Neumans LLP (A Firm) v Andrew Andronikou & Ors

The Court of Appeal dismissed the appeal and affirmed the judgment of Morgan J. The court held that the Insolvency Rules 1986 contain the exhaustive list of items properly payable as expenses of an out-of-court administration and that solicitors' fees incurred by the company in opposing a winding up petition are not within that list for an out-of-court administration. Certain items of the solicitors' fees may, however, be allowed as liquidation expenses under rule 4.218(3)(h) of the Insolvency Rules 1986. The court also held that section 51 of the Senior Courts Act 1981 and the court's inherent jurisdiction do not permit judicial infilling of the Rules to order payment of those fees as administration expenses.

Background and parties. Neumans LLP acted for Portsmouth City Football Club Limited in defending a winding up petition presented by HMRC. Administrators were appointed out of court and the winding up petition was suspended. Neumans sought an order that their fees for opposing the petition be paid from assets in the hands of the administrators as an administration expense. The administrators successfully argued before Morgan J that the court lacked jurisdiction to make such an order for an out-of-court administration. Neumans appealed.

Nature of the application. Neumans applied for payment of their solicitors' fees and disbursements as an expense of the out-of-court administration; alternatively they sought recognition of such fees as liquidation expenses.

Issues framed by the court.

• Whether the court had jurisdiction under section 51 of the Senior Courts Act 1981 to order payment of the solicitors' fees out of assets in the hands of administrators as administration expenses;
• Whether the court had inherent jurisdiction or other powers under the Insolvency Act 1986 or Schedule B1 to direct administrators to treat those fees as administration expenses;
• Whether the Insolvency Rules 1986 permit those fees to be paid as administration expenses in an out-of-court administration, or whether they are confined to being liquidation expenses under the Rules.

Court's reasoning and conclusions. The court adopted Morgan J's detailed reasoning. It concluded that the Insolvency Rules 1986 set out the complete list of administration expenses for out-of-court administrations (in particular rule 2.67) and that the fees in issue did not fall within that list. The court held that rule 4.218(3)(h) permits certain costs of resisting a winding up petition to be allowed as liquidation expenses. Section 51 of the Senior Courts Act 1981 was not a lawful basis for converting unpaid solicitors' fees into administration expenses because the fees were not "costs" within the meaning of that section and an order under s.51 could not be used indirectly to confer administration-expense priority. The court also rejected the use of inherent jurisdiction or paras 65/66 of Schedule B1 as grounds to direct administrators to treat the fees as administration expenses. The court noted that if there was a lacuna in the Rules the correct remedy was rule change rather than judicial legislation.

Practical consequence. The solicitors' claim for payment as an administration expense was dismissed; certain items could be pursued as liquidation expenses but in this case the administration consumed the assets so no payment resulted.

Appeal dismissed. The Court of Appeal affirmed Morgan J's decision that the Insolvency Rules 1986 provide the exhaustive code for expenses of an out-of-court administration and that solicitors' fees incurred by the company in opposing a winding up petition are not administration expenses under those Rules. The court held that those fees may, where appropriate, be allowed as liquidation expenses under rule 4.218(3)(h), and that neither section 51 of the Senior Courts Act 1981 nor the court's inherent jurisdiction may be used to create administration-expense priority where the Rules do not provide for it.

Appeal from the judgment of Morgan J in the High Court, Chancery Division, Companies Court (order dated 2 November 2012; reported at [2012] EWHC 3088 (Ch); [2013] Bus. LR 374). This Court of Appeal gave judgment on 24 July 2013 ([2013] EWCA Civ 916) dismissing the appeal.