Appleyard (Trustee) v Reflex Recordings Ltd

Where a freezing injunction permits a company to spend a reasonable amount on legal representation, and the company incurs those costs but cannot access the frozen funds, the court may authorise payment directly from the account before an administration order takes effect. Those costs should be limited to the company’s proper costs of addressing the administration application and the freezing injunction. They should be distinguished from costs concerning the interests of directors, other individuals or third-party creditors. The costs will not ordinarily be treated as expenses of the administration merely because the company was prevented from paying them by the freezing order, particularly where the order was properly made and the company was unsuccessful.

The applicant sought an administration order against the respondent company and had obtained, on an ex parte basis, a freezing injunction preserving the company’s assets pending that application. The injunction contained the conventional exception permitting reasonable expenditure on legal representation. The company’s bank nevertheless refused to release funds, leaving unpaid liabilities to its solicitors and counsel for responding to the two applications.

The court was required to determine how those costs should be dealt with before the administration order took effect, and what amount constituted reasonable legal expenditure permitted by the freezing injunction.

1. The company’s unpaid legal costs should not be directed to be paid as expenses of the administration. The company had not succeeded in the applications, no proper grounds had been shown for treating the freezing injunction as wrongly made, and such an order would be an unattractive means of circumventing the consequences of the injunction.

2. The appropriate course was to authorise the transfer of a reasonable sum from the frozen bank account directly to the company’s solicitors. This rectified the prejudice caused where solicitors had provided services on credit for purposes contemplated by the freezing order.

3. Reasonable costs for this purpose comprised the company’s proper costs of considering the administration application, including whether it could properly respond to or resist it, together with the proper costs of complying with and considering whether to respond to or resist the freezing injunction.

4. Those costs had to be distinguished from costs concerning the interests of directors or other individuals, and from costs concerning third parties to whom funds had been paid and who might otherwise be creditors in the administration. The schedule of £8,280 including VAT was excessive. Allowing for the company’s VAT registration and applying a broad-brush assessment, the court allowed £5,000.

5. The order was to treat £5,000 of the bank-account balance as transferred to the solicitors immediately before the administration order, so that that sum would not form part of the company’s assets on administration. The application to adjourn further consideration of the freezing injunction was refused, and the injunction expired in accordance with its terms. The applicant’s costs of the freezing injunction were ordered as an expense of the administration by agreement.