Where a company incurred costs in its unsuccessful opposition to a winding up petition, there was no statutory provision or rule or general principle of law which had the effect that those costs, represented by any liability the company had to pay fees to the solicitors acting for the company, were an expense of the administration. Conversely, rule 4.218(3)(h) of the Insolvency Rules 1986 allowed the court to hold that the solicitors’ fees were an expense of the liquidation. Where there was one insolvency process followed by another type of insolvency process, then the rules did not automatically produce the result that something which was an expense in one of those processes should also be an expense in the other.

Morgan J so held in the Chancery Division when allowing an application, in part, brought by the applicant solicitors firm, Neumans LLP, against the respondents, Andrew Andronikou, Peter Kubik, Michael Kiely, joint administrators of Portsmouth City Football Club Ltd, and Geoffrey Carton-Kelly and David Hudson, joint liquidators of Portsmouth City Football Club Ltd. The application was for 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 unsuccessfully opposing a winding up petition, should be determined to be an expense of the administration of the company, or in the alternative that those fees and disbursements should be an expense of the liquidation of the company, or in the further alternative that those fees and disbursements should be an expense of a CVA which the company entered into while it was in administration.

Rule 2.67 of the Insolvency Rules 1986 provides: “(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 … (f) any necessary disbursements by the administrator in the course of the administration … (4) … the former administrator’s remuneration and expenses shall comprise all those items set out in paragraph (1) of this rule.”

Rule 4.218(3)(h) of the 1986 Rules, dealing with liquidation expenses, provides: “the expenses are payable in the following order of priority — (h) the costs of the petitioner, and of any person appearing on the petition whose costs are allowed by the court.”

Paragraph 13 of Schedule 1 to the Insolvency Act 1986, listing the powers of administrator or administrative receiver provides: “Power to make any payment which is necessary or incidental to the performance of his functions.”

Paragraph 65 of Schedule B1 to the 1986 Act provides: “(1) The administrator of a company may make a distribution to a creditor of the company … (3) A payment may not be made by way of distribution under this paragraph to a creditor of the company who is neither secured nor preferential unless the court gives permission.”

Paragraph 66 of Schedule B1 to the 1986 Act provides: “The administrator of a company may make a payment otherwise than in accordance with paragraph 65 or paragraph 13 of Schedule 1 if he thinks it likely to assist achievement of the purpose of administration.”

Section 51 of the Senior Courts Act 1981, as substituted by the Courts and Legal Services Act 1990 and as amended by the Access to Justice Act 1999, provides: “(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 … (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) ʻproceedings’ includes the administration of estates and trusts. (5) Nothing in subsection (1) shall alter the practice in any criminal cause, or in bankruptcy.”

MORGAN J said that the solicitors’ fees did not qualify as an expense of the administration under rule 2.67. Rule 2.67(4) provided that the administrators’ remuneration and expenses comprised all those items set out in rule 2.67(1). That suggested that the matters listed in rule 2.67(1) were a complete list of administration expenses. Even if the solicitors had locus standi to apply to the court for an order for costs in favour of the company: (1) it did 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 was 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 were seeking was, 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 did not confer power to make such an order. CPR rule 48.4 was not applicable to the present case, even by analogy. The Lundy Granite principle (In re Lundy Granite Ltd (1871) LR 6 Ch App 462) did not involve a qualification of the conclusion that the list of expenses in rule 2.67 was an exhaustive list. A liability which was payable in full under the Lundy Granite principle could be a necessary disbursement within rule 2.67(1)(f). Further, such a liability could be a liability incurred by the administrator under rule 2.67(1)(a). The solicitors’ fees could only be “treated” as an administration expense if the company was liable to pay them in full under the Lundy Granite principle. The Lundy Granite principle did not apply in the administration in the present case. His Lordship doubted if a direction that the administrators should pay the solicitors their fees was what was meant by a distribution within paragraph 65 of Schedule B1 to the 1986 Act. 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 did not provide for the solicitors to have priority in that way over other creditors and other persons entitled to claim payment of expenses. In the present case there was no special reason, connected with the administration, to promote the solicitors from their position as unsecured creditors. The payment of the solicitors’ fees could not be said to be likely to assist achievement of the purpose of the administration, under paragraph 66 of Schedule B1. It could not be said that payment in full of the solicitors’ fees would be necessary or incidental to the performance of the administrators’ functions, under paragraph 13 of Schedule 1. 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, it would not be right to exercise the inherent jurisdiction the court had to give appropriate direction to the administrators. It followed 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) of the 1986 Rules. The solicitors’ fees were not an expense of the CVA under rule 1.23(2). The company came 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 was whether to “allow” the costs of the company as costs within rule 4.218(3)(h). His Lordship said that he should adopt the same general approach in principle to the costs of a company unsuccessfully applying to strike out a petition as he did to the costs of a company unsuccessfully opposing a petition. Both sets of costs could be regarded as the costs of a person appearing on the petition. The decision in relation to each set of costs was whether they should be “allowed”. In the present case, and having regard to the fact that there was no real opposition to this course, his Lordship would allow the company’s costs as expenses of the liquidation in accordance with rule 4.218(3)(h). The rules in their present form did not automatically produce the result that where there was one type of insolvency process followed by another type of insolvency process then something which was an expense in one of those processes should be also be an expense in the other.