UK: Administration Expenses: Costs Of An Administration Application When An Administration Order Is Not Granted

Last Updated: 12 July 2012
Article by Prav Reddy

Re Bickland; von Berg Rohl v Bickland Ltd

An administrator can be appointed either by a qualifying floating charge holder ("QFC") under Schedule B1 of the Insolvency Act 1986, or by an application to the court for an administration order. On occasion, an application to the court for an administration order is defeated by an intervening 'out of court' appointment by a qualifying floating charge holder. The Court has developed a practice of ordering that the application costs be payable as an administration expense, but this was the first case in which that practice has been disputed. Charles Russell acted for the Applicant where the Court decided this novel point on administration expenses.

Facts

The Applicant (a director of the Company) made an application (in his capacity as creditor) to court for an administration order to facilitate his purchase of the Company's business on a "pre-pack" basis. One of the Company's directors, however, sought to block the purchase by acquiring and therefore claiming subrogated rights under the QFC. The director then appointed an administrator under paragraph 14 of Schedule B1 of the Insolvency Act 1986. The application for an administration order was therefore adjourned, as an administrator had already been appointed out of court.

The Applicant applied for the costs of his failed application to be paid as an expense of the administration. That application was opposed by the Company.

Issues before the court

  • Is there jurisdiction to order the costs of an administration application to be treated as an expense of the administration when an administration order is not made?
  • If so, what determines the level of priority given to those costs?
  • So far as there is jurisdiction to do so, should the discretion be exercised in favour of the Applicant in this case?

Is there jurisdiction to order the costs of an administration application to be treated as an expense of the administration when an administration order is not made?

Counsel for the Applicant argued that the discretion of the court under paragraph 13(1)(f) of Schedule B1 of the Insolvency Act 1986 to "make any other order which the court thinks appropriate" is wide enough to confer jurisdiction to make such an order. Although there were no direct authorities on this point, the Court was persuaded by the anomalies that would be produced if it did not make a costs order. In particular, if a winding up petition were dismissed on the making of an administration order or if a QFC sought to intervene in an administration application to appoint his own administrator, then the petitioner or applicant in either case could be granted costs by an order of the court. Counsel for the Applicant referred the court to the Irish Reel case whereby a winding up petition was presented and subsequently dismissed following an administration application that was granted. An application was made by the petitioner for costs of the petition to be paid as an administration expense. The court granted the application, using a purposive interpretation of Rule 2.12 of the Insolvency Rules, which allowed for costs of the applicant or "any person appearing on the hearing of the application" to be considered costs of the administration.

The court therefore found that it had the discretion to make an order that costs of the unsuccessful administration application should be treated as an administration expense.

What level of priority should be given to the costs of the failed administration application?

The court recognised that the costs which were sought in the instant application did not fall into any of the categories of administration expenses as set out in the Insolvency Rules 1986, rule 2.67. However, the court was convinced that paragraph 13(1)(f) of Schedule B1 is wide enough to provide the court with a discretion to order that pre-appointment costs are expenses of the administration and that this discretion can be exercised notwithstanding the fact that the matter cannot be brought within Rule 2.67. The court was satisfied that it could treat the costs of the failed application as an administration expense by extension of the "liquidation expenses" principle described by Lord Hoffman in Re: Toshouku Finance Plc (2002).

The court therefore decided that it had the jurisdiction to make a discretionary order that the costs of the application be payable as an administration expense.

Should the discretion be exercised in favour of the Applicant?

The court considered that, since the administration application had been unsuccessful, the burden was on the Applicant to justify an order that his costs be payable as an administration expense.

The court was persuaded by the fact that the "pre-pack" sale proposed by the Applicant of the Company's business was in the best interests of the creditors (or at least as much in their interests as the deal that had been negotiated by the existing administrators) and the fact that the Applicant's application for an administration order was not opposed at the time. The court considered that the application for administration would have succeeded but for the out of court appointment of administrators, in which case the Applicant's costs of appointment would have been recoverable as an expense of the administration.

The court therefore ordered that costs of the application should treated as an expense of the administration and be given the same level of priority as they would have obtained had the administration order been made under Rule 2.67(1)(c).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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