Revisiting fees agreed by administrators—Hosking and another (as joint liquidators of Hellas Telecommunications (Luxembourg) II SCA) v Slaughter and May

Can liquidators seek a detailed assessment of solicitors’ fees previously agreed by administrators? Hilary Stonefrost, barrister at South Square, explains the Court of Appeal’s decision in Hosking v Slaughter and May.

Original news

Hosking and another (as joint liquidators of Hellas Telecommunications (Luxembourg) II SCA) v Slaughter and May [2016] EWCA Civ 474, [2016] All ER (D) 173 (May)

The Court of Appeal, Civil Division, held that where a firm of solicitors providing legal services to a company in administration had agreed the amount of their fees with the administrators, subsequently appointed liquidators could not ask the Companies Court to direct that there be a detailed assessment of the amount of those costs under rule 7.34 of the Insolvency Rules 1986, SI 1986/1925 (IR 1986) or under the court’s inherent jurisdiction. That was the case whether the agreement had taken place before or after the end of the administration. If the liquidators did not agree with the fees that had been paid, they could bring misfeasance proceedings against the administrators.

What were the facts of the case?

After the company, Hellas, had gone into administration, the administrators instructed the solicitors firm Slaughter and May to act during the administration. The administrators agreed and paid 13 invoices rendered by Slaughter and May, the last one after Hellas had been put into liquidation.

The administrators sought the direction of the court as to whether Hellas should be dissolved or whether it should be put into liquidation. The court decided to wind up Hellas, and the Secretary of State appointed liquidators.

What is the history of the case?

The liquidators applied to a registrar for an order for detailed assessment of the 13 invoices. The registrar decided that, although IR 1986, r 7.34(1) and the other sub-clauses of that rule applied to administrations, on the proper construction of IR 1986, r 7.34, he had no jurisdiction to make the order. He went on to consider whether he had inherent jurisdiction to make the order—there was subsequently an issue as to what he in fact decided.

The registrar considered the reasoning in Engel v Peri [2002] EWHC 799 (Ch), [2002] All ER (D) 285 (Apr) in which it was stated that where a trustee in bankruptcy had obtained legal advice it was a matter for the trustee as to whether to pay or challenge the solicitor’s bill. It was not for the court to do any of this. The trustee could only be challenged if he acted unreasonably or improperly in incurring legal or other costs. The registrar applied that reasoning and concluded that to order a detailed assessment of Slaughter and May’s fees would be to permit a challenge to the exercise of discretionary power conferred upon the administrators. He therefore dismissed the liquidators’ application.

The liquidators appealed to the High Court. The judge agreed with the registrar’s decision on IR 1986, r 7.34 which, as a matter of construction, permitted the administrators to agree and pay the fees of the persons employed to assist with the administration.

The judge also held that the registrar had not decided (as the parties had read the judgment) that he had no inherent jurisdiction to direct that the fees be subject to detailed assessment—he had decided that there was an inherent jurisdiction but had declined to exercise his discretion.

The judge held that the registrar was plainly right to have regard to the statutory regime, which as a matter of policy places the decision in the hands of the insolvency practitioner whether to pay or have detailed assessment. The judge also agreed with Slaughter and May’s submissions that there was a commercial importance for third parties dealing with insolvency practitioners to have certainty as to their position and that decisions made by administrators to agree and pay third parties instructed to assist in the administration should not be capable of being overridden on the application of a subsequent liquidator.

The judge accepted the liquidators’ argument in relation to the last invoice that had been agreed and paid after the administrators had left office and Hellas had been put into liquidation. He read the reference in IR 1986, r 7.34 to the ‘responsible insolvency practitioner’ as being a reference to the liquidator once the administration had come to an end.

The liquidators appealed to the Court of Appeal, while Slaughter and May appealed against the judge’s decision on the last invoice.

What were the main issues before the Court of Appeal?

The main issues were:

  • the construction of IR 1986, r 7.34 (in the form before it was amended in April 2010)
  • the scope of the court’s inherent jurisdiction where an issue is governed by legislation
  • the meaning of ‘responsible insolvency practitioner’ and whether, once an administrator ceased to be in office, the administrator could still agree and pay administration expenses or whether that role fell to the liquidator

What did the Court of Appeal decide?

The court held that on the construction of IR 1986, r 7.34 that was in force at the time, the liquidators had no jurisdiction to ask the court to direct a detailed assessment of fees agreed and paid by administrators.

It decided that IR 1986, r 7.34(1)(a) did not apply to administrations because there could be no reference to 'administration' in that rule unless words were added. The registrar had held that IR 1986, r 7.34(1)(a) should be read as if the word ‘including’ appeared after the phrase ‘company insolvency’, but the Court of Appeal considered that this was unlikely to be an inadvertent omission and that the rule made sense without reading in this word.

The court also decided that IR 1986, r 7.34(2) could apply to administrations because it expressly applied to 'insolvency proceedings'.

In reaching its conclusion, the court interpreted ‘expenses’ in IR 1986, r 7.34(3) as meaning those in the relevant insolvency proceedings and ‘insolvency practitioner’ as meaning the person acting as administrator or liquidator, depending on the particular insolvency proceeding which was relevant. In the case of the administration, the persons were the administrators not the liquidators.

The court rejected the submission that it had inherent jurisdiction to direct a detailed assessment—IR 1986, r 7.34 made it clear that the persons who may proceed to such an assessment are in the case of an administration the administrators.

The court rejected Slaughter and May’s argument, which had been accepted by the registrar and the judge, that if liquidators could have fees that had been agreed and paid to third parties by administrators subjected to detailed assessment there would be catastrophic consequences because it would deter third parties from working for administrators. The court held that a creditor who acted properly need have no fear of having to repay any amount paid to him.

Accordingly, the Court of Appeal concluded that the liquidators had no right to require any of the fees agreed and paid to Slaughter and May by the administrators to be subject to detailed assessment.

Does the judgment clarify the law?

The case concerned an historic version of IR 1986, r 7.34. As amended, IR 1986, r 7.34(1) plainly applies to administrations.

The decision of the Court of Appeal does two things:

  • it makes it clear that the court has no inherent jurisdiction to order detailed assessment of costs agreed and paid by administrators, or any other insolvency practitioners, as the case may be
  • it makes clear the definition of ‘responsible insolvency practitioner’—it is not the person in office, but is ascertained by reference to the insolvency proceedings in issue

While the definition of ‘responsible insolvency practitioner’ is still included in the IR 1986 so the decision has some relevance to current insolvencies, the current IR 1986, r 7.34 now uses the term ‘office holder’ which is defined as ‘any person who by virtue of any provision of the Act or Rules holds an office in relation to those proceedings’. This definition is entirely consistent with the decision on the meaning of ‘responsible insolvency practitioner’ in this case.

What practical lessons can those advising take away from this case?

The court has decided that there is no basis for a liquidator to seek detailed assessment of fees of persons employed by former administrators just because it is more difficult for the liquidators to recover damages or compensation from the administrators than it is to argue that a bill should be reduced on taxation. There is now no scope for a subsequently appointed liquidator to bring an application against third parties employed by administrators seeking to recover monies from them on detailed assessment.

Hilary Stonefrost appeared for Slaughter and May in this case.

Interviewed by Robert Matthews.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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First published on LexisPSL Restructuring and Insolvency

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