Johnson Machine and Tool Co Ltd & Anor, Re

Pre-appointment costs of an insolvency practitioner are not ordinarily administration expenses merely because a court makes an administration order or the administration is likely to produce a better result than liquidation. Where directors, or a company connected with them, purchase the business through a pre-pack, the applicants must clearly establish that the advantage to creditors outweighs the advantage to management of acquiring a business free from its debts.

A costs order should ordinarily be confined to additional costs occasioned by the administration application. Advice on the appropriate insolvency route, and negotiating or arranging the pre-pack, will ordinarily remain where it falls.

Two companies applied for administration orders in the context of pending winding-up petitions. In each case, a company controlled by or connected with the existing directors was to purchase the business and assets immediately after appointment of the administrator.

The applications raised whether the insolvency practitioner's pre-appointment costs could be treated as administration expenses. The court accepted that pre-packs were legitimate and that jurisdiction existed under paragraph 13 of Schedule B1 to the Insolvency Act 1986, but had to determine whether the discretionary power should be exercised and, if so, which costs could properly be included.

1. Applications refused. The court declined to order that the insolvency practitioners' pre-appointment costs be treated as administration expenses.
2. The jurisdiction was discretionary and derived from paragraph 13 of Schedule B1 to the Insolvency Act 1986. The fact that an administration and pre-pack were reasonably likely to produce a somewhat better result for creditors than liquidation did not, without more, justify the order.
3. Following the approach in Re SE Services Ltd, the relevant comparison was between the advantage to purchasing directors of retaining a business free from debt and the advantage to creditors produced by the pre-pack. Where the purchasers were the existing directors, or a connected company, it would rarely be possible to establish clearly that the balance favoured creditors.
4. In an out-of-court appointment, creditors could not approve payment of pre-appointment costs which were not otherwise administration expenses. Paragraph 49(1) of Schedule B1 concerned proposals for achieving the purpose of the administration. Rule 2.106 of the Insolvency Rules 1986 concerned remuneration for time spent on matters arising in the administration, and rule 2.67(1) provided a complete code of administration-expense priorities. Neither provision covered costs incurred before administration.
5. Costs of insolvency advice incurred before the decision to seek administration would ordinarily remain where they fell. Even where an order was appropriate, it should ordinarily cover only additional costs caused by bringing the application, such as preparing the application documentation after the decision to seek administration. Negotiating the pre-pack sale, identifying assets, valuation advice and deciding whether to market the business were ordinarily not costs of preparing the application.
6. The applicants should ordinarily provide evidence that they were personally liable for the costs, together with a breakdown and justification sufficient for summary assessment. The evidence here did not provide that information, and the court was in any event not persuaded that the orders were appropriate.

Not stated in the judgment.