Court resolves doubts about the status of Liquidator's fees and costs of bringing wrongful trading or preference actions - Re. Floor Fourteen Limited - 24.05.99

FACTS

Floor Fourteen Limited (the "Company") went into creditors' voluntary liquidation in 1995. Whilst there were insufficient assets even to pay preferential creditors in full, the liquidator had been advised that he had a good claim against the former directors of the Company for wrongful trading and to recover preferential payments. He therefore applied to the Court for directions on whether he could use the Company's limited assets of £11,250 to fund these actions. The preferential creditors (who were owed £25,000) objected to the liquidator using the Company's assets to fund the litigation, and cited the decision in Re. M C Bacon Limited (No. 2) [1991] Ch 127 in which Millett J held that the costs of pursuing such claims under the Insolvency Act 1986 (the "Act") were not payable out of the Company's assets. However, this view had been doubted by the Court of Appeal in the subsequent case of Katz -v- McNally [ 1997] BCC 784, although not expressly overruled.

COMMENT

It is now therefore clear that liquidators can fund actions under the preference/wrongful trading /transactions at an undervalue provisions of the Act from the company's assets, and that these costs will be expenses of the liquidation payable in priority to preferential claims. So far as the order of priority of expenses themselves is concerned, these costs will rank as disbursements of the liquidation whether or not the action is successful. For an analysis of the Court's reasoning see below.

HELD

Mr D Donaldson QC (sitting as a Deputy High Court Judge) clarified the position in a decision given on 24th May 1999, as follows:

1. Were the costs of the proceedings expenses of the winding-up within Sections 115 and 175 of the Act?

The Court preferred the view expressed by the Court of Appeal in Katz -v- McNally, which raised doubts about the decision in M C Bacon (No. 2). Section 115 states that "all expenses properly incurred in the winding-up, including the remuneration of the Liquidator, are payable out of the company's assets in priority to all other claims." Section 175 provides that preferential debts rank equally amongst themselves "after the expenses of the winding up". In M C Bacon (No. 2) Millett J had held that the costs incurred by a liquidator in pursuing claims under the Act were not "expenses of the winding-up" for the purpose of Section 175. In the present case, however, the Judge stated that Sections 115 and 175 created the right and obligation on the Liquidator to pay the expenses, and therefore given that no challenge was made to the propriety of the liquidator's decision to bring the proceedings, the costs would be expenses of the winding-up, and were therefore payable out of the Company's assets in priority to the claims of the preferential creditors.

2. What was the priority of the costs under Insolvency Rule 4.218(1)?

Insolvency Rule 4.218(1) sets out the general order of priority of liquidator's expenses. The question was therefore whether the liquidator's costs of bringing the contemplated proceedings fell within sub-section (a) which covers expenses properly incurred by the liquidator in getting in the assets of the Company, or (m) which refers to any necessary disbursements by the liquidator. The Court found that they were a necessary disbursement, since if the proceedings were unsuccessful, the costs would not have been incurred in "getting in" the Company's assets. The costs would be necessary disbursements whatever the outcome of the proceedings.