Neumans LLP (A Firm) v Andrew Andronikou & Ors

Factual and Procedural Background

An application was made by a firm of solicitors ("Appellant") seeking payment of their legal fees and disbursements as an expense of an out of court administration concerning the insolvency of Company A. The Appellant acted for Company A in opposing a winding up petition presented by Her Majesty's Revenue and Customs (HMRC). The Company eventually entered insolvent liquidation only after joint administrators were appointed out of court and a creditors' voluntary arrangement (CVA) failed.

The Appellant claimed priority for their fees as an administration expense, arguing that no funds remained at the conclusion of the administration to pay such fees, and that they were unlikely to receive payment as liquidation expenses. The respondents, former joint administrators, successfully raised a jurisdictional objection before Judge Morgan, asserting that the court lacked jurisdiction to order payment of the solicitors' fees as an expense of the out of court administration, and that the 1986 Insolvency Rules exhaustively define expenses payable in such administration.

The Appellant contended this result was anomalous, noting that if administrators had been appointed by the court, the fees would have been payable as administration expenses. They argued that fees incurred in defending a winding up petition suspended by an out of court administration should be treated as expenses of that administration. The respondents countered that the 1986 Rules provide no express priority for such fees in out of court administrations and that solicitors could protect their positions by third party funding or indemnities.

The appeal arose from Judge Morgan's order dated 2 November 2012, which accepted the administrators' contention and denied jurisdiction to order payment of the solicitors' fees as administration expenses. The liquidators did not participate in the appeal.

Additional facts include that the Appellant acted for the Company from December 2009 to February 2010 during the defence of the winding up petition. Administrators were appointed out of court in February 2010, suspending the petition. The Appellant's retainer ended at that point. A CVA was proposed and approved without notice to the Appellant, who did not claim unsecured creditor status but sought payment as an administration expense or alternatively as a liquidation expense. The administration consumed the Company's assets, leaving no funds to pay the Appellant’s fees in liquidation.

Legal Issues Presented

1. Whether the court has jurisdiction to order payment of solicitors' fees incurred in defending a winding up petition as an expense of an out of court administration.
2. Whether such solicitors' fees qualify as administration expenses under the Insolvency Rules 1986.
3. Whether the court can exercise inherent jurisdiction or powers under section 51 of the Senior Courts Act 1981 to order payment of such fees as administration expenses.
4. The proper classification and priority of solicitors' fees incurred in defending a winding up petition where the administration was out of court and preceded liquidation.

Arguments of the Parties

Appellant's Arguments

• The court should have jurisdiction to order payment of the solicitors' fees as administration expenses, relying on public policy favouring payment of costs incurred in relation to winding up petitions as expenses of the subsequent insolvency process.
• The 1986 Rules and relevant case law support payment of winding up petition costs as administration expenses where the winding up petition is overtaken by an administration order, and this principle should extend to out of court administrations despite the absence of express provision.
• The absence of express provision in the 1986 Rules for out of court administrations is an oversight and creates an unjustifiable lacuna, which should be resolved by purposive construction rather than strict adherence.
• The court has wide discretion under section 51 of the Senior Courts Act 1981 to order payment of costs from administration assets, and the solicitors' fees should be considered "costs" within that provision.
• The solicitors' fees were incurred in anticipation of insolvency and conferred a benefit on the administration process, justifying their treatment as administration expenses.
• The court has jurisdiction under the Insolvency Act 1986 and inherent jurisdiction to direct payment of such expenses.

Respondents' Arguments

• The 1986 Insolvency Rules exhaustively define administration expenses payable in out of court administrations, and solicitors' fees for defending winding up petitions are not included.
• The court lacks jurisdiction under section 51 of the Senior Courts Act 1981 to order payment of fees that are not "costs" incurred by the company in the relevant proceedings.
• The solicitors' retainer ended before administration commenced, so fees were not incurred for the benefit of the administration and are not payable as administration expenses.
• Solicitors can protect their position by seeking indemnities or third party funding; any gap in the rules should be addressed by legislative amendment, not judicial decision.
• Fees of this nature are payable as liquidation expenses under the 1986 Rules, specifically rule 4.218(3)(h), not as administration expenses.

Table of Precedents Cited

Court's Reasoning and Analysis

The court carefully reviewed the submissions and the detailed judgment of Judge Morgan, concluding that the 1986 Insolvency Rules provide an exhaustive list of expenses payable in out of court administrations. Solicitors' fees incurred in defending a winding up petition are not included in this list and therefore do not qualify as administration expenses in such circumstances.

The court found no jurisdiction under section 51 of the Senior Courts Act 1981 to order payment of these fees as administration expenses, since the fees were not "costs" within the meaning of that section and were not incurred by the company during the administration. The retainer was terminated before administration began, and the fees were not for the benefit or purpose of the administration but related to resisting the winding up petition.

The court rejected the Appellant's argument that the court's inherent jurisdiction or powers under the Insolvency Act 1986 could be used to fill the gap in the rules. It emphasized that any lacuna should be addressed by legislative amendment rather than judicial extension.

While some of the solicitors' fees were payable as liquidation expenses under rule 4.218(3)(h) of the 1986 Rules, this did not address the anomaly that in many out of court administrations there is no subsequent liquidation or that the administration assets had already been dissipated.

The court adopted a restrained approach, affirming the comprehensive reasoning of the lower court and declining to restate the detailed analysis already provided. It emphasized the importance of certainty and adherence to the statutory framework in insolvency proceedings.

Holding and Implications

DISMISSED

The court dismissed the appeal, holding that the solicitors' fees incurred in defending the winding up petition are not payable as expenses of the out of court administration under the Insolvency Rules 1986 or section 51 of the Senior Courts Act 1981. Instead, such fees may be payable as expenses of the subsequent liquidation, if any.

The decision means that in out of court administrations, solicitors acting for the company in resisting winding up petitions do not have priority payment status as administration expenses. This maintains the existing statutory scheme and leaves any remedy for the identified lacuna to legislative amendment. No new precedent altering the scope of administration expenses was established; the ruling reinforces strict adherence to the express provisions of the Insolvency Rules 1986.