Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2010] CSOH 150
P1168/10	OPINION OF LORD GLENNIE in the PETITION of COLIN PETER DEMPSTER and FIONA LIVINGSTON TAYLOR, Joint Liquidators of Park Gardens Investments Limited for an order in connection with the audit of accounts etc. under s.53 of the Bankruptcy (Scotland) Act 1985 as applied with modifications to liquidations ­­­­­­­­­­­­­­­­­________________

Noters: Sellar, Q.C., Shepherd & Wedderburn LLP

12 November 2010

[1] Rule 4.68 of the Insolvency (Scotland) Rules 1986 applies, with necessary modifications, ss.52 and 53 of the Bankruptcy (Scotland) Act 1985 to liquidations. As so modified, s.53 provides that within two weeks after the end of an accounting period, the liquidator shall, in respect of that accounting period, submit to the liquidation committee or, if there is no liquidation committee, to the court (a) his accounts of his intromissions with the Company's assets ("the accounts") and, if funds are available, a scheme of division, and (b) his claim for outlays and remuneration. Accounting periods are defined in s.52(2) as being successive periods of six months beginning with the date of commencement of the winding up, i.e. the date on which the winding up petition was presented, unless some other period is agreed between the liquidator and the liquidation committee or the Court. In terms of s.53(3)(a), the liquidation committee or, as the case may be, the court, within six weeks of the end of the accounting period (i) may audit the accounts; and (ii) shall issue a determination fixing the amount of the outlays and remuneration payable to the liquidator. The liquidator is required to make the audited accounts, the scheme of division and the determination fixing his outlays and remuneration available for inspection by the Company and the creditors.

[2] In a case, such as the present, where there is no liquidation committee, the task of auditing the accounts and fixing the amount of the outlays and remuneration payable to the liquidator falls on the court. The practice of the court in such circumstances has been (a) to remit to a Reporter, normally a chartered accountant, to audit the accounts and to report to the court his views on the amount which should be paid to the liquidator in respect his outlays and remuneration, and also (b) to remit the question of remuneration to the Auditor of Court for him to report on what would be a suitable figure. Typically, the Reporter and the Auditor are required to confer before finalising their respective Reports. The court will then consider their Reports before issuing a determination.

[3] The practice of remitting to a Reporter has no statutory basis. It appears to have emerged at the end of the 19^th century and, so far as can be ascertained, has been followed fairly consistently since then. The court itself has for some time fixed the remuneration of the liquidator: see, for example, City of Glasgow Bank (1880) 7 R. 1196. The remit to the Reporter no doubt arose as a practical means by which the court could be properly informed before exercising its judgment as to the appropriate remuneration to be awarded. It is not clear when the practice of remitting to the Auditor arose, or how consistently it has been followed. It is not mentioned, for example, in Wilton, Company Liquidation, Law and Practice (1922) at pages 62-67 or in Thomson & Middleton, Manual of Court of Session Procedure (1937) in which, at pages 250-1, there is a discussion of the terms of the Final Note in a liquidation (obviously before the Insolvency Act 1986). A recent practitioner's book, McBride & Dowie, Petition Procedure in the Court of Session (1988) appears to contemplate that there will be a remit to an accountant to audit the accounts of the liquidator's intromissions and a remit to the Auditor to suggest a suitable remuneration, with the stipulation that the Auditor should confer with the accountant before reporting. It is not stated in terms that the remit to the accountant (the Reporter) should include a remit to suggest a suitable remuneration, but that appears to be implicit in the requirement for the Auditor and the accountant to confer. I was told that in a relatively recent application in connection with an administration and subsequent liquidation, the insolvency judge remitted the matter to a Reporter but was persuaded in the particular circumstances to dispense with a remit to the Auditor. On another occasion, however, another insolvency judge indicated that he preferred to retain the assistance of the Auditor's involvement in recommending a suitable remuneration.

[4] The Noters are the joint liquidators of Park Gardens Investments Limited, a company incorporated in Gibraltar. On 23 October 2009, on the application of HSBC Bank plc, the Company was ordered to be wound up as an unregistered company in terms of ss.221-224 of the Insolvency Act 1986 and the Noters were appointed as liquidators. The petition for winding up was presented on 29 September 2009. In terms of s.52 of the Bankruptcy (Scotland) Act 1985, the first accounting period ran from 29 September 2009 until 28 March 2010, and the second from 29 March 2010 until 28 September 2010.

[5] In respect of the first accounting period, a remit was duly made to the Reporter in respect of the accounts and the claim for outlays and remuneration, and to the Auditor in respect of the claim for remuneration. Both conferred and reported, and the court made an order fixing the amount of the outlays and remuneration in the recommended amount.

[6] As regards the second accounting period, the Noters have timeously submitted their accounts and their claim for outlays and remuneration. However, rather than moving the court to order a remit to a Reporter and to the Auditor, they now move the court, in the particular circumstances of this case, to disapply the existing practice of ordering a remit; and to issue a determination fixing the outlays and remuneration payable to the liquidator in the amounts claimed.

[7] Their argument, in brief, is as follows. They say that there is no obligation on the court to audit the accounts. The word used in s.53(3) is "may", not "shall". There is no statutory underpinning for the practice of remitting to a Reporter and/or to the Auditor before fixing the amount of outlays and remuneration. While in the ordinary case the court will be assisted by the Reports of the Reporter and the Auditor, it is not necessary in the present case where only the petitioning creditor, the Bank, has any financial interest in the amount of such outlays and remuneration and it has consented to payment in the sums claimed.

[8] The Noters prepared an estimated statement of the Company's affairs as at 29 September 2009. That statement records that the Company then had assets of £1,175,000 in the form of its interest in a development site. It had liabilities of £1,611,960, of which £1,593,261 was owed to the Bank. The Bank is the only secured creditor. The claims of unsecured creditors total only £19,000. On the above figures, there will be a shortfall in the amount recovered by the Bank of £418, 261. It is wholly unrealistic to conceive of the Company's assets realising an amount sufficient to pay the Bank in full, let alone there being anything left over to meet the claims of the unsecured creditors. The Noters have asked unsecured creditors whether they would be willing to join a liquidation committee, but none has agreed to do so. No doubt that is in recognition of the fact that no unsecured creditors will achieve anything from the liquidation.

[9] The only effect of a remit to a Reporter and to the Auditor in the circumstances of this case will be to increase the expenses of the liquidation and reduce the sums which the Bank recovers in respect of its secured claim. The petition contains averments of the fees likely to be charged by the Reporter and by the Auditor. Although not themselves very large sums, they cannot simply be dismissed as irrelevant. The Bank, which is the only party with a realistic financial interest, is content with the outlays and remuneration claimed by the Noters. The sums claimed do not appear out of the ordinary. Further, the traditional remit is likely to cause significant delay. The remit for the first accounting period was ordered on 14 April 2010, but the final Reports were not available until 22 September 2010.

[10] The existing practice is there for a good reason. Often the court holds the balance between the interests of secured and unsecured creditors. The level of fees claimed by liquidators can give rise to concerns, and the court will be astute to guard against the liquidators being rewarded at the expense of unsecured creditors. It will generally wish to examine the claim for outlays and remuneration critically to ensure that the liquidators, as officers of the court, are properly remunerated. It cannot usually do so without some assistance from those used to dealing with questions as to the reasonableness of legal and accountancy fees. Accordingly, it will normally be appropriate to order a remit to a Reporter and/or to the Auditor. Were it not be for the particular circumstances of this case, where (a) there is no realistic possibility of any party other than the Bank having a financial interest in the outcome of the liquidation, and therefore in the level of outlays and remuneration claimed by the Noters, (b) the unsecured creditors have not been willing to form a liquidation committee and (c) the level of outlays and remuneration claimed do not give rise to any obvious concerns, I would have been minded to adhere to the existing practice. But the circumstances here are such that no prejudice will be caused to anyone by departing from it.

[11] I accordingly granted the orders sought, fixed the sum claimed as a reasonable sum for the remuneration of the Noters and determined the figure for their outlays. The application made in this case is one of eleven applications by Note in related cases by the same Noters. I made the equivalent orders in each of those cases.

[12] Before coming to a concluded view on the matter, I consulted informally with the Auditor of Court and also with the other judges who handle insolvency matters. We were agreed that the existing practice could properly be departed from in an appropriate case. We were agreed that this was such a case. Whether it is appropriate in any particular case will depend on all the circumstances. The matter will be kept under review.

[13] I was also asked to make an order permitting the Noters to make their future applications in respect of their accounts, outlays and remuneration and other matters by way of motion in the current Note rather than by a separate Note on each occasion. The purpose of this is to save expense. It is consistent with a practice which has developed over the last year or more in respect of applications in administrations, and I see no reason why that practice should not be applied also in the case of liquidations. Accordingly, I granted that Order too.