Neumans LLP (a firm) v Andronikou & Ors

Administration expenses are confined to the categories identified in the governing legislation and rules, subject to principles such as the Lundy Granite principle where a pre-insolvency contract is retained for the purposes of the insolvency process. The court cannot use Aiden Shipping Co Ltd v Interbulk Ltd or section 51 of the Senior Courts Act 1981 indirectly to create a new category of administration expense or to convert solicitors’ fees into such an expense. The court’s inherent jurisdiction and administrative payment powers must be exercised consistently with the statutory scheme and cannot promote an unsecured creditor without a special reason connected with the administration. By contrast, under rule 4.218(3)(h) of the Insolvency Rules 1986, the court may allow a company’s costs of appearing on, or closely connected with, a winding-up petition as liquidation expenses. The court must distinguish costs sufficiently connected with the petition from separate litigation or proceedings.

The applicant solicitors acted for Portsmouth City Football Club Ltd in opposing HMRC’s winding-up petition and in related proceedings. Their retainer ended before the company entered administration through an out-of-court appointment. The company later entered a company voluntary arrangement and was ultimately wound up.

The solicitors sought priority for unpaid fees and disbursements as expenses of the administration, alternatively the CVA, and further alternatively the liquidation. The central issues were whether the court had jurisdiction to create or direct payment of an administration expense, whether the fees fell within the CVA expenses provisions, and which elements of the company’s costs should be allowed as liquidation expenses.

1. Administration expenses. The fees did not fall within rules 2.12, 2.67 or 12.2 of the Insolvency Rules 1986. Rule 2.67 provided an exhaustive scheme, subject to recognised principles which properly fit a liability within an existing category.
2. Section 51. Section 51 of the Senior Courts Act 1981 gives the court a broad costs jurisdiction, but it does not authorise an order which indirectly adds a new class of administration expense. The solicitors had earned fees rather than incurred costs, and the proposed order would in substance require the company to pay its own costs to itself.
3. Lundy Granite principle. A pre-insolvency contractual liability may be treated as an administration expense where the contract continues after the insolvency begins and the office-holder elects to retain its benefit for the insolvency process. That principle did not apply because the retainer had ended before administration and the administrators did not retain its benefit.
4. Directions and payments. The administrators’ powers under Schedule B1 and Schedule 1 did not justify payment. The fees were not likely to assist the purpose of the administration and payment would prejudice other unsecured creditors. The inherent jurisdiction likewise did not justify the direction sought.
5. CVA. The fees were not expenses properly incurred and payable under the Act or Rules and therefore were not payable under rule 1.23(2).
6. Liquidation expenses. The company’s costs of appearing on the HMRC petition, including certain preparatory work, connected dealings with the Grosvenor petition, and advice concerning a possible validation order, were allowed under rule 4.218(3)(h). Costs of the separate VAT appeal were not allowed because they were insufficiently connected with the winding-up petition.