Jackson & Anor v Alshammari & Ors

In an application by office-holders for directions concerning remuneration, expenses and common costs, the court declined to grant declarations without a practical purpose. A declaration cannot be used to alter investors’ legal or equitable proprietary rights, or to convert those rights into pari passu claims, without an appropriate legal basis.

Office-holders’ entitlement to remuneration and an indemnity for proper expenses does not itself establish that they will be paid from assets held by another company. Costs must be attributed to the company or companies receiving the relevant benefit. Common costs cannot be loaded onto companies merely because they hold the group’s readily realisable assets. Any allocation must be fair, reasonable and commensurate with the work and benefit involved, and should not be determined without giving affected unsecured creditors an opportunity to be heard.

The applicants were joint office-holders of 24 companies in the Carlauren Group, whose business involved selling long leases in proposed care-home studios. They sought directions and declarations under paragraph 63 of Schedule B1 and section 168 of the Insolvency Act 1986.

The proposed declarations would have permitted payment from proceeds of sale of the relevant freehold properties for property costs, investigation and realisation costs, administration costs and an apportionment of group-wide common costs. Investors opposed relief which might affect their leasehold interests. The central issues were whether the declarations had a useful legal purpose, whether costs could be charged to the relevant estates or leasehold value, and whether common costs could be allocated to the PropCos.

1. Application dismissed. The court declined to grant either proposed declaration.
2. The first declaration was purposeless in the form advanced. Once the applicants clarified that “proceeds of sale” meant the gross proceeds received by the PropCo’s solicitors, and that the “freehold properties” meant the freehold estates as sold, the declaration stated no more than the ordinary position. The relevant costs could already be charged to the company in the proper course, subject to the applicable statutory and procedural rules. The court was not apt to grant declarations without a purpose.
3. The application did not provide a basis for altering investors’ rights. It did not establish any entitlement to extinguish or mutate legal or equitable leasehold interests, nor to require investors to bear costs beyond their contractual obligations merely by deducting them from value said to be attributable to their leases.
4. Office-holders are entitled to remuneration for proper services and an indemnity for proper expenses, but that entitlement does not guarantee payment where the assets of the relevant company are insufficient. A declaration concerning common costs would have to distinguish mandatory functions from voluntary activities and identify which companies benefited, and in what proportions.
5. By analogy with paragraph 21.1 and paragraph 21.2(4) of Part Six of the Insolvency Proceedings Practice Direction, any allocation had to be fair, reasonable and commensurate with the nature and extent of the work, and reflect the value of the service rather than simply time spent and costs incurred. It was impermissible in principle to load costs onto the PropCos merely because they happened to possess the group’s available assets. A proper allocation required a sufficiently firm analysis of the group’s assets, liabilities and benefits.
6. It was also unfair to make a declaration adverse to unsecured creditors without giving them an opportunity to appear. The representation order represented specified investors, not the unsecured creditors whose returns might be reduced. The proposed proviso preserving challenges to remuneration did not cure that procedural and substantive difficulty.