fees as administration expenses, analogizing to the Lundy Granite principle and the decision in Re Toshoku Finance UK plc, which allows certain pre-insolvency liabilities to be treated as expenses.
- They argue the administrators have power, and the court has jurisdiction, to direct payment of the solicitors' fees even if not strictly obliged, making such payments administration expenses.
- Policy considerations include the need to ensure solicitors acting for companies facing insolvency petitions can expect payment, encouraging proper legal representation.
Administrators' Arguments
- Administrators submit that the court lacks jurisdiction to order that the solicitors' fees be paid as an expense of the administration.
- They argue the categories of administration expenses are exhaustively set out in rule 2.67 and the solicitors' fees do not fall within any such category.
- They contend that section 51 of the Senior Courts Act 1981 cannot be used to circumvent the statutory code governing administration expenses.
- They reject the submission that the court can "treat" the solicitors' fees as administration expenses or direct the administrators to pay them.
- Administrators do not oppose the solicitors' fees being allowed as an expense of the liquidation.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965 | Broad discretionary power under section 51 of the Senior Courts Act 1981 to order costs against non-parties. | Confirmed that section 51 confers wide discretion but does not support ordering company costs to be paid by administrators as administration expenses in this context. |
| Re Toshoku Finance UK plc [2002] 1 WLR 671 | Exhaustive list of liquidation expenses under rule 4.218; Lundy Granite principle allowing certain pre-liquidation liabilities to be treated as liquidation expenses. | Applied analogy to administration expenses under rule 2.67; held solicitors' fees not within exhaustive list and Lundy Granite principle not applicable here. |
| Re Gosscott (Groundworks) Ltd (1988) 4 BCC 372 | Costs of administration petition allowed as expenses of liquidation; application of section 51 in insolvency context. | Considered but distinguished; did not provide basis to treat solicitors' fees as administration expenses here. |
| Unadkat & Co (Accountants) Ltd v Bhardwaj [2007] BCC 452 | Court's power under Companies Act to order costs as expenses of liquidation. | Did not assist solicitors' case regarding administration expenses. |
| Irish Reel Productions Ltd v Capitol Films Ltd [2010] Bus LR 854 | Construction of rule 2.12(3) relating to costs allowed as administration expenses. | Confirmed costs of persons appearing on petition can be administration expenses but did not extend to solicitors' fees in this case. |
| Rohl v Bickland Ltd [2012] EWHC 706 (Ch) | Power under schedule B1 para. 13(1)(f) to treat certain costs as administration expenses. | Held court can treat certain costs as administration expenses, but facts distinguishable from present case. |
| Re Eurodis Electron plc [2012] 2 BCLC 257 | Court's inherent jurisdiction to order payment of administration expenses as liquidation expenses. | Did not alter conclusion that solicitors' fees here were not administration expenses nor payable by administrators. |
| Re Bathampton [1976] 1 WLR 168 | Discretion to allow or disallow company costs as expenses of winding up. | Guided approach to costs of unsuccessful opposition to winding up petition; influenced court's discretion here. |
| Re a Company (No 004055 of 1991) [1991] 1 WLR 1004 | Discretion to allow company costs as expenses of liquidation even if opposition unsuccessful. | Supported solicitors' expectation of payment as liquidation expenses despite unsuccessful opposition. |
| Re Aurum Marketing Ltd [2000] 2 BCLC 645 | Costs orders in public interest winding up petitions. | Illustrated third party applications for costs; not determinative of administration expense issue. |
Court's Reasoning and Analysis
The court undertook a detailed statutory and case law analysis focusing primarily on the relevant provisions of the Insolvency Act 1986 and the Insolvency Rules 1986, particularly rules 2.12, 2.67, 4.218, and 12.2, and the powers conferred by section 51 of the Senior Courts Act 1981. The court identified that the categories of administration expenses are exhaustively set out in rule 2.67, and the solicitors' fees do not fall within any of these categories as they were incurred before the administration and not by the administrators in the performance of their functions.
Section 51 was examined extensively. While it confers broad discretion on the court to order costs, the court held that it does not empower making an order that effectively converts the company's costs into administration expenses payable by the administrators. The court observed that an order under section 51 that administrators pay the company's costs to the company would be nonsensical and would not result in payment to the solicitors. Further, the solicitors did not incur costs themselves but earned fees, so section 51 does not apply to order payment to them directly.
The court considered the "treating" of fees as administration expenses, drawing on the Lundy Granite principle and the decision in Re Toshoku. It concluded that such treatment is only appropriate where the contract under which the fees arise continues in effect after the insolvency process and the office holder elects to retain its benefit. Here, the solicitors' retainer ended before administration, and the administrators did not retain the benefit, so the principle does not apply.
Regarding powers to direct payment, the court found no statutory or inherent jurisdiction to require the administrators to pay the solicitors' fees as administration expenses, especially where such payment would not assist the administration and would prejudice unsecured creditors. The court rejected submissions relying on paragraphs 65, 66, and 13(1)(f) of schedule B1 and the inherent jurisdiction of the court.
On the CVA expenses, the court held that the solicitors' fees were not expenses properly incurred under the relevant rules, so no payment obligation arose.
Turning to liquidation expenses, the court applied rule 4.218(3)(h), which allows the court to "allow" the costs of any person appearing on the petition as liquidation expenses. The court held that the solicitors' fees represent the company's costs and that these should be allowed as expenses of the liquidation, noting the absence of opposition from the administrators and liquidators. The court distinguished between costs directly connected to the winding up petition and other costs, allowing the former but disallowing costs related to an appeal to the First-tier Tribunal under VAT legislation.
Holding and Implications
The court's final decision is as follows:
- The solicitors' fees and disbursements incurred before administration do not qualify as expenses of the administration under rule 2.67 and cannot be "treated" as such.
- The court does not have jurisdiction under section 51 of the Senior Courts Act 1981 to order the administrators to pay the solicitors' fees as administration expenses.
- The solicitors' fees are not expenses of the CVA under the relevant rules.
- The solicitors' fees are allowed as expenses of the liquidation under rule 4.218(3)(h) of the Insolvency Rules 1986.
Implications: The decision clarifies that administration expenses are confined to statutory categories and that fees incurred by solicitors prior to administration, without continuation of contract or election by administrators, do not attain administration expense status. The ruling preserves the priority scheme under the Insolvency Rules and confirms the court's limited jurisdiction under section 51 in insolvency contexts. Although the solicitors are entitled to have their fees allowed as liquidation expenses, the practical effect is that payment is unlikely due to lack of available funds. No new precedent is established beyond the application of existing principles to the facts.
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