16 January 2006
The payment of an officeholder's remuneration and expenses has always been a sensitive issue, and in recent years there have been a number of important developments. The fallout of Re Leyland Daf (2004), in which the House of Lords decided that general liquidation costs are not payable from floating charge assets, has been severe, and although a prospective amendment to redress the situation is promised in the forthcoming Company Law Reform Bill, significant problems are likely to remain. Further, despite the apparent failure to implement directly the Ferris Report, the teeth of the provisions of the Practice Statement on the Fixing and Approval of the Remuneration of Appointees, which came into force on 1 October 2004 and which stipulates a stringent process of assessment whenever an officeholder's remuneration is approved or challenged by/to the Court, are starting to bite on a more regular basis.
That apart, a more recent issue has arisen in the context of administrations which threatens their effectiveness and thereby has the potential to undermine the entire regime envisaged by the Enterprise Act itself. This spectre relates to costs and expenses incurred before the commencement of an administration and the extent to which creditors, or even the courts, have power to sanction the same.
Essentially, the problem is caused by the way in which the relevant statutory provisions are drafted. Rule 2.106 of the Insolvency Rules 1986, which provides for the fixing of an administrator's remuneration, specifically states that "the administrator is entitled to receive remuneration for his services as such", and that such remuneration shall be fixed either as a percentage of the value of the property with which they have to deal, or by reference to the time properly given by them and their staff in attending to matters "arising in the administration".
Similarly, Rule 2.67, which lists the priority of expenses of an administration, includes among other things any remuneration so fixed under Rule 2.106 "expenses properly incurred by the administrator in performing his functions in the administration" and "any necessary disbursements by the administrator in the course of the administration".
On their face, the rules thus only permit expenses and remuneration post-appointment.
The issue has become prevalent as more concerns have been expressed about the increasing use of 'pre-pack' administrations and their occasional misuse by some practitioners. Such concerns have led the relevant authorities, including government departments, to point out the deficiencies in the statutory provisions dealing with expenses and remuneration so as to discourage such abuse from being repeated. Unfortunately, in so doing, perfectly proper preparatory and pre-pack work, which is often essential and has to be carried out for the benefit of all stakeholders in many cases, is likely to be affected in the absence of a clear facility permitting payment.
Such uncertainty is not assisted by the restrictive approach taken by the relevant authorities, which prefer to advocate a situation whereby any preparatory work should be paid before the appointment takes effect - a situation that is often impracticable and could lead to problems in discharging other liabilities, such as wages.
Some assistance is afforded by Rule 2.67(1)(c) which, in allowing as an expense any costs and expenses of an appointor in connection with the making of an appointment out of court, as well as those of any other person giving notice of an intention to appoint and those of an applicant for an administration order, surely includes the costs incurred by an administrator in preparing pre-appointment what some call an 'invisible 2.2 report', so that they can complete their requisite statement confirming their opinion that the purpose of the administration is reasonably likely to be achieved. Of course, that statement must be filed at court so that the appointment can take effect.
Common sense dictates that, in preparing the 'invisible 2.2 report', any necessary investigatory work as to the financial position of the subject company must be included. Moreover, it is tentatively suggested that, in appropriate cases, work carried out identifying the extent to which the company's business and assets can be sold post-appointment is also covered.
As for the court's approach, in the case Cabletel Installations (2005), which admittedly was a pre-Enterprise Act administration and did not involve an in-depth analysis of the issue, Registrar Baister clearly acknowledged that some pre-appointment work should be paid for, as he accepted that the administrators in question had a responsibility to the court and the company to satisfy themselves of relevant matters before the order was made.
It is hoped that other judges will adopt that rationale and continue to recognise the importance of preparatory and pre-pack work, but clearly the court's powers are limited by the statutory provisions.
As an alternative, it may be possible to make freestanding contractual agreements with creditors but issues as to the consideration provided by the administrator in such circumstances and the justification for creditors entering into such arrangements ex post facto will arise. Other arrangements may provide for the payment of expenses pre-appointment to be conditional upon the appointment being made, but they are equally unsatisfactory.
Notably, some steps are being taken to address the issue, but they will take time. In November 2005, the Insolvency Service circulated a questionnaire that required completed returns by 20 January. The nature of the responses provided should be most illuminating.
Further, although the latest indications from R3, following a recent meeting with Gerry Sutcliffe MP, Under-Secretary of State for Employment Relations and Consumer Affairs, are that it would appear to be accepted that the Insolvency Rules should be amended to provide an appropriate facility provided proper sanction is in place, either from the creditors or the court, present estimates are that no revisions are likely before 2007.
Given that the future success of a number of administrations is potentially at risk until this issue is resolved, more urgent action is undoubtedly required.
Giles Maynard Connor is a barrister at Exchange Chambers