Neumans LLP (a firm) v Andronikou & Ors [2012] EWHC 3088 (Ch) (02 November 2012)

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England and Wales High Court (Chancery Division) Decisions

You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Neumans LLP (a firm) v Andronikou & Ors [2012] EWHC 3088 (Ch) (02 November 2012)
URL: http://www.bailii.org/ew/cases/EWHC/Ch/2012/3088.html
Cite as: [2012] EWHC 3088 (Ch), [2013] Bus LR 374, [2012] WLR(D) 310

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		Neutral Citation Number: [2012] EWHC 3088 (Ch)
		Case No: 22180 of 2009

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
IN THE MATTER OF
PORTSMOUTH CITY FOOTBALL CLUB LTD (in liquidation)
AND IN THE MATTER OF THE INSOLVENCY ACT 1986

Rolls Building,
7 Rolls Building,
Fetter Lane, London,
EC4A 1NL

02/11/2012

B e f o r e :

MR JUSTICE MORGAN
____________________

Between:

	NEUMANS LLP (a firm)	Applicant
	-and-
	(1) ANDREW ANDRONIKOU (2) PETER KUBIK (3) MICHAEL KIELY (Joint Administrators of Portsmouth City Football Club Limited)
	-and-
	(4) GEOFFREY CARTON-KELLY (5) DAVID HUDSON (Joint Liquidators of Portsmouth City Football Club Limited)	Respondents

____________________

Mr Richard Snowden QC and Mr Alex Barden (instructed by Neumans LLP) for the Applicants
Ms Hilary Stonefrost (instructed by Walker Morris) for the Administrators
The Liquidators did not appear and were not represented

Hearing dates: 10, 11 May and 12 October 2012
____________________

HTML VERSION OF JUDGMENT
____________________

HEADING	PARAGRAPH NUMBER
PART I: THE FACTS AND OTHER MATTERS	1
Introduction	1
The insolvency processes in this case	3
The application	9
The provisions relevant to the liquidation	17
The provisions relevant to the administration	25
The submissions for the solicitors	35
The submissions for the administrators	40

PART II: ADMINISTRATION EXPENSES	44
Introduction	44
Senior Courts Act 1981, section 51	51
"Treating" the fees as an administration expense	85
Powers and directions	99

PART III: CVA EXPENSES	111

PART IV: LIQUIDATION EXPENSES	113

PART V: THE OVERALL RESULT	137

Mr Justice Morgan:

PART I: THE FACTS AND OTHER MATTERS

Introduction

This application arises out of the insolvency of Portsmouth City Football Club Ltd, company number 03742737 ("the company"), which is not to be confused with Portsmouth City Football Club (2010) Ltd. The application is brought by a firm of solicitors, Neumans LLP ("the solicitors"). The principal relief sought by the solicitors is a determination that certain fees and disbursements, said to be payable by the company to the solicitors for work done by them on behalf of the company, in the period from 15^th December 2009 to 12^th February 2010, should be determined to be an expense of the administration of the company; that administration lasted from 26^th February 2010 to 24^th February 2011. Alternatively, the solicitors say that those fees and disbursements should be an expense of the liquidation of the company, which was ordered to be wound-up on 24^th February 2011, pursuant to a petition presented on 23^rd December 2009. In the further alternative, the solicitors say that those fees and disbursements should be an expense of a CVA which the company entered into while it was in administration. Although the sums in question are not confined to the fees chargeable by the solicitors for their work but also include substantial disbursements in relation to counsel, I will for convenience refer to the sums in question as "the solicitors' fees", save where it is relevant to refer to both fees and disbursements.

Mr Snowden QC and Mr Barden appeared on behalf of the solicitors and Ms Stonefrost appeared on behalf of the administrators. The administration came to an end on 24^th February 2011 but it is convenient to refer to the administrators by that description both when referring to their position during the administration and after it. The liquidators did not appear and were not represented. Counsel's submissions were elaborate and thorough and I fear that in order to do justice to them I need to explain my reasons at what has become considerable length.

The insolvency processes in this case

On or about 15^th December 2009, the company instructed the solicitors to act for it in connection with a threatened winding up petition which was expected to be presented by HM Revenue and Customs ("HMRC"). On 23^rd December 2009, HMRC did present a creditor's petition for the winding up of the company. On 12^th January 2010, the company issued an application notice in the Companies Court seeking, principally, an order that the petition be dismissed as an abuse of the process of the court. That application was heard by Newey J on 15^th and 18^th January 2010 and dismissed by him on 19^th January 2010. His judgment is reported at [2011] STC 683. Newey J granted the company permission to appeal to the Court of Appeal and an Appellant's Notice was filed on 3^rd February 2010. The solicitors acted for the company in connection with the company's application to the Companies Court and the appeal to the Court of Appeal and continued to act for the company until on or about 12^th February 2010, when their instructions were withdrawn. The appeal to the Court of Appeal was overtaken by later events.

On 26^th February 2010, by an out of court appointment pursuant to Insolvency Act 1986 ("the 1986 Act"), schedule B1, para. 14, a qualifying floating charge holder appointed administrators of the company. The winding up petition was automatically suspended while the company was in administration pursuant to the 1986 Act, schedule B1 para. 40(1)(b).

HMRC initially raised an issue as to the validity of the appointment of the administrators. On 2^nd March 2010, HMRC's winding up petition was heard. Directions were given for the determination of the issue whether the administrators had been validly appointed. Not long afterwards, HMRC accepted that the administrators had been validly appointed.

The administrators' initial report of 19^th April 2010 proposed a company voluntary arrangement. The administrators' proposals were approved at a meeting on 17^th June 2010. The terms of the CVA provided for it to cease to have effect on 16^th February 2011 unless extended, or earlier than 16^th February 2011 if the company were wound-up. The supervisors of the CVA were the administrators.

HMRC challenged the CVA on the grounds that it unfairly prejudiced its interests and that there was a material irregularity in respect of voting by the creditors. That challenge was rejected by Mann J on 5^th August 2010. The neutral citation of his judgment is [2010] EWHC 2013 (Ch).

On 26^th November 2010, the administrators made revised proposals. In particular they proposed a meeting to consider ending the administration via a compulsory liquidation. On 14^th December 2010, the creditors met and approved resolutions that the company should exit administration via a compulsory liquidation. On 28^th January 2011, the administrators applied under the 1986 Act, schedule B1, para. 79 to bring the administration to an end on or before the anniversary of their appointment (25^th February 2011). That application was heard on 10^th February 2011 when it was ordered that the administration should cease to have effect pursuant to schedule B1, para. 79 on the court making an order to wind up the company. The original winding up petition which had been presented by HMRC was restored to a hearing on 24^th February 2011 when Norris J made an order winding up the company. The result was that the administration ended on the making of that order. The liquidators were appointed on 25^th February 2011.

The application

The application before me arises out of the fact that the company did not pay the solicitors all of their fees for the work which they did for the company in the period from 15^th December 2009 to 12^th February 2010. The total sum now identified by the solicitors in relation to their fees (and disbursements) amounts to £462,599.21. The solicitors' own fees are £214,859.10. The disbursements are in respect of the fees of leading counsel and two junior counsel. Before 12^th February 2010, the solicitors were paid £160,000 by a person connected with the company. The bulk of this money was used to make payments to counsel. In addition two of the counsel have written off part of their fees. The solicitors say that the sum outstanding which they wish to claim as an expense of the administration or the liquidation or the CVA is £267,079.45. In case the level of the fees for acting in the period from 15^th December 2009 to 12^th February 2010 might be considered to be on the high side, Mr Snowden stressed that the solicitors' fees and disbursements could be the subject of a detailed assessment, as between solicitor and client, if they were not agreed. On 26^th February 2010, shortly after the appointment of the administrators, the solicitors wrote to the administrators seeking payment of their fees and disbursements as an expense of the administration.

As indicated above, HMRC's winding up petition was heard on 2^nd March 2010. At that hearing, the court granted the solicitors liberty to apply in relation to their fees. On 8^th March 2010, the solicitors wrote to the solicitors acting for the administrators setting out their arguments as to why their fees and disbursements should be paid as an expense of the administration. On 12^th March 2010, the solicitors for the administrators replied to the solicitors indicating that on any application by the solicitors to the court, the administrators would not be unsympathetic to the solicitors' position but that such an application was premature until the question as to the suspension of the winding up petition was considered at a future hearing. As indicated above, around this time, HMRC accepted that the administrators had been validly appointed and it automatically followed that the winding up petition was suspended.

Time went by and further correspondence passed between the solicitors and the administrators. On 13^th August 2010, the administrators called on the solicitors to make any application they wished to make for a determination that their fees and disbursements should be an expense of the administration. On 27^th August 2010, the solicitors issued the original application which is before me. At that stage, the administrators were the only respondents. The solicitors sought a determination that their fees in relation to the winding up petition should rank as an expense of the administration.

On 22^nd February 2011, the solicitors applied for permission to amend their original application to claim, in summary, a determination that their fees should rank as an expense of the administration, alternatively as an expense of the CVA or in the further alternative as an expense of the liquidation. The draft amended application identified some 8 different categories of fees. The application for permission to amend also sought to join the liquidators of the company as respondents. Mr Snowden on behalf of the solicitors told me that the application for a determination that the solicitors' fees and disbursements should be an expense of the CVA or of the liquidation was "very much as a fall-back". On 24^th February 2011, Norris J gave directions in relation to the solicitors' original application and their application to amend. On 18^th May 2011, the registrar ordered that the liquidators be joined as respondents to the solicitors' original application and their application to amend.

At the hearing before me, I granted permission to amend the solicitors' application in accordance with the draft amended application. Accordingly, the matter which is before me is the amended application to which both the administrators and the liquidators are respondents.

As I understand it, the administrators did realise certain assets of the company. Accordingly, if the solicitors' fees, or some of them, are determined to be an expense of the administration, then there had been a fund available to the administrators, out of which those fees could have been paid. That fund which was originally available to the administrators has since been spent by them. I was told that the administrators' fees were £1,151,683.17 and that they have been paid £1,027,936.50. Further, the administrators engaged solicitors and consultants. Their solicitors' fees were £1,342,000 of which £1,036,421 has been paid. The consultants' fees were £182,533.72 and these fees have been paid in full. If the solicitors' fees (which are the subject of the present application) are determined to be an expense of the administration, the administrators will have to pay back some of the fees which they paid themselves in order for them to be able to pay the appropriate sums due to the solicitors. The administrators resist the application that the solicitors' fees should be determined to be an expense of the administration. Their principal argument is that there is no statutory provision or rule which produces that result in this case. They also say that the court has no jurisdiction to determine that the solicitors' fees are an expense of the administration when they cannot be brought within any such statutory provision or rule. The solicitors did not press their claim that their fees should be an expense of the CVA.

I also have to consider whether the solicitors' fees should be allowed as an expense of the liquidation. If the solicitors' fees are determined not to be an expense of the administration but are determined to be an expense of the liquidation, the solicitors are unlikely to receive anything. This is because when the administration ended and the company was ordered to be wound-up, there were then no funds in the hands of the administrators, as all of the realisations up to that date had been expended in payment of the administrators' fees and the other disbursements. Accordingly, the administrators did not pass any funds to the liquidators at the end of the administration. The liquidators have explained in a detailed witness statement, and in subsequent correspondence addressed to the court, that the only circumstances in which the liquidators would be in a position to pay the solicitors' fees as an expense of the liquidation would be if the liquidators were able to realise any monies as a result of any claims which the liquidators might be able successfully to pursue. The liquidators have served a lengthy witness statement dealing in detail with a large number of matters and explaining that they do not feel it would be right to consent to the solicitors' application. Their overall stance is that they do not oppose the solicitors' application (in relation to liquidation expenses) and they will abide by the court's decision. They did not appear at the hearing of the application. Thus, the real contest in this case is between the solicitors and the administrators.

There have been two hearings before me in relation to the present application. At the first hearing, Mr Snowden's principal, and I understood his only, submission in relation to the fees being an expense of the administration was based on section 51 of the Senior Courts Act 1981. Following the hearing, I reserved my judgment and I later released a draft judgment to the parties. In the draft judgment, I analysed the jurisdiction under section 51 and concluded that section 51 did not enable the court to hold that the solicitors' fees should be an expense of the administration. Before the draft judgment was handed down, Mr Snowden applied in writing for me to allow further argument, in particular, in relation to section 51. I permitted the parties to make further submissions at a second oral hearing. At the second hearing, Mr Snowden made further submissions in relation to section 51 and he also developed a submission that the court had power to "treat" the solicitors' fees as an administration expense. Shortly before the second hearing, I invited counsel to make submissions on the decision in Re Eurodis Electron plc [2012] 2 BCLC 257. In the course of his oral submissions, Mr Snowden contended that the court had power to direct the administrators to pay the solicitors' fees, with the result that those fees would be an administration expense.

The provisions relevant to the liquidation

I will refer to the statutory provisions and the rules dealing with liquidation before I deal with those dealing with administration. As will be seen, rule 4.218 of the Insolvency Rules 1986, dealing with liquidation expenses, was the model for rule 2.67, dealing with administration expenses, and it is convenient to refer to liquidation expenses before turning to administration expenses.

To summarise, on 23^rd December 2009, HMRC presented a creditor's winding up petition pursuant to the 1986 Act, section 124. That petition was suspended on 26^th February 2010, pursuant to 1986 Act, schedule B1, para. 40(1)(b), when the administrators were appointed by a qualifying floating chargeholder. The suspension of the petition came to an end on 24^th February 2011 when the administration ended and the company was ordered to be wound-up pursuant to the original petition. The winding up was deemed to commence on the presentation of that petition: 1986 Act, section 129(3).

As is well known, the expenses of a liquidation have priority over many other claims. The rule which is of central relevance as regards the expenses of a liquidation is rule 4.218, which is in these terms:

"4.218 General rule as to priority

(1) All fees, costs, charges and other expenses incurred in the course of the liquidation are to be regarded as expenses of the liquidation.

(2) The expenses of the liquidation are payable out of—

(a) assets of the company available for the payment of general creditors, which shall be taken to include proceeds—

(i) of any legal action which the liquidator has power to bring in his own name or in the name of the company, or

(ii) arising from any award made under any arbitration or other dispute resolution procedure which the liquidator has power to bring in his own name or in the name of the company,

which shall, for the purposes of this subparagraph, also include—

(iii) any payments made under any compromise or other agreement intended to avoid legal action or recourse to arbitration or to any other dispute resolution procedure, and

(iv) payments made as a result of a settlement of any such action, arrangement or procedure in lieu of or prior to any judgment being given or award being made;

(b) subject as provided in Rules 4.218A to 4.218E, property comprised in or subject to a floating charge created by the company.

(3) Subject as provided in Rules 4.218A to 4.218E, the expenses are payable in the following order of priority—

(a) expenses which—

(i) are properly chargeable or incurred by the provisional liquidator in carrying out the functions conferred on him by the court;

(ii) are properly chargeable or incurred by the official receiver or the liquidator in preserving, realising or getting in any of the assets of the company or otherwise in the preparation or conduct of any legal proceedings, arbitration or other dispute resolution procedures, which he has power to bring in his own name or bring or defend in the name of the company or in the preparation or conduct of any negotiations intended to lead or leading to a settlement or compromise of any legal action or dispute to which the proceedings or procedures relate;

(iii) relate to the employment of a shorthand writer, if appointed by an order of the court made at the instance of the official receiver in connection with an examination; or

(iv) are incurred in holding an examination under Rule 4.214 (examinee unfit) where the application for it was made by the official receiver;

(b) any other expenses incurred or disbursements made by the official receiver or under his authority, including those incurred or made in carrying on the business of the company;

[(c) the fees payable under any order made under section 414 [or section 415A], including those payable to the official receiver (other than the fee referred to in sub-paragraph (d)(i) below), and any remuneration payable to him under general regulations;

(d)

(i) the fee payable under any order made under section 414 for the performance by the official receiver of his general duties as official receiver;

(ii) any repayable deposit lodged under any such order as security for the fee mentioned in sub-paragraph (i);]

(e) the cost of any security provided by a provisional liquidator, liquidator or special manager in accordance with the Act or the Rules;

(f) the remuneration of the provisional liquidator (if any);

(g) any deposit lodged on an application for the appointment of a provisional liquidator;

(h) the costs of the petitioner, and of any person appearing on the petition whose costs are allowed by the court;

(j) the remuneration of the special manager (if any);

(k) any amount payable to a person employed or authorised, under Chapter 6 of this Part of the Rules, to assist in the preparation of a statement of affairs or of accounts;

(l) any allowance made, by order of the court, towards costs on an application for release from the obligation to submit a statement of affairs, or for an extension of time for submitting such a statement;

[(la) the costs of employing a shorthand writer in any case other than one appointed by an order of the court at the instance of the official receiver in connection with an examination;]

(m) any necessary disbursements by the liquidator in the course of his administration (including any expenses incurred by members of the liquidation committee or their representatives and allowed by the liquidator under Rule 4.169, but not including any payment of [corporation] tax in circumstances referred to in sub-paragraph (p) below);

(n) the remuneration or emoluments of any person who has been employed by the liquidator to perform any services for the company, as required or authorised by or under the Act or the Rules;

(o) the remuneration of the liquidator, up to any amount not exceeding that which is payable [under Schedule 6];

(p) the amount of any [corporation] tax on chargeable gains accruing on the realisation of any asset of the company (without regard to whether the realisation is effected by the liquidator, a secured creditor, or a receiver or manager appointed to deal with a security);

(q) the balance, after payment of any sums due under sub-paragraph (o) above, of any remuneration due to the liquidator[;

(r) any other expenses properly chargeable by the liquidator in carrying out his functions in the liquidation].

(2) . . .

(3) . . ."

It is not necessary to set out the terms of rules 4.218A to 4.218E. This is because the fees which are claimed by the solicitors in the present case are not "litigation expenses" within rule 4.218A(1)(d) because the proceedings in which they were incurred were not "legal proceedings" within rule 4.218A(1)(c).

Rule 4.220 provides:

"4.220 Saving for powers of the court

(1) In a winding up by the court, the priorities laid down by Rules 4.218 and 4.219 are subject to the power of the court to make orders under section 156, where the assets are insufficient to satisfy the liabilities.

(2) Nothing in those Rules applies to or affects the power of any court, in proceedings by or against the company, to order costs to be paid by the company, or the liquidator; nor do they affect the rights of any person to whom such costs are ordered to be paid."

Rule 4.220(1) refers to section 156 of the 1986 Act which gives the court power to vary the priorities set out in rule 4.218 and 4.219. Rule 4.220(2) is not directly relevant in this case but it is referred to in one of the cases to which I was referred.

Rule 12.2(1) is a general rule dealing with winding up, administration and bankruptcy. In the case of a winding up, it does not add anything to rule 4.218(1).

Of these rules, the most important for present purposes is rule 4.218(3)(h) which refers to: "the costs of the petitioner, and of any person appearing on the petition whose costs are allowed by the court".

The provisions relevant to the administration

To summarise, administrators were appointed out of court on 26^th February 2010, pursuant to the 1986 Act, schedule B1, para. 14. The winding up petition was thereupon suspended pursuant to schedule B1, para. 40(1)(b). The petition remained suspended until 24^th February 2011 when the administration ended and the company was ordered to be wound-up.

A number of the provisions in schedule B1 to the 1986 Act are potentially relevant. An administrator:

(1) is an officer of the court: para. 5;

(2) may do anything necessary or expedient for the management of the affairs, business and property of the company: para. 59(1);

(3) has the powers specified in schedule 1 to the 1986 Act (I will refer to these below): para. 60;

(4) may apply to the court for directions in connection with his functions: para. 63;

(5) may make a distribution to a creditor of the company, save that he needs the permission of the court to make a payment by way of distribution to a creditor who is neither secured nor preferential: para. 65(1) and (3);

(6) may make a payment otherwise than in accordance with paragraph 65 (or para. 13 of schedule 1) if he thinks it likely to assist achievement of the purpose of the administration: paragraph 66;

(7) must comply with any direction given by the court to the administrator in connection with any aspect of his management of the company's affairs, business or property: para. 68(2);

Schedule 1 to the 1986 Act confers further powers on an administrator. By para. 13 of schedule 1, an administrator has power to make any payment which is necessary or incidental to the performance of his functions.

The 1986 Act, schedule B1, para. 13(1)(f) provides that on hearing an administration application, the court may make any order which the court thinks appropriate. This paragraph is considered in one of the authorities to which I was referred.

The 1986 Act, schedule B1, para. 99(3) provides that when the administrator ceases to be administrator his remuneration and expenses are charged on and payable out of the property of which he had custody or control immediately before cessation and are payable in priority to any floating charge (as referred to in schedule B1, para. 70).

By the 1986 Act, section 411 and schedule 8, para. 18, rules may be made providing for expenses that may be incurred in an administration. The principal rules which are relevant in this context are the 1986 Rules, rule 2.12, 2.67 and 12.2.

Where the court makes an administration order, the question of costs is dealt with by rule 2.12(3) which provides:

"If the court makes an administration order, the costs of the applicant, and of any person whose costs are allowed by the court, are payable as an expense of the administration."

Rule 2.67 is in these terms:

"2.67

(1) The expenses of the administration are payable in the following order of priority—

(a) expenses properly incurred by the administrator in performing his functions in the administration of the company;

(b) the cost of any security provided by the administrator in accordance with the Act or the Rules;

(c) where an administration order was made, the costs of the applicant and any person appearing on the hearing of the application and where the administrator was appointed otherwise than by order of the court, any costs and expenses of the appointor in connection with the making of the appointment and the costs and expenses incurred by any other person in giving notice of intention to appoint an administrator;

(d) any amount payable to a person employed or authorised, under Chapter 5 of this Part of the Rules, to assist in the preparation of a statement of affairs or statement of concurrence;

(e) any allowance made, by order of the court, towards costs on an application for release from the obligation to submit a statement of affairs or statement of concurrence;

(f) any necessary disbursements by the administrator in the course of the administration (including any expenses incurred by members of the creditors' committee or their representatives and allowed for by the administrator under Rule 2.63, but not including any payment of corporation tax in circumstances referred to in sub-paragraph (j) below);

(g) the remuneration or emoluments of any person who has been employed by the administrator to perform any services for the company, as required or authorised under the Act or the Rules;

[(h) the administrator's remuneration the basis of which has been fixed under Chapter 11 of this Part of the Rules and unpaid pre-administration costs approved under Rule 2.67A;]

(j) the amount of any corporation tax on chargeable gains accruing on the realisation of any asset of the company (without regard to whether the realisation is effected by the administrator, a secured creditor, or a receiver or manager appointed to deal with a security).

(2) The priorities laid down by paragraph (1) of this Rule are subject to the power of the court to make orders under paragraph (3) of this Rule where the assets are insufficient to satisfy the liabilities.

(3) The court may, in the event of the assets being insufficient to satisfy the liabilities, make an order as to the payment out of the assets of the expenses incurred in the administration in such order of priority as the court thinks just.

(4) For the purposes of paragraph 99(3), the former administrator's remuneration and expenses shall comprise all those items set out in paragraph (1) of this Rule.

Rule 2.67A has the heading: "Pre-administration costs". This rule was inserted into the 1986 Rules with effect from 6^th April 2010, which was after the relevant events in this case. In any event, it is not said that the provisions of rule 2.67A would have had any bearing on the issues in this case, even if the rule had been in force at the relevant time.

Rule 12.2(1), so far as relevant to administration, provides that all fees, costs, charges and other expenses incurred in the course of administration are to be regarded as expenses of the administration.

The submissions for the solicitors

Mr Snowden submitted that where solicitors act for a company which is subject to a winding up petition, they ought to be able to expect that in ordinary circumstances, even if the company loses in respect of the stance it adopts in relation to the petition, that the solicitors' fees and disbursements should normally be paid as an expense of any ensuing liquidation. He said that there was an important policy reason supporting this expectation. Were it otherwise, it would be difficult for solicitors to act for a company facing a winding up petition because they would have no assurance of being paid. In some cases, the solicitors might be able to come to an arrangement with persons standing behind the company for the payment of their fees and disbursements. However, in many cases that would not be possible. There ought to be a general rule which applies in this area whether or not there are such persons who could afford to pay the solicitors' fees and disbursements. The court would retain a discretion on the facts of any individual case but speaking generally the court ought not to deprive the solicitors of their fees and disbursements unless they had behaved inappropriately. It ought not to deprive the solicitors of their fees because they might have been able to agree, or even actually were able to agree, in advance that others would be responsible for those fees. The court's normal response should therefore be to allow the fees and disbursements to be an expense of the liquidation.

It was submitted that the policy reasons which apply to a case of a winding up petition applied equally to an application for an administration order. The difficulty in the present case arose because the winding up petition was followed by an administration and, relevantly, an administration pursuant to an out of court appointment. Speaking generally, where there was a series of steps taken in or towards different insolvency processes, whether steps taken in or towards an administration followed by steps taken in or towards a liquidation, or vice versa, the solicitors' fees and disbursements in relation to one set of steps should all be considered as expenses in the insolvency process, so that they could be expenses of any ensuing liquidation or of any ensuing administration and even of both the liquidation and the administration.

Section 51 of the Senior Courts Act 1981 gave the court the necessary power to produce the result described above. Under that section, the court could order that the company's costs, being the fees payable to the solicitors, in relation to the winding up petition should be paid by the administrators. If the court made such an order, the payment of those fees would be "necessary disbursements" within rule 2.67(1)(f) and so would be, without more, expenses of the administration.

On the facts, the solicitors had acted entirely properly. They had been duly instructed by the company. They took advice from counsel and acted in accordance with it. Their action was considered to be in the best interests of the company and indeed turned out to be in the best interests of the company. If the company had been wound-up, without going into administration, then the solicitors' fees and disbursements would plainly have been ordered to be an expense of the liquidation. The intervention of an administration pursuant to an out of court appointment should not change the position so that the solicitors' fees would go unpaid or be postponed to the expenses of the administration and payments to unsecured creditors.

As I explained earlier, at the second hearing before me, Mr Snowden widened his submissions. In addition to his continued reliance on section 51 of the Senior Courts Act 1981, Mr Snowden additionally submitted that I should "treat" the solicitors' fees as an expense of the administration. He further submitted that I should direct the administrators to pay the solicitors' fees and so that those fees would then rank as an expense of the administration.

The submissions for the administrators

In her written submissions for the first hearing, Ms Stonefrost identified two legal issues which arose. The first concerned the usual approach of the court to the costs incurred by a company which has unsuccessfully defended a winding up petition. The second issue was whether the court had jurisdiction to order that the costs of unsuccessfully defending the winding up petition in this case be paid as an expense of the administration.

On the first issue, Ms Stonefrost's written submissions addressed the principles which she submitted the court should apply. She referred to the facts of the case in relation to the court's discretion to order such costs to be an expense of the liquidation. She identified a number of factors which she submitted ought to be taken into account. Mr Snowden had dealt with those matters in his oral submissions. Ms Stonefrost was then able to indicate that she was not pursuing some of the matters she had raised. As I understood her, in the course of oral submissions, she appeared ready to accept that it would be right in the present case to order that the relevant costs should be an expense of the liquidation. It may be that she considered that an order to that effect would not affect her clients, who were the administrators. In any event, in case she was not conceding that this was a proper case for an order that the relevant costs be an expense of the liquidation, I will deal with this point in the discussion later in this judgment.

Ms Stonefrost's principal opposition to the solicitors' application at the first hearing was based on jurisdiction. She submitted that the court simply did not have the power to order that the relevant costs should be an expense of the administration. She submitted that the categories of expenditure which can qualify as an expense of the administration were exhaustively set out in rule 2.67 and that the relevant costs could not be brought within any of those categories. It was submitted that the court could not make an order for costs under section 51 so as to produce the result that the costs so ordered were within rule 2.67 unless such costs were capable of coming within that rule and it was submitted that they were not so capable. She submitted that earlier cases in which costs which were not incurred in connection with a liquidation were ordered to be an expense of the liquidation were inconsistent with the law as declared by the House of Lords in Re Toshoku Finance UK plc [2002] 1 WLR 671.

At the second hearing, Ms Stonefrost submitted that it was not open to the court to "treat" the solicitors' fees as an expense of the administration and, similarly, it was not open to the court to direct the administrators to pay the solicitors' fees.

PART II: ADMINISTRATION EXPENSES

Introduction

I will first consider whether the company's costs, in relation to the solicitors' fees, should be an expense of the administration. As explained above, if the fees are an expense of the administration then the administrators were in funds to pay them. If the fees are not an expense of the administration then the solicitors are likely not to be paid even if the fees are an expense of the liquidation (which I will consider later).

The solicitors' difficulty is that they cannot point to anything in rule 2.12 or rule 2.67 or rule 12.2 which directly allows them to ask the court to hold that the fees are an expense of the administration. It is not said that the court can allow the fees as the costs of any person within rule 2.12(3), because rule 2.12(3) only applies where the court makes an administration order and that did not occur in this case. It is not said that the fees were within rule 2.67(1)(a); it is plain that the fees in question were not incurred by the administrators in performing their functions in the administration of the company. It is not said that the fees were within rule 2.67(1)(c) as the costs of any person appearing on the application for an administration order because there was no such application. Further, the costs in question do not come within the other limbs of rule 2.67(1)(c). It is not said that the fees come directly within rule 2.67(1)(f) or rule 12.2(1), because unless something else were to happen to produce this result, the fees were not disbursements by the administrators, or costs incurred, in the course of the administration.

It is not said that there is any statutory provision or rule or general legal principle which has the effect that something which is an expense of the liquidation (a matter which is considered later in this judgment) is also an expense of the administration or that the administrators are liable to pay sums which are liquidation expenses. It is not said that the assets which came into the hands of the administrators on their appointment were subject to any charge or liability in this respect which they became obliged to honour.

The solicitors accept that, subject to one possible qualification, the categories of expenses which could rank as administration expenses are confined to those set out in rules 2.12, rule 2.67 and rule 12.2(1). It is not said that paragraph 13(1)(f) of schedule B1 is relevant in the present case. The solicitors appeared to me to accept that the decision of the House of Lords in Re Toshoku Finance UK plc [2002] 1 WLR 671 (to which I refer below), as to the operation of rule 4.218 in relation to liquidation expenses, applies also to the operation of rule 2.67 in relation to administration expenses. In any event, even if they did not accept it, that proposition is consistent with the approach of the courts in a number of decisions such as Re Trident Fashions plc [2007] 2 BCLC 455 at [79]-[80] and Re Nortel Gmbh [2012] 1 BCLC 248.

Mr Snowden on behalf of the solicitors eventually put his case in three ways. His first submission was that the court had power under section 51 of the Senior Courts Act 1981 to make an order in relation to the company's costs. The order which I was asked to make under that section, as formulated in the course of submissions at the second hearing, was an order: "that the company's costs in relation to the winding up petition should be paid by the company from its assets in the hands of the administrators as an expense of the administration". It was submitted that if the court made such an order, the administrators would be obliged to comply with it and that the sums they expended in complying with the court's order would be "necessary disbursements" by them within rule 2.67(1)(f) and therefore would be expenses of the administration.

Mr Snowden's second submission was that it was permissible, when construing or applying rule 2.67, to "treat" certain expenses as coming within the list in rule 2.67. The court's ability to treat certain expenses as coming within that list was said to have been identified in Re Toshoku in relation to rule 4.218 and the reasoning in that case was said to be equally applicable to rule 2.67. It was submitted that the present was a case where the court was able to treat the solicitors' fees as being expenses incurred by the administrators within rule 2.67(1)(a) or as necessary disbursements by the administrators within rule 2.67(1)(f).

Mr Snowden's third submission was that the administrators had power to pay the solicitors' fees in full even if they were not strictly obliged to do so. In those circumstances, and possibly in any event, the court had power to direct the administrators to pay the solicitors' fees. It was submitted that if the court gave such a direction, the administrators would be obliged to comply with it. The sums they expended in complying with the court's direction would be "necessary disbursements" by them within rule 2.67(1)(f) and therefore would be expenses of the administration.

Senior Courts Act 1981, section 51

The solicitors ask the court to make an order under section 51 of the Senior Courts Act 1981 that the company's costs in relation to the winding up petition should be paid by the company from its assets in the hands of the administrators as an expense of the administration. The administrators say that the court has no power under Section 51 of the 1981 Act to make that order. I therefore need to consider the power conferred by that section.

Section 51 of the 1981 Act, as substituted by the Courts and Legal Services Act 1990 and as amended by the Access to Justice Act 1999, provides, so far as material:

"(1) Subject to the provisions of this or any other enactment and to rules of court, the costs of and incidental to all proceedings in –

…

(b) the High Court,

…

shall be in the discretion of the court.

(2) …

(3) The court shall have full power to determine by whom and to what extent the costs are to be paid.

(4) In subsections (1) and (2) "proceedings" includes the administration of estates and trusts.

(5) Nothing in subsection (1) shall alter the practice in any criminal cause, or in bankruptcy.

…. "

Before its amendment, section 51(1) of the 1981 Act was in these terms:

"(1) Subject to the provisions of this or any other Act and to rules of court, the costs of and incidental to all proceedings in the civil division of the Court of Appeal and in the High Court, including the administration of estates and trusts, shall be in the discretion of the court, and the court shall have full power to determine by whom and to what extent the costs are to be paid."

The unamended version of section 51 was considered by the House of Lords in Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965. It is accepted that this decision is authoritative in relation to the amended version of section 51 also. The House of Lords held that section 51 conferred on the court a discretionary power in wide terms and there was no justification for implying a limitation to the effect that costs could only be ordered to be paid by parties to the proceedings. Therefore, the court had jurisdiction, where a person had incurred costs in or incidental to relevant court proceedings, to make an order that another person, not necessarily a party to the relevant proceedings, should pay the first person's costs. Lord Goff, in the only speech in that case, said at 975F-H:

"The subsection simply provides that "the court shall have full power to determine by whom … the costs are to be paid." Such a provision is consistent with a policy under which jurisdiction to exercise the relevant discretionary power is expressed in wide terms, thus ensuring that the court has, so far as possible, freedom of action, leaving it to the rule-making authority to control the exercise of discretion (if it thinks fit to do so) by the making of rules of court, and to the appellate courts to establish principles upon which the discretionary power may, within the framework of the statute and the applicable rules of court, be exercised."

The reference in the speech of Lord Goff to the jurisdiction under section 51 being administered in accordance with the rules and established legal principles was picked up and applied by Hoffmann LJ in McDonald v Horn [1995] 1 All ER 961 at 969.

Mr Snowden stressed the words "full power" in section 51(3). The effect of those words has been explained by Lord Goff in Aiden Shipping in the passage from his speech quoted above. Further, the historical development of the statutory provisions in this area is explained by Hoffmann LJ in McDonald v Horn [1995] 1 All ER 961 at 968 – 969. The words "full power" were included, originally in section 5 of the Supreme Court of Judicature Act 1890, to make it clear that the court's jurisdiction to make orders for costs was not fettered in the way described in Re Mill's Estate, ex parte Works and Public Buildings Commissioners (1886) 34 Ch D 24.

The decision in Aiden Shipping led to the development of an area of practice where the court can be asked to make an order for costs in favour of or against a non-party. Applications of that kind are now dealt with pursuant to CPR 48.2. There is a substantial body of case law as to when it is appropriate to make an order for costs against a non-party. The solicitors do not suggest that anything in that area of practice would justify the court in making an order that the company's costs be paid by the administrators. The administrators were not appointed until after all of the relevant costs had been incurred by the company and the administrators played no part in relation to the decisions made by the company to incur those costs.

Before considering the specific authorities to which I was referred, which were said to involve the application of section 51 of the 1981 Act in an insolvency context, it is useful to make some basic points as to the operation of section 51.

Section 51 deals with "the costs of and incidental to … proceedings". It enables the court to determine "by whom" such costs are to be paid. Section 51 does not expressly refer to the person "to whom" the costs are to be paid. However, section 51 authorises the making of rules of court to elaborate its provisions and CPR 48.2 deals with costs order "in favour of" as well as against non-parties. CPR 48.2(1)(a) directs that where the court is considering whether to make a costs order in favour of a person who is not a party to proceedings, that person must be added as a party to the proceedings for the purposes of costs only. An example of a costs order in favour of a non-party is Individual Homes Ltd v Macbream Investments Ltd [2002] LS Gaz R 32.

In the ordinary case of a claimant suing a defendant, the claimant and the defendant are the persons who incur the costs. In such a case, the claimant's solicitor does not incur the costs of and incidental to the proceedings. The claimant's solicitor provides legal services and becomes entitled to be paid a fee for those services. If there is a dispute between the claimant and his solicitor as to whether the solicitor is entitled to be paid, and how much he is entitled to, the solicitor cannot apply under section 51 of the 1981 Act for an order that his client pays his fee. That would not be an order for costs.

In the present case, the costs involved in connection with the winding up petition were incurred by the company. The solicitors' fees are not costs incurred by the solicitors. They are the fees which they would recover from the company if the company were solvent. I do not consider that a claimant's solicitor can apply under section 51 for an order that the defendant pays to the solicitor the solicitor's fees. So if section 51 is to apply in the present case, one has to apply it to the costs incurred by the company. I note at this point that the jurisdiction under section 51 is quite different from the court's jurisdiction under rule 4.218(3)(h) or even rule 2.12(3); in those cases the court's task is to decide whether to allow the company's costs as an expense of the liquidation or the administration, as the case may be. Under section 51, the court's task is to determine whether to make an order that the company's costs be paid to the company.

These considerations give rise to the question as to who may apply for an order that a person's costs be paid. If A sues B and A wins, A can plainly apply for an order under section 51 that B pays A's costs. But if A does not apply for such an order can a third party apply to the court for an order that B pays A's costs to A? In particular, can A's solicitor apply to the court for an order under section 51 that B pays A's costs to A?

In the present case, the company has not at any time applied to the court for an order under section 51 for the payment of its costs. I drew attention to this omission in my draft judgment. The response of the solicitors was that if it were necessary for the company, now acting through its liquidators, to make such an application, the court should direct the liquidators to make that application. There then ensued correspondence between the solicitors and the liquidators. The solicitors requested the liquidators to apply to the court for an order that the solicitors' fees be treated as an administration expense. I suspect that the solicitors would want me to interpret that as a request that the liquidators should apply for an order in relation to the company's costs pursuant to section 51. In any event, the liquidators declined to make such an application and they gave their reasons for their decision. Shortly before the second hearing, the liquidators' solicitors wrote to the court setting out their detailed reasons for not making the application which the solicitors had asked them to make. The liquidators' solicitors added that as officers of the court, the liquidators were subject to the direction of the court. They asked that if the court were minded to direct the liquidators to apply for an order for the company's costs under section 51, that the liquidators be given notice of any such proposed direction in order that they might consider the same and make any further representations prior to any such direction being given. The position at the second hearing was that, although the solicitors had stated that the court could direct the liquidators to apply for an order for costs under section 51, the solicitors had not made any application for such a direction. If they were to make such an application, I would wish to give the liquidators an opportunity to make representations to the court in response to it. The result is that it would not be appropriate to determine in this judgment the question whether the court should direct the liquidators to apply for an order for the company's costs under section 51. I therefore have to proceed in this judgment on the basis that the company has not yet applied for an order for costs in its favour.

Mr Snowden seeks to meet the difficulty that the company has not applied for an order for costs in its favour by submitting that there does not have to be an application for costs made by the company. He says that a third party, such as the solicitors, can apply for such an order. He drew my attention to the orders for costs made in Re Aurum Marketing Ltd [2000] 2 BCLC 645 (Court of Appeal) and Secretary of State for Trade and Industry v Liquid Acquisitions Ltd [2003] 1 BCLC 375 (Lloyd J). In both of these cases the relevant company was wound up on public interest grounds under section 124A of the Insolvency Act 1986 on petitions presented by the Secretary of State. Following the winding up orders, the Secretary of State applied to the court for orders that a third party pay: (1) the costs of the Secretary of State; and (2) the costs of the company. The court made orders accordingly. Mr Snowden pointed out that these two cases were therefore examples of a party other than the company applying for an order that the third party pay the company's costs. I was not shown any special provision, dealing with public interest petitions, which governed that situation. The court's jurisdiction to make an order for the company's costs on the application of the Secretary of State was not discussed in the judgments in those cases. Neither Mr Snowden nor Ms Stonefrost were able to show me any other analogous example.

Mr Snowden also submitted that the usual compulsory winding up order included a provision pursuant to rule 4.218(3)(h) that the company's costs should be an expense of the liquidation. He said that the principal persons who benefited from such a provision were the solicitors who had acted for the company up until the winding up order was made. He asked me to consider the question as to who could apply for such an order. He suggested that immediately following the winding up order, the solicitors who had acted for the company up to that point would no longer be instructed on behalf of the company. Therefore they could not make an application on behalf of the company for an order that would principally be of benefit to the solicitors. Therefore, it must be the case that the solicitors could themselves apply for such an order. In practice, there does not seem to be any problem when the court is asked to make an order allowing the company's costs under rule 4.218(3)(h). There is no case in which the identity of the applicant for such an order has been considered. I am not satisfied that Mr Snowden's suggestion that it is open to the solicitors themselves to apply is the only possible analysis. In any case, an order under rule 4.218(3)(h) is not the same as an order for costs under section 51.

In the absence of any discussion of the relevant jurisdiction in the two public interest winding up cases, I do not think that I am bound to hold that I have jurisdiction to consider an application by the solicitors for an order under section 51 in relation to the company's costs, when the company itself has so far declined to apply for such an order in its own favour. Conversely, I do not think that it would be right to hold the opposite. I would prefer to leave the point open unless and until a decision on it becomes necessary to deal with the application which is before me. I will therefore proceed to discuss the other issues which arise on the assumption that there is a valid application before me for an order under section 51 in relation to the company's costs. Nonetheless, this issue only serves to emphasise the very unusual nature of the solicitors' application and how far away it is from anything normally done under section 51.

In these circumstances, I return to the order which I am asked to make, purportedly under section 51. It is helpful to consider who will be the paying party and who will be the receiving party under an order which, it is submitted, is an order for the payment of costs. The costs in question are the company's costs. The receiving party will be the company. The paying party will also be the company. If the company were not in a process of insolvency, it would plainly not be open to the court to make such an order because such an order would make no sense and would have no content. If I were now to make such an order, I would be making it at a time when the company is under the control of the liquidators. I am not asked to make any order under section 51 that the liquidators pay any sum to anyone. Instead, I am asked today to make an order that the administrators of the company, who ceased to be the administrators on 24^th February 2011, should make a payment from the company's assets to the company. Even if I assume that the facts today are the same as they were at the date of the solicitors' application for an order in this case (27^th August 2010), when the company was still in administration, I am asked to order that the administrators should make a payment from the company's assets to the company. Such an order would be of no benefit to the company as the extent of its assets would be the same before and after compliance with the order.

Mr Snowden says that such an order would have certain consequences. He says that if the administrators made a payment to the company out of the company's assets, then this would be a "necessary disbursement" by the administrators within rule 2.67(1)(f). When the administrators come to distribute the assets of the company, they would give that payment the status of an administration expense to be paid in priority to certain other payments. I do not see how an analysis of this kind helps the solicitors. An order for costs under section 51 is for the benefit of the company. At most, it would involve a payment by the company to the company. It would not involve the administrators making a payment to the solicitors. There would not be a disbursement by the administrators to the solicitors. A payment by the company to the company could not be a necessary disbursement to the solicitors within rule 2.67(1)(f). Section 51 does not authorise the court to order the administrators to make a payment to the solicitors. As I have explained, they did not incur costs and no order for costs is to be made in their favour.

If I am wrong as to the effect of an order that the administrators make a payment to the company out of the company's assets and the position is that the administrators somehow or other become liable to make a payment of fees to the solicitors as an administration expense, then it becomes clear that the order which is sought is not an order for costs at all but is quite simply an attempt to impose on the administrators an obligation to pay the solicitors in full instead of leaving the solicitors to prove for the amount of their fees.

My conclusion is that the solicitors are not in substance asking for an order that the company's costs are paid to the company. Instead, what the solicitors seek is a determination that when the administrators distribute the assets of the company, they give to the company's costs of the winding up petition, a priority which can only be given to those costs if they are an administration expense. However, as explained the company's costs of the winding up petition are not within the permissible class of administration expenses. Approaching the matter as one of principle, I do not see that it is open to me to hold that the court has power to make an order under section 51 of the 1981 Act which indirectly turns these costs into an expense of the administration.

Although the case was not put this way, I have considered whether it might have been said that this case came within a different line of principle from the principles governing orders for costs as between parties to litigation or even as regards third party costs orders. For example, orders can be made that a trustee or a personal representative, who has incurred costs, should be entitled to be paid his costs out of the relevant trust fund or estate. That topic is dealt with in CPR 48.4. Assuming that rule 48.4 derives its authority from section 51 of the 1981 Act (as to which I received no submissions), does the existence of rule 48.4 show that section 51 confers on the court a power to permit a person who has incurred the costs of proceedings to recover those costs from assets, the legal title to which is vested in that person, but where the assets are beneficially owned, or are the subject of equitable interests owned, by others?

I have already referred to the decision of the Court of Appeal in McDonald v Horn [1995] 1 All ER 961. In that case, members of an occupational pension scheme brought proceedings against their employers, the pension fund trustees and others concerning the administration of the scheme. The members applied to the court for an order to the effect that their costs, and any costs which they might be ordered to pay to other parties, should be paid out of the pension fund, whether the members won or lost the proceedings. The Court of Appeal made such an order. The precise reasons why such an order was appropriate are not material for present purposes. What might be relevant was the court's power to make such an order. Hoffmann LJ said at 973 that the jurisdiction to make such an order was conferred by section 51 of the 1981 Act. In my judgment, the present case is not comparable and rule 48.4 is not applicable, even by analogy. The order which Mr Snowden says should be made under section 51 is not an order that one person pays to another person the costs incurred by that other person. He asks for an order that the company pays its own costs to itself. He cannot ask for an order under section 51 that the company pays the solicitors' fees because, unlike the trustee or the personal representative in this type of case, the solicitors have not incurred costs but they have instead earned fees.

The above discussion was based on the wording of section 51 of the 1981 Act as considered in Aiden Shipping and applying general principles. I now need to consider with care certain authorities, four in particular, which were cited as to the operation of section 51 in the insolvency context. The cases are Re Gosscott (Groundworks) Ltd (1988) 4 BCC 372 (Mervyn Davies J), Unadkat & Co (Accountants) Ltd v Bhardwaj [2007] BCC 452 (HHJ Norris QC sitting as a High Court Judge), Irish Reel Productions Ltd v Capitol Films Ltd [2010] Bus LR 854 (Briggs J) and Rohl v Bickland Ltd [2012] EWHC 706 (Ch) (Mann J).

In Re Gosscott (Groundworks) Ltd, the court ordered that the costs of the company in relation to an administration petition, which was dismissed when the court made a winding up order, should be allowed as an expense of the liquidation. The company was in financial difficulties. A creditor presented a winding up petition. The company then presented its petition seeking an administration order. The administration petition was adjourned to be heard at the same time as the winding up petition. At a subsequent hearing, the company did not support the administration petition, which was dismissed, and an order made winding up the company. It was submitted that the company's costs of the administration petition should be allowed as an expense of the liquidation in the same way as the company's costs of a winding up petition would be allowed. The judge referred to the possibility that if no such order was made the company's solicitors might go unpaid and that it would not be satisfactory to expect the solicitors to seek payment from the directors personally. As the administration petition was presented in good faith, the judge considered it was just to allow the company's costs of the petition as an expense of the liquidation, if he had power to do so. He observed that it might be appropriate to regard the costs of the administration petition as part of the costs of the liquidation because the administration petition was presented in the course of the winding up proceedings and the matter had not proceeded beyond the first hearing of both petitions.

Commenting on Re Gosscott at this stage, I consider that, with respect, the judge would have been entitled to decide the case in favour of the company on the ground he identified. The costs of the administration petition were costs of "any person appearing on the petition", that is, they were the costs of the company. The administration petition was obviously closely connected with the winding up petition. The question then was whether those costs should be allowed. The judge had said that it was just to allow the costs as an expense of the liquidation. That reasoning should have sufficed to support a finding in favour of the company.

However, in Re Gosscott, the judge went on to make further points. He referred to section 51 of the 1981 Act and the decision in Aiden Shipping. He considered that that decision applied to a case where there were two sets of proceedings, the administration petition and the winding up petition. He saw no difficulty in holding that the discretion under section 51 was wide enough to enable the court to order that the administration costs should be treated as the costs of the winding up. It is not clear precisely how his order was expressed. He did not spell out how section 51 of the 1981 Act allowed him to treat certain costs as an expense in the liquidation. He did say that there was nothing in the 1986 Act or the 1986 rules which bore on the question and he mentioned, in passing, section 156 and rules 4.218 and 4.220. Accordingly, he did not identify any part of rule 4.218 as being directly relevant. The judge seemed to have thought that the decision in Aiden Shipping was a good analogy. In that case, there were two sets of proceedings, just as in Re Gosscott. However, that does not, to my mind, explain how the judge went on to hold that the company's costs of the administration petition should be paid by the company or the liquidator and as a consequence that such liability would then become an expense of the liquidation. The decision was made before the decision in Re Toshoku Finance UK plc to the effect that the list of expenses in rule 4.218 was an exhaustive list. If the only relevant part of rule 4.218 was rule 4.218(3)(h) and if that referred to the costs of a person appearing on the petition, then (unless the judge's first line of reasoning were right) it would not have been open to the judge to hold that the costs of the administration petition should also be an expense of the liquidation.

Re Gosscott (Groundworks) Ltd was referred to in Unadkat & Co (Accountants) Ltd v Bhardwaj. Simplifying the facts somewhat, that case involved a company which had entered creditors' voluntary liquidation and had been dissolved. A creditor applied to declare the dissolution void pursuant to Companies Act 1985, section 651. That section gave the court power to make such an order on such terms as it thought fit. The judge held that section 651 gave the court power to make an order that the company should pay the applicant's costs and that the costs should be paid with priority over the expenses of the liquidation or as an expense in the liquidation. In addition to the express terms of section 651, the judge relied on rule 4.220(2) and the decision in Re London Metallurgical Co Ltd [1895] 1 Ch 758. He also referred to the decision in Re Gosscott (Groundworks) Ltd on section 51 of the Senior Courts Act 1981 as supporting his decision as to section 651 of the Companies Act 1985.

I do not consider that that discussion of section 51 of the 1981 Act in Unadkat helps the solicitors in the present case. In that case, there was an application for costs by the applicant against the company. An order for costs was made in accordance with established principle, as explained by the judge. The decision does not assist in the present case where the order which is sought is that the administrators should make a payment to the company out of the company's own assets.

In Irish Reel Productions Ltd v Capitol Films Ltd the court had to construe the reference in rule 2.12(3) to "the costs of any person whose costs are allowed by the court". I have set out the terms of rule 2.12(3) above. In that case, a winding up petition had been presented in relation to the company. Irish Reel was later substituted as petitioner in relation to that petition. Later still, the court made an administration order in relation to the company and the winding up petition was dismissed pursuant to the 1986 Act, schedule B1, para. 40(1)(a). Irish Reel applied under rule 2.12(3) for an order that its costs of the petition be paid as an expense of the administration. It was held that rule 2.12(3) should be construed so that the reference to the costs of any person could extend to the costs of that person in relation to a winding up petition which was dismissed on the making of the administration order. It was pointed out at [7] that an administration order might be made at the end of a long process which involved steps to wind up the company leading to a petitioner incurring costs. If an order for costs were made under rule 2.12(3), that rule expressly provided that such costs were to be an expense of the administration. An order for costs in those circumstances then fell within rule 2.67(1)(c) as "the costs … of any person appearing on the hearing of the application". The judge referred to Re Gosscott (Groundworks) Ltd and Unadkat and commented that the order in the first case made under section 51 of the Senior Courts Act 1981 could provide that the costs were to be an expense of the liquidation notwithstanding the decision in Re Toshoku Finance UK plc [2002] 1 WLR 671 to the effect that rule 4.218 contained an exhaustive statement as to the expenses of the liquidation. The comments which I made in paragraph 78 above apply also to the decision in Irish Reel.

Rohl v Bickland Ltd was another case which concerned costs, which had been incurred before an administration, being held to be payable as an expense of the administration. In that case, a director of the company applied for an administration order. A few days later, a qualifying floating charge holder appointed an administrator out of court. Thereafter, the application for an administration order came before the court when the director accepted that the application had to be dismissed in view of the appointment out of court. The director applied for an order that his costs of the application should be an expense of the administration which had come about by the appointment out of court. The judge held that he had power to make that order. The power to do so was conferred by the 1986 Act, schedule B1, para. 13(1)(f) where, on the hearing of an administration application, the court can make any order which the court thinks appropriate. The administrator had submitted that the court had no jurisdiction because costs could only be an expense of the administration if they came within the express terms of rule 2.67 which were an exhaustive code as to what could qualify as expenses of an administration. It was said that the costs did not come within rule 2.67(1)(c) because that referred to an administration order being made or to the costs of an appointor out of court and neither of these applied to the director's application which had not resulted in an administration order. The judge considered earlier authority and held that the court had a discretion under para. 13(1)(f) which operated differently from what he regarded as the automatic provisions of rule 2.67(1)(c). He held that the answer to the submission that rule 2.67 was an exhaustive code, a submission based on Re Toshoku Finance UK plc dealing with expenses of a liquidation, was that Re Toshoku recognised that there could be cases where the liquidator (in that case) could and should, at the direction of the court, "treat" as liquidation expenses certain expenditure which strictly did not fall within the code. On that basis, the judge held that he had power to order the costs of the applicant to be treated as an expense of the administration. I will consider this part of Mann J's reasoning when I turn later in this judgment to deal with the court's power to "treat" charges as an expense of an administration.

Mann J then added at [32]:

"There is probably another route to the same conclusion. In Re Gosscott (Groundworks) Ltd (1988) 4 BCC 372, Mervyn 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 [counsel] 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."

Mann J then exercised the power under para. 13(1)(f) to order that the director's costs of the application should be an expense of the administration. Consistently with his interpretation of the power referred to in Re Toshoku to treat costs as an expense of the administration he directed that the costs should have the same priority as the costs which were expressly dealt with in rule 2.67(1)(c).

The judge's remarks in Rohl v Bickland Ltd, at [32], were expressly in tentative terms and the implications were not spelt out. Although the judge referred to the order for costs being made against the administrators rather than against the company, I would respectfully question whether it would be right to make an order that the administrators personally do pay the costs in question, if that is what the judge was suggesting.

Having considered the authorities relied upon, they do not change my view as to the operation of section 51 in this case. I can therefore now express my conclusion on that point. Even if the solicitors have locus standi to apply to the court for an order for costs in favour of the company: (1) it does not make sense to make an order that the company, or even the administrators, make a payment to the company in relation to the company's costs; (2) an order that the company, or the administrators, should pay the company's costs would not make any such payment a "disbursement" within rule 2.67(1)(f) and certainly not a disbursement in favour of the solicitors; (3) the solicitors did not incur any costs and it is not open to the court under section 51 to make an order that the company or the administrators should pay the solicitors' fees; (4) what the solicitors are seeking on this application is, in substance, an order that the company's costs, in relation to the fees charged by the solicitors, should be added to the permissible list of administration expenses but section 51 does not confer power to make such an order.

"Treating" the fees as an administration expense

I have already set out the statutory provisions and the rules which provide for certain matters to be administration expenses. Paragraph 99(3) of schedule B1 provides for the payment of the administrators' remuneration and administration expenses out of the property of which the administrators had custody or control immediately before cessation of the administration. Rule 2.67(4) provides that the administrators' remuneration and expenses shall comprise all those items set out in rule 2.67(1). That suggests that the matters listed in rule 2.67(1) are a complete list of administration expenses.

I need to consider whether there is any qualification to the suggestion that the matters listed in rule 2.67(1) are a complete list of administration expenses. In Re Toshoku, Lord Hoffmann considered rule 4.218 dealing with liquidation expenses. Rule 2.67 is plainly modelled on rule 4.218 and the courts have proceeded on the basis that what Lord Hoffmann said about rule 4.218 holds good for rule 2.67 also.

In Re Toshoku, Lord Hoffmann considered in detail what he described as the Lundy Granite principle, so called after the decision in Re Lundy Granite Ltd (1871) LR 6 Ch App 462. He described how a liability under a contract which had been entered into before the commencement of the liquidation, where the liquidator had retained the benefit of the contract for the purposes of the winding up, could be treated as if it were an expense of the liquidation. A common example is where the company had entered into a lease before the liquidation and, following the winding up, the liquidator retained the demised premises for the purposes of the winding up. If the liquidator had entered into a new contract for the benefit of the winding up, the company would have been obliged to discharge in full the liabilities under that contract for the period that the liquidator retained the benefit of the contract for the purposes of the winding up. Under the Lundy Granite principle, it was considered to be right to treat the liability under a pre-liquidation contract, such as a lease, in the same way as the liability under a new contract entered into by the company following the winding up. In one of the leading cases on the Lundy Granite principle, Re Oak Pitts Colliery Co (1882) 21 Ch D 322 at 330 (in a passage quoted by Lord Hoffmann in Re Toshoku at [26]), Lindley LJ had referred to the liability under the pre-liquidation contract being "regarded as a debt contracted for the purposes of the winding up" which "ought to be paid in full like any other debt or expense properly incurred by the liquidator for the same purpose".

In an important passage in Re Toshoku, at [38], Lord Hoffmann referred to rule 4.218 being "interpreted" to include liabilities which arose under the Lundy Granite principle. He also referred to such liabilities being "treated" as coming within what is now rule 4.218(3)(a) which refers to expenses "incurred" by the liquidator. He then referred to the possibility that the Lundy Granite principle might "enlarge" the scope of other paragraphs in what is now rule 4.218(3).

Re Toshoku did not itself involve the application of the Lundy Granite principle. That principle was discussed only for the purpose of explaining the court's decision in relation to an entirely different submission which had been made. It may be on that account that Lord Hoffmann did not elaborate what he meant by "interpreting" rule 4.218 or "enlarging" the scope of rule 4.218 or "treating" certain charges as liquidation expenses.

Taken literally, the reference to expenses being "treated" as liquidation expenses, or the list of such expenses being "enlarged", might suggest that it is open to the court to hold that certain matters can be liquidation expenses even when they do not fit within the lists of such expenses. I do not consider that Lord Hoffmann had such a possibility in mind. It seems to me that there is a ready explanation for the language he used in describing the way in which liabilities under the Lundy Granite principle are to be fitted into the list of liquidation expenses without going so far as to hold that the court has a power as it considers appropriate, to "treat" something which is not in the list of expenses as nonetheless qualifying as such an expense and thereby acquiring a priority as regards its payment.

If the company is under a liability to pay a sum under the Lundy Granite principle, then it seems to me that, as a matter of fact, payment of such a sum will be a necessary disbursement within rule 4.218(3)(m). In that way, paragraph (m) is "enlarged" by the Lundy Granite principle. Similarly, one might say that such a liability is "treated" as an expense under that paragraph. Paragraph (a) of rule 4.218(3) refers to expenses "incurred" by the office holder. Technically, because the contract in question, such as a pre-liquidation lease, was entered into the company before the commencement of the liquidation, the liability was incurred by the company when it entered into the lease and the liability was not incurred by the liquidator. However, as explained in Re Oak Pitts Colliery Co, as regards the liability to pay under the contract after the benefit of the contract is retained for the purposes of the winding up, the position is to be "regarded" in just the same way as if the contract had been entered into by the office holder for the purposes of the liquidation. In that way, the liability is to "treated" as a liability incurred by the office holder. Similarly, the court will "interpret" the word "incurred" as extending to a case where the action of the liquidator, in retaining the benefit of the contract for the purposes of the liquidation, has resulted in a liability to pay in full the sums due under the contract.

If Re Toshoku is understood in this way, then the Lundy Granite principle does not involve a qualification of the conclusion that the list of expenses in rule 4.218 is indeed an exhaustive list.

The discussion in Re Toshoku concerned liquidation expenses. The wording of rule 2.67 dealing with administration expenses has clearly been modelled on rule 4.218 dealing with liquidation expenses. The above analysis in relation to rule 4.218 should therefore apply equally to rule 2.67. A liability which is payable in full under the Lundy Granite principle can be a necessary disbursement within rule 2.67(1)(f). Further, such a liability can be a liability incurred by the administrator under rule 2.67(1)(a).

Mr Snowden submitted that the solicitors' fees can be "treated" as an administration expense. In my judgment, they can only be so treated if the company is liable to pay them in full under the Lundy Granite principle. In such a case, they would be a necessary disbursement within rule 2.67(1)(f) and/or expenses incurred within rule 2.67(1)(a).

For present purposes, it is sufficient to describe the Lundy Granite principle as applying in a case where: (1) the company entered into a contract with a third party before the commencement of the insolvency process; (2) the contract continued to have effect after the insolvency process and (3) the office holder elected to retain the benefit of the contract for the purposes of the insolvency process. On that basis, the Lundy Granite principle does not apply in the administration in the present case. The company's contract of retainer of the solicitors was ended by the company on 12^th February 2010. The company entered administration on 26^th February 2010. The contract of retainer did not have any continuing effect after the company entered administration. The administrators did not do anything to elect to retain the benefit of the contract of retainer for the purposes of the administration. Further, if they had so elected, they would only have been liable for charges in relation to the period from the time of such election.

Mr Snowden sought to derive some assistance from the decisions in Re Lehman Brothers International (Europe) Ltd [2009] EWHC 2545 (Ch) and Rohl v Bickland Ltd [2012] EWHC 706 (Ch). In the first of these cases, Briggs J applied the Lundy Granite principle to somewhat unusual facts and making an assumption that, elsewhere in his judgment, he held was not correct. The administrators submitted that payment to unsecured creditors constituted administration expenses, in particular, as necessary disbursements by the administrators. The administrators' argument is summarised at [102] of the judgment. As summarised, the argument applied the Lundy Granite principle to the assumed facts as follows: the unsecured creditors were contractually entitled to redeem certain securities; they were able to apply to the court for permission to redeem; it was for the benefit of the administration that the administrators should not be subjected to a large number of redemption actions; the result of the securities not being redeemed was that the company in administration received cash sums which it was contractually obliged to pay to the unsecured creditors; and it was not necessary for the unsecured creditors to apply to the court for orders giving them permission to redeem in response to which applications the court could refuse such permission on terms that the administrators pay to the unsecured creditors the cash the administrators had received. The judge accepted the essentials of this argument: see [104] and he added some comments of his own. At [108], the judge discussed the meaning of "necessary" for the purposes of "necessary disbursements" as an administration expense. He considered that the disbursements in that case were "necessary" even though they did not have to be extracted from the administrators by legal or commercial pressure. At [109], the judge explained how the actions of the administrators had been for the better conduct of the administration. He then commented that it was not the purpose of the administration to confer a windfall on creditors other than those who were entitled to redeem the securities. Payments to the creditors who were entitled to redeem the securities were "necessary" to remedy the injustice which the retention of that windfall would bring about. Mr Snowden relied upon the comments in [109] of this judgment. I read those comments as essentially comments on the highly particular facts of that case. I do not consider that the judge was laying down a general principle applicable in all cases which enables the court to inquire into whether it was just for an unsecured creditor to have his debt paid with priority as an expense of an administration.

In Rohl v Bickland Ltd, the court made an order that Mr Rohl's costs be paid by the company as an expense of the administration. The order was made under paragraph 13(1)(f) of schedule B1 to the 1986 Act. The case did not involve an application of the Lundy Granite principle. At [30], Mann J referred to the fact that Lord Hoffmann had stated in Re Toshoku that certain expenses could be treated "as if" they were administration expenses. That helped the judge to interpret paragraph 13(1)(f) in the way he did. He stated that the Lundy Granite did not need to be investigated.

In my judgment, these two cases have no bearing on the analysis or the result which is appropriate in the present case. For the reasons given earlier, the solicitors' fees in the present case do not come within the Lundy Granite principle and it is not open to the court to add them to the list of administration expenses in rule 2.67.

Powers and directions

Earlier in this judgment, I set out the various provisions in the 1986 Act conferring on an administrator powers to make certain payments to creditors and others. At the first hearing, Mr Snowden on behalf of the solicitors did not ask me to make a direction (except pursuant to section 51 of the 1981 Act) requiring the administrators to pay the solicitors their fees. In his skeleton argument prepared for the second hearing, Mr Snowden relied on section 51 of the 1981 Act and, further asked me to treat the solicitors' fees as an administration expense. He did not suggest that I separately had any power to direct the administrators to pay the solicitors' fees. Prior to the second hearing, I invited submissions from counsel on the decision in Re Eurodis Electron plc [2012] 2 BCLC 257. At the second hearing, in the course of oral submissions, Mr Snowden submitted that the court should direct the administrators to pay the solicitors' fees even if those fees were not otherwise an expense of the administration.

Following the second hearing, Mr Snowden provided me with copies of nine authorities (to which I will refer below) which he submitted were relevant to the question of the administrators' power to make a payment which they were not obliged to make and relevant to the court's power to give directions to the administrators. He also provided me with a short written submission referring to the inherent jurisdiction of the court to give directions to the administrators. He submitted that the court had power under paragraph 65 or 66 of schedule B1 or under the inherent jurisdiction of the court to require the administrators to pay the solicitors their fees. Ms Stonefrost made a brief written submission in reply drawing my attention to one further authority, to which I will refer below, and submitting that the court was not able to, alternatively, ought not to make the direction which was now being sought by the solicitors.

Before considering the cases to which the parties referred, I will indicate my reaction to the submissions based on paragraphs 65 and 66 of schedule B1 and on paragraph 13 of schedule 1 to the 1986 Act (to the extent that the solicitors rely on that paragraph). I will also indicate my reaction to the submission that I should exercise the inherent jurisdiction of the court to require the administrators to pay the solicitors their fees.

As to paragraph 65 of schedule B1 to the 1986 Act, I doubt if a direction that the administrators should pay the solicitors their fees is what is meant by a distribution within that paragraph. In any event, there would have to be some special reason, connected with the administration, to make the administrators pay fees in full as an expense when the statutory provisions and the rules do not provide for the solicitors to have priority in that way over other creditors and other persons entitled to claim payment of expenses. I am not persuaded in this case that there is a special reason, connected with the administration, to promote the solicitors from their position as unsecured creditors. As to paragraph 66 of schedule B1, the payment of the solicitors' fees cannot be said to be likely to assist achievement of the purpose of the administration. The state of affairs when the company entered administration was that the solicitors' retainer had been terminated. The solicitors were no longer instructed and were not expected to do anything further. What they had done was in the past. They were unsecured creditors for their unpaid fees. Starting from that position, it cannot be said that payment of the full amount of the solicitors' fees would be likely to assist achievement of the purpose of the administration. As to paragraph 13 of schedule 1, for reasons similar to those I have given in relation to paragraph 66 of schedule B1, it cannot be said that payment in full of the solicitors' fees would be necessary or incidental to the performance of the administrators' functions.

As to the inherent jurisdiction of the court, I accept that the court has an inherent jurisdiction to give appropriate directions to the administrators. However, in a case where a payment to the solicitors would not in any way benefit the administration process and would adversely alter the position of unsecured creditors and/or other persons entitled to be paid expenses of the administration, I do not think that it would be right to exercise the inherent jurisdiction. I might conceivably take a different view if it could be shown that the administrators had bound themselves in law or in morality to pay the solicitors' fees. It is not said that the administrators have bound themselves at law to pay the fees. It is not said that they are estopped from contending that the solicitors are not entitled to be paid their fees as an expense of the administration. It is not said that this is a case within Ex parte James (1874) LR 9 Ch App 609. Mr Snowden did submit in passing that the administrators had "excluded the solicitors from the CVA". The facts of that matter were not explored in the course of submissions. Even if the administrators were at fault and the solicitors were not in any way responsible for what happened in relation to the CVA, as to which I make no findings, that would not lead to the result sought by the solicitors which is that the administrators should now pay the solicitors' fees in full, as an expense of the administration.

Having examined the authorities relied upon by the parties, I find that there is nothing in those authorities which affects my reaction as stated above. I will however, refer briefly to what those authorities show.

In Re Atlantic Computer Systems plc [1992] Ch 505 at 527-530, Nicholls LJ discussed the power of the administrators, in particular, under paragraph 13 of schedule 1 to the 1986 Act. In Re Mark One plc [1999] 1 WLR 1445 at 1448, Jacob J referred to the inherent jurisdiction of the court with particular reference to Ex parte James. Other parts of Jacob J's judgment were not approved in Re Lune Metal Products Ltd [2006] EWCA Civ 1720, although his reference to inherent jurisdiction was approved: see at [34],[35]. In Centre Reinsurance Interntional Co v Freakley [2007] Bus LR 284 at [17], Lord Hoffmann referred to administrators making payments "for the purposes of the administration". I do not think the passage cited from Re A Company [2000] 1 WLR 502 at 514 adds anything. In Re Japan Leasing Europe plc [1999] BPIR 911 at 925, Warren J commented that his approach conformed to that adopted in Ex parte James. Finally, the decisions in Re Collins & Aikman Europe SA [2006] BCC 861, Re GHE Realistions Ltd [2006] 1 WLR 287, Re MG Rover Belux [2007] BCC 446, Re MG Rover Espana [2006] BCC 599 and Re HPJ UK Ltd [2007] BCC 284 discuss paragraphs 65 and 66 of schedule B1 and paragraph 13 of schedule 1 and the inherent jurisdiction of the court in a way which supports rather than detracts from my approach.

Finally, I should refer to Re Eurodis Electron plc [2012] 2 BCLC 257. It was my reference to that case which appears to have prompted Mr Snowden into making the submission that I should direct, if necessary under the inherent jurisdiction of the court, that the administrators should pay the solicitors' fees in full. In Re Eurodis, Mann J directed that expenses incurred by persons who had been administrators should be paid as an expense of a subsequent liquidation. He referred to a jurisdiction recognised in Re Associated Travel Ltd [1978] 1 WLR 547, which case in turn referred to Re Banque des Marchands de Moscou (Koupetschesky) [1953] 1 WLR 172. In Moscou, the court sanctioned a payment by a liquidator of a dividend to someone who had rendered services of great assistance in the winding up but in circumstances where he was not entitled to prove for any sum. In Re Associated Travel Ltd, solicitors had acted for the company in liquidation and thereby enabled the company to recover a sum of £15,800. The solicitors presented a bill for £124.60 in respect of their fees but they were not entitled to be paid because there was no prior sanction for the instruction of the solicitors. Section 246(3) allowed the liquidator to apply to the court for directions in relation to any particular matter. It was held that either under that subsection or under its inherent powers, the court could authorise the liquidator to make a variety of payments including even an ex gratia payment.

In Re Eurodis itself, a Belgian company was the subject of an administration order made by Rimer J. Later, proceedings in relation to the company were started in Belgium. Pursuant to those proceedings, the company was wound up and eventually irreversibly dissolved. This seemed to mean that the administrators ceased to be administrators of the company when it ceased to exist. The court made an order under section 221(5)(a) of the 1986 Act winding up the company and appointed the administrators as liquidators. The court was asked to order that the outstanding expenses of the administration should be paid as an expense of the liquidation. Mann J referred to the jurisdiction recognised in Re Associated Travel Ltd. He did not refer to any statutory provision nor any rule. He held that he had jurisdiction to make the order sought. He held that it would be right so to order on the grounds that it would be unfair if the administrators were unable to recover their remuneration and expenses out of the assets of the company still held by them.

As to the cases cited above, Re Banque des Marchands de Moscou and Re Associated Travel Ltd were cases where the fees charged were for services which were of assistance in the winding up and the courts sanctioned payment of part or all of the fee. The reasoning in Re Eurodis is relatively brief and the argument was on one side only.

I do not consider that anything in these three cases dealing with liquidation expenses alters the views I have formed as to the court's powers under the statutory provisions and its inherent jurisdiction in relation to administration.

The result is that the solicitors' fees do not qualify as an expense of the administration under rule 2.67. Further, the fees are not to be "treated" as if they were within rule 2.67. I do not have power under section 51 of the 1981 to make an order which would directly or indirectly produce the result that the solicitors become entitled to their fees as an expense of the administration. Further, I will not direct the administrators to pay the solicitors' fees in full as if they were such an expense.

PART III: CVA EXPENSES

Expenses of the CVA

I can deal with this shortly. Mr Snowden relies on the 1986 Rules, rule 1.23(2) which provides, so far as material:

"Where the company is in … administration, the supervisor shall on taking possession of the assets discharge any balance due to the insolvency practitioner by way or remuneration or on account of -

(a) fees, costs, charges and expenses properly incurred and payable under the Act or the Rules …"

Before the CVA, the company was in administration so that rule 1.23(2) applied. However, in view of my earlier conclusions, the solicitors' fees were not expenses properly incurred and payable under the 1986 Act or the 1986 Rules. It follows that there was no relevant sum due to the administrators which the supervisors of the CVA were obliged to discharge under rule 1.23(2).

PART IV: LIQUIDATION EXPENSES

Expenses of the liquidation

The liquidators have left it to the court to decide whether the company's costs, represented by its liability to pay the solicitors' fees, should be allowed as an expense of the liquidation. Although the liquidators do not oppose such a result and although the administrators have accepted that the court should reach that result, I think that I need to consider whether this is the appropriate result in all the circumstances of this case. I recognise that a decision in favour of the solicitors on this point is not likely to result in them being paid.

In the course of the argument, probably as a result of the wording of the application which is before me, the fact that the solicitors made the application and that the liquidators did not appear at the hearing, there was a tendency to describe the issue as being whether the court should allow the solicitors' fees as an expense of the liquidation. In my judgment, it is important to bear in mind throughout that the question is whether the company's costs, represented by any liability it has to pay the solicitors' fees, should be allowed as an expense of the liquidation.

Rule 4.218(3)(h) refers to "the costs of any person appearing on the petition whose costs are allowed by the court". The company comes within the reference to "any person" in rule 4.218(3)(h). The company incurred costs in that it contracted, before the presentation of the winding up petition, to pay fees to the solicitors. Thus, the decision for the court is whether to "allow" the costs of the company as costs within rule 4.218(3)(h). If they are so allowed then they will be expenses of the liquidation with the priority given by that rule. It is important to appreciate that the court is simply applying the words of the rule to the facts of the instant case. There is no need at this stage to consider any possible application of section 51 of the Senior Courts Act 1981.

In the ordinary way, one would expect it to be the company which asks the court to allow its costs as an expense of the liquidation. In the present case, the application for a decision allowing the company's costs to be an expense of the liquidation is made by the solicitors. A question might have arisen as to whether the solicitors had locus standi to make such an application. No point of this kind was raised at the first hearing before me. I consider that I do not need to grapple with this question in view of the stance taken by the liquidators who have invited the court to give its ruling on whether the company's costs which are in question should be allowed as an expense. Therefore, the court can give a ruling on that matter. However, I will need to refer to this question of locus standi later in this judgment in the context of the arguments as to the costs being an expense of the administration.

Where a company, which is the subject of a winding up petition, appears on the hearing of the petition and consents to the winding up order then the costs of the company are normally allowed as an expense of the liquidation. But what if the company unsuccessfully opposes the winding up order? It is clear that the court is able in an appropriate case to make an order which does not "allow" the costs of the company to be an expense of the liquidation. The wording of rule 4.218(3)(h) makes this clear. I therefore need to consider what attitude the court should adopt in relation to costs incurred by the company in its unsuccessful opposition to a winding up petition. There are several cases which bear upon this question.

A previous rule, rule 195 of the Companies (Winding up) Rules 1949, which was in the same terms as rule 4.218(3)(h), was considered and applied in Re Bathampton [1976] 1 WLR 168. A winding up petition was unsuccessfully opposed by the company and by the beneficial owner of the shares in the company as opposing contributory and creditor. The company asked for its costs to be paid out of the assets of the company, i.e. as an expense of the winding up. The petitioner opposed this application and invited the court: (1) to order that the costs of the company be borne by the opposing beneficial owner; or (2) to make no order for costs. Brightman J stated that if he had power to do so, he would wish to make an order that the costs of the company so far as increased by its unsuccessful and unjustifiable opposition did not reduce the assets available for payment of the debts due to the general body of creditors. The judge allowed the costs of the company, down to the first hearing of the petition, as an expense of the winding up. He held that he could not order the opposing beneficial owner to pay the costs of the company. He concluded that he should order that the costs of the company should not be paid out of the assets of the company in priority to the payment in full of all the unsecured creditors of the company. The judge referred to In re Bleriot Manufacturing Aircraft Co Ltd (1916) 32 TLR 253 (where Neville J considered the similar rule 187 of the Companies (Winding up) Rules 1909), where the court made no order in relation to the costs incurred by a company in its unsuccessful opposition to a winding up petition and to an unreported decision of Roxburgh J where the order was in the same form as that made in Re Bathampton. Brightman J thought that he had undoubted jurisdiction to make such an order and in the case before him that such an order was just and fair.

In Re Bathampton, the judge considered the position of the solicitors retained by the company to act for it in its opposition to the winding up petition. He referred, first, to the position in bankruptcy of a solicitor acting for a person opposing a bankruptcy petition. He thought it would be deplorable if such a person was not able to get legal advice as to his position. He considered that the position of a company facing a winding up petition might be different. The corporators might well be able to fund the company's opposition to the petition. He commented that a solicitor retained on behalf of a company, which is potentially insolvent, for the purpose of opposing a winding up petition, might feel it prudent to seek an indemnity from one or more of the corporators before embarking on his task. This would be salutary as it might help to avoid the assets of the company being wasted on hopeless opposition to a winding up order.

This decision was considered by Hoffmann J in Re a Company (No 004055 of 1991) [1991] 1 WLR 1004. The company had applied to strike out a creditor's petition on the ground that the debt was disputed. The court held that the company's case was without any substance and the application was dismissed. The company was hopelessly insolvent. The petitioner asked that the company's costs of its unsuccessful application should not be paid out of the assets of the company in priority to the claims of the unsecured creditors. The judge held that in relation to the relevant rule, which was in the same terms as the present rule 4.218(3)(h), the court's power to "allow" the company's costs to be an expense of the liquidation gave the court a complete discretion. He went on to hold that, following the decision of the House of Lords in Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965, the court had power to order that the company's costs be paid by a director who had caused the company to incur the costs when the director's motive was to protect his own interests and not those of the company. The judge then considered the position of the solicitors retained by the company to make the application to strike out the petition. He said at 1005C that such solicitors could expect that their fees and disbursements would be an expense of the liquidation even if their application or their opposition to the petition was unsuccessful. He considered that an order such as that made in Re Bathampton could result in the solicitors being deprived of their fees and disbursements and that could be unfair on them. He said that he found it difficult to imagine a case in which it would be proper in the future to make an order in that form.

The attitude of the court in Re Bathampton and the attitude of the court in Re a Company to the position of the company's solicitors are obviously very different. In the first case, the court felt that the solicitors receiving instructions from an insolvent company should seek to make arrangements for their costs to be paid by someone who could afford to pay them and should not expect that they would automatically be paid in priority to the claims of the unsecured creditors. In Re a Company, the court felt that the solicitors should expect to be paid their costs in priority to the unsecured creditors, even where the opposition to the winding up petition had failed.

Hoffmann J's comment that, because the court could order the company's costs to be paid by a director or some third party, he found it difficult to imagine a case where it would be appropriate to make an order postponing the company's costs to the claims of the unsecured creditors appears to me to leave out of account the possibilities that the court might later decide not to make a third party costs order or that the director or third party might not be good for the costs or might otherwise avoid complying with the order.

In any event, there are later cases where the courts have made orders of the kind made in Re Bathampton: see Re North West Holding plc [2000] BCC 731 (Hart J) (this part of the order was not the subject of a later appeal against another part of the order: see [2001] BCLC 468), Re Aurum Marketing Ltd [2000] 2 BCLC 645 (Court of Appeal) and Secretary of State for Trade and Industry v Liquid Acquisitions Ltd [2003] 1 BCLC 375 (Lloyd J). All three cases concerned public interest petitions by the Secretary of State. In the first of these cases, the court ordered a third party to pay the costs of the Secretary of State. In the second and third of these cases, the court ordered a third party to pay the costs of the Secretary of State and the costs of the company. In all three cases, it was ordered that the company's costs should not have priority over the claims of the unsecured creditors by being allowed as an expense of the liquidation. In each of these cases, the company was ordered to be wound-up in the public interest. That fact may have been of significance in the court's decision to make a third party pay the company's costs. I have considered the position of the solicitors acting for the companies in those cases. In the first case, the third party had agreed to pay the fees of the company's solicitors. In the second and third cases, the solicitors' chances of being paid would depend on whether the third party paid the company its costs and how such a receipt by the company and the solicitors' unsecured claim to be paid their fees would be treated on the winding up. As I see it, the courts in those three cases did not show any particular concern for the position of the solicitors who had been retained by the company to oppose the petitions. Indeed in Re Aurum Marketing Ltd, Mummery LJ pointed out at 654g that following the presentation of the petition, no order had been made authorising the disposition of the company's assets for the purpose of funding the opposition to the petition and in those circumstances, the interests of the unsecured creditors should be protected.

So far, I have considered the attitude which a court should adopt to the costs of a company which has unsuccessfully opposed a winding up petition. Should the court adopt the same attitude to a company which has unsuccessfully taken positive steps to strike out the petition on the ground that it is an abuse of the process of the court? I did not receive any submissions on this point although I note that the costs which were allowed in Re a Company were the costs of the company's unsuccessful application to strike out the petition. It seems to me that the answer to the question must turn on the meaning of the words in rule 4.218(3)(h) which refer to: "the costs of any person appearing on the petition whose costs are allowed by the court."

In order to construe these words, and to apply them in this case, I plainly must have regard to the language and the purpose of the relevant rule. The reference to "the costs of any person" is in wide general language. The reason for referring to a person "appearing on the petition" may be because it was envisaged that the court's decision to allow costs should be made on the hearing of the petition. Alternatively, those words may have been designed to refer only to costs which were closely connected with the petition and so as to exclude other costs. The court's ability to "allow" or disallow costs appears to give the court a wide discretion, but one which must be exercised in a principled way. The purpose of the rule is to allow the court to decide whether certain costs merit the degree of priority conferred on a liquidation expense as compared with all of the other claims on the assets of a company in liquidation.

In my judgment, I should adopt the same general approach in principle to the costs of a company unsuccessfully applying to strike out a petition as I do to the costs of a company unsuccessfully opposing a petition. Both sets of costs can be regarded as the costs of a person appearing on the petition. The decision in relation to each set of costs is whether they should be "allowed".

Having identified the authorities as to the approach which I should adopt, I now turn to consider whether to allow the costs of the company of applying to strike out the petition as an expense of the liquidation within rule 4.218(3)(h). There was a substantial body of evidence filed in connection with this question. However, as I have explained, Ms Stonefrost on behalf of the administrators did not in the end oppose the application for these costs to be allowed under that rule and the liquidators have left this question for the court to decide.

I have considered all of the points made in the evidence filed by the administrators and by the liquidators and the submissions made by counsel in relation to those points. In view of the fact that the administrators did not oppose a determination that the company's costs should be allowed as an expense of the liquidation and the liquidators have also stated that they do not oppose that result, I do not think that I need to set out at length all of the points which were at one time or another put forward in relation to this question. I conclude that it is appropriate to allow the company's costs of appearing on the petition, represented by whatever is their liability to pay the solicitors' fees for their work in that respect, as an expense pursuant to rule 4.218(3)(h). On the evidence and the submissions in this case, and having regard to the fact that there was no real opposition to this course, I consider that I am able to hold: (1) the solicitors were duly instructed on behalf of the company; (2) those directing the affairs of the company at the relevant time considered that it was in the best interests of the company for the company to oppose the winding up petition in the way, and on the grounds, on which it did; (3) those directing the company were not acting in their own interests in a way which was in conflict with the best interests of the company; (4) the work done by the solicitors on behalf of the company was in fact in the best interests of the company; (5) there is no factor which would justify the court in refusing to allow the company's costs to be an expense of the liquidation.

If I had held that those who were in control of the company between December 2009 and February 2010 had applied to strike out the petition for their own reasons, which were not in the best interests of the company, then it would have been necessary to consider whether I should apply the approach adopted in Re Bathampton or that in Re a Company. In such a case, I would have been inclined to give weight to the views expressed in re Bathampton, notwithstanding the dismissive comments in Re a Company. However, in view of what I have held as to the motivation of those in control of the company in that period, I do not need to consider this matter further.

The costs which I have so far discussed relate to the greater part of the fees charged by the solicitors. However, the solicitors have sought to charge the company for other work on its behalf and they wish to include these further fees in the costs of the company to be allowed under rule 4.218(3)(h). These further costs are:

(1) the costs incurred by the company in the period after 15^th December 2009 but before 23^rd December 2009 when HMRC presented its winding up petition;

(2) the costs incurred by the company in dealing with another winding up petition; the further petition has been referred to as "the Grosvenor petition";

(3) the costs incurred by the company in seeking advice from the solicitors in relation to a possible application for a validation order under the 1986 Act, section 127;

(4) the costs incurred by the company in applying to the First-tier Tribunal under sections 80 and 83 of the Value Added Tax Act 1994 ("VATA 1994").

The solicitors said that all of these costs should be allowed. The administrators said that none of these costs should be allowed. The liquidators appeared to be neutral on these points. Although these further questions were raised at the hearing, and although they are not straightforward and the outcome in this case may be considered to be important in other cases, the parties did not make detailed submissions in relation to them and no authority was cited in support of the rival positions.

I have earlier considered the meaning of the words in rule 4.218(3)(h) which refer to "the costs of any person appearing on the petition whose costs are allowed by the court". I will now attempt to apply my understanding of those words to the facts in relation to these four further heads of cost.

As regards the costs incurred between 15^th December 2009 and 23^rd December 2009, it is helpful to refer to the general approach which is adopted in relation to orders for costs where a party is awarded the costs "of and incidental to proceedings". It is established that such an order can extend to costs incurred before the proceedings were commenced. The position is discussed in detail in Re Gibson's Settlement Trusts [1981] Ch 179, in particular between pages 184E and 188B. The earlier decision in Frankenburg v Famous Lasky Film Services Ltd [1931] 1 Ch 428 is analysed at pages 186E to 187B. In my judgment, it is open to me to hold that the company's costs incurred in the period from 15^th December 2009 to 23^rd December 2009 were "the costs of any person appearing on the petition". Further, I consider that I should "allow" those costs for the purposes of rule 4.218(3)(h) in relation to work done in that period if and insofar as that work ultimately proved of use and service in the application which the company later made to strike out the petition.

I next consider whether to allow the costs incurred by the company in relation to the Grosvenor petition. This was a creditor's petition presented by Grosvenor in the Portsmouth County Court. The evidence shows that the company had no defence to the debt relied on in this petition. This petition was ordered to be transferred to the High Court to be heard together with HMRC's petition. If the company had been wound-up on this petition, then the company's costs of submitting to such an order would clearly have been allowed as an expense of the liquidation. I am prepared to allow the company's costs of dealing with the Grosvenor petition from the date of the order that this petition and the HMRC petition should be dealt with together in the High Court. From that point, it seems appropriate to approach the matter as if Grosvenor were a supporting creditor to the HMRC petition and to treat the costs of dealing with Grosvenor as sufficiently connected with the HMRC petition. On the other hand, I am not prepared to allow the company's costs of dealing with the Grosvenor petition before that point. Those costs are to be regarded as the costs of a separate matter and not sufficiently connected with the HMRC petition so as to give to those costs the priority of an expense of the liquidation.

I next consider the company's costs in relation to the advice given by the solicitors in connection with a possible application for a validation order under 1986 Act, section 127. The solicitors did give advice on this subject but the company chose to continue to trade without seeking a validation order. In general, it seems to me that the costs resulting from a company seeking advice on the need for a validation order are very closely bound up with the costs resulting from a company responding to a winding up petition. I consider that I should allow this cost under rule 4.218(3)(h).

Finally, as regards possible liquidation expenses, I need to consider the company's costs of applying to the First-tier Tribunal under sections 80 and 83 of VATA 1994. The background to this application is as follows. The principal argument which was run by the company on its application to strike out the petition was that the company had a substantial cross-claim against HMRC as a result of the company having a right to a credit under section 80 of VATA 1994. The way in which that alleged credit arose and HMRC's answer to the claim are described in the judgment of Newey J at [2011] STC 683. The company duly claimed a credit under section 80 of VATA 1994. Later, the company applied to the First-tier Tribunal by way of an appeal under section 83(t) of VATA 1994 in order to pursue its claim that it was entitled to a credit. Later, when the company went into administration, the administrators withdrew that appeal. In my judgment, the arguments as to whether the costs in relation to the appeal under sections 80 and 83 of VATA 1994 should be allowed as an expense under rule 4.218(3)(h) are very evenly balanced. The costs are part of the costs of the company who appeared on the petition but should they be "allowed"? In my judgment, I ought not to allow these costs as an expense of the liquidation. I consider that they are sufficiently different from the direct costs of responding to the HMRC winding up petition so that it would be wrong to give them the priority which would follow from allowing them as an expense of the liquidation.

PART V: THE OVERALL RESULT

The result is that the solicitors' fees do not qualify as an expense of the administration under rule 2.67. Further, the fees are not to be "treated" as if they were within rule 2.67. I do not have power under section 51 of the 1981 to make an order which would directly or indirectly produce the result that the solicitors become entitled to their fees as an expense of the administration. Further, I will not direct the administrators to pay the solicitors' fees in full as if they were such an expense.

Further, the solicitors' fees are not an expense of the CVA under rule 1.23(2).

Finally, I will allow the company's costs which are particularised in paragraphs 128, 133, 134 and 135 above as expenses of the liquidation in accordance with the 1986 Rules, rule 4.218(3)(h).

The result in relation to the expenses of the administration is thus different from the result in relation to the expenses of the liquidation. The reason is that there is no statutory provision or rule or general principle of law which has the effect that the solicitors' fees are an expense of the administration. Conversely, there is an express rule which allows the court, in accordance with established principle, to hold that the solicitors' fees, or at least some of them, are an expense of the liquidation. The solicitors' contention, that where there is one type of insolvency process followed by another type of insolvency process then something which is an expense in one of those processes should be also be an expense in the other, is not the result which is automatically produced by the rules in their present form.

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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Neumans LLP (a firm) v Andronikou & Ors [2012] EWHC 3088 (Ch) (02 November 2012) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2012/3088.html Cite as: [2012] EWHC 3088 (Ch), [2013] Bus LR 374, [2012] WLR(D) 310

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		02/11/2012