ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION LEEDS DISTRICT REGISTRY
HIS HONOUR JUDGE BEHRENS
309 of 2007/BK065A
B e f o r e :
LADY JUSTICE BLACK
MR JUSTICE DAVID RICHARDS
| HELEN BROOK
|- and -
|NICHOLAS EDWARD REED (TRUSTEE IN BANKRUPTCY OF THE ESTATE OF HELEN BROOK)
Mr Stephen Davies QC (instructed by Eversheds LLP) for the Respondent
Hearing date: 19 January 2011
Crown Copyright ©
Mr Justice David Richards :
"Judge Behrens was wrong in law not to reduce the amount of the trustee in bankruptcy's costs and disbursements to a sum substantially lower than £12,820.50 (costs of £9,929.75 and disbursements of £2,890.75) because that figure is disproportionately high in relation to the circumstances of the bankruptcy (which involved only two creditors with debts of less than £20,000 in all and two assets, a modest retail business and a share in a matrimonial home) especially when taken together with the amount allowable in respect of the costs of the trustee in bankruptcy's solicitors. That figure does not have regard to the Practice Statement: The Fixing and Approval of the Remuneration of Appointees 2004, and in particular to the principle that the remuneration of the trustee in bankruptcy should reflect and be fixed so as to reward the value of the service rendered by him, not simply to reimburse him in respect of time expended and cost incurred, nor does it take properly into account the status of the trustee in bankruptcy as a fiduciary."
"The Court as a general rule only fixes remuneration on a time-basis if there is no other method which would operate to give the liquidator fair remuneration. Experience has shown that the time occupied by a liquidator and his clerks affords a most unreliable test by which to measure the remuneration. Even the best accountant may spend hours over unproductive work, let alone his more or less efficient staff of clerks…The Court has long since come to the conclusion that the proper method to adopt whenever it is practicable is to assess the remuneration according to the results attained,"
Insolvency Rules 1986
"(2) The remuneration shall be fixed either –
(a) as a percentage of the value of the assets in the bankrupt's estate which are realised or distributed, or of the one value and the other in combination, or
(b) by reference to the time properly given by the insolvency practitioner (as trustee) and his staff in attending to matters arising in the bankruptcy. "
The substantial change to the pre-1986 law was to permit remuneration to be determined on a time basis as an alternative to a percentage of realisations and distributions.
"(4) In arriving at that determination, the committee shall have regard to the following matters-
(a) the complexity (or otherwise) of the case,
(b) any respects in which, in connection with the administration of the estate, there falls on the insolvency practitioner (as trustee) any responsibility of an exceptional kind or degree,
(c) the effectiveness with which the insolvency practitioner appears to be carrying out, or to have carried out, his duties as trustee, and
(d) the value and nature of the assets in the estate with which the trustee has to deal."
This sub-rule applies equally if the decision is made by a meeting of creditors: rule 6.138(5). These criteria, together with the amount of time spent by the office-holder and his staff, reflect the recommendation in para 895 of the Cork Committee Report.
"The essential point which requires constantly to be borne in mind is that office-holders are fiduciaries charged with the duty of protecting, getting in, realising and ultimately passing on to others assets and property which belong not to themselves but to creditors or beneficiaries of one kind or another. They are appointed because of their professional skills and experience and they are expected to exercise proper commercial judgment in the carrying out of their duties. Their fundamental obligation is, however, a duty to account, both for the way in which they exercise their powers and for the property which they deal with."
"First, office-holders must expect to give full particulars in order to justify the amount of any claim for remuneration. If they seek to be remunerated upon, or partly upon, the basis of time spent in the performance of their duties they must do significantly more than list the total number of hours spent by them or other fee-earning members of their staff and multiply this total by a sum claimed to be the charging rate of the individual whose time was spent. They must explain the nature of each main task undertaken, the considerations which led them to embark upon that task and, if the task proved more difficult or expensive to perform than at first expected, to persevere in it. The time spent needs to be linked to this explanation, so that it can be seen what time was devoted to each task. The amount of detail which needs to be provided will, however, be proportionate to the case.
The charging rate claimed must also be proved by evidence; and what is relevant is not the charging rate of the particular individual but the broad average or general rate charged by persons of the relevant status and qualifications who carry out this kind of work (cf in relation to solicitors' charges Jones v Secretary of State for Wales  2 All ER 507,  1 WLR 1008 and the cases there referred to).
Second, office-holders must keep proper records of what they have done and why they have done it. Without contemporaneous records of this kind they will be in difficulty in discharging their duty to account. While a retrospective reconstruction of what has happened may have to be looked at if there is no better source of information, it is unlikely to be as reliable as a contemporaneous record. Office-holders whose records are inadequate are liable to find that doubts are resolved against them because they are unable to fulfil their duty to account for what they have received and to justify their claim to retain part of it for themselves by way of remuneration.
Third, the test of whether office-holders have acted properly in undertaking particular tasks at a particular cost in expenses or time spent must be whether a reasonably prudent man, faced with the same circumstances in relation to his own affairs, would lay out or hazard his own money in doing what the office-holders have done. It is not sufficient, in my view, for office-holders to say that what they have done is within the scope of the duties or powers conferred upon them. They are expected to deploy commercial judgment, not to act regardless of expense. This is not to say that a transaction carried out at a high cost in relation to the benefit received, or even an expensive failure, will automatically result in the disallowance of expenses or remuneration. But it is to be expected that transactions having these characteristics will be subject to close scrutiny. "
"In my judgment it is vital to recognise three things in this field. First, time spent represents a measure not of the value of the service rendered but of the cost of rendering it. Remuneration should be fixed so as to reward value, not so as to indemnify against cost. Second, time spent is only one of a number of relevant factors, the others being, as I have said, those which find expression in r 2.47 and similar rules. The giving of proper weight to these factors is an essential part of the process of assessing the value, as distinct from the cost, of what has been done. Third, it follows from the first two points that, as the task is to assess value rather than cost, the tribunal which fixes remuneration needs to be supplied with full information on all the factors which I have mentioned."
A vivid illustration of the excessive remuneration which can arise from an office-holder's uncritical reliance on time spent can be seen in Re Cabletel Installations Ltd  BPIR 28 at  where work was carried out at too senior level and where there were more and lengthier meetings and excessive reviews than the administration warranted.
The Ferris Report
"In all cases it is in the interests of those ultimately entitled to the assets, whether as creditors or beneficiaries or owners in some other capacity, as well as being in the public interest in general, that the office-holder shall carry out his duties with proper skill and care. These duties include the carrying out of certain investigations and the recognition of the public interest element as well as the administration of the assets. These factors in turn require that persons having proper qualifications, experience, skill and integrity shall be available to perform the duties of office-holders. In the long term this will only be so if such persons can expect to receive reasonable remuneration for their services as office-holders. The lowest rate of remuneration will not necessarily be the most advantageous."
"An important matter which we have endeavoured to keep in mind and which needs to be kept in mind by every court or body which has to fix or approve the remuneration or disbursements of an office-holder is the need for what, in the absence of a better term, we describe as "proportionality". The administrations undertaken by office-holders are of almost unlimited range of size and complexity. Mega-insolvencies, or even medium sized insolvencies where the remuneration claimed is large in cash terms or as a proportion of the value of assets dealt with, justify and require a higher degree of evaluation and justification than small and straightforward cases where the suggested remuneration is comparatively modest. This makes it impossible to prescribe, except in general terms, a universal approach applicable to all cases. It would be counter-productive if, for example, an office-holder were to feel that he has to explain and prove every element which goes to make up what is self-evidently a modest charge in a simple case, regardless of the expense he incurs in doing so and hopes to recover from the estate which he is administering. Over-zealous recording of the minutiae and exact timing of an office-holder's activities is a waste of the office-holder's time and the creditors' money. What is, however, needed (and thus required by the principle of proportionality) is the provision of sufficient information to enable creditors or the court to have a clear view of what the office-holder has done or intends to do and of the value he has protected for the creditors. "
"We see much attraction in the promulgation of a new scale of charging which, in smaller cases, would replace the Official Receiver's scale as a basis of remuneration where the office-holder is engaged in private practice. Such a scale, if it can be devised, would go a long way towards enabling the office-holder to know how he is to be remunerated and the creditor to be satisfied that the office-holder's charges are objectively justifiable. It could therefore be expected to be adopted in a wider range of cases, which nevertheless fall into the category of smaller cases, than those in which the Official Receiver's scale is now applied. This would reduce the areas of dispute and criticism concerning the remuneration payable to the office-holder. Even in cases where it is not adopted it would provide a useful bench mark. Office-holders who claim remuneration which is more generous than that allowed under the new scale would need to justify their claim. Likewise creditors who allege that the scale provides remuneration that is too generous in their case would have to show why this is so."
"The main problem which is perceived to have arisen from the application of the quantum meruit basis in the recent past is that the figure which can be arrived at by the application of current charging rates to recorded hours may be a very large one, not obviously linked to the value of the services rendered. The main remedy for this problem is, of course, the refinement of the concept of "value" and its appraisal, on which some comments are made below."
There are further observations on the relevance of time spent:
"6.9 We think we should say something more about the weight which is to be given to time spent. … We have a good deal of anxiety about what appears to have become the modern tendency for office-holders to charge mainly, or even solely, by reference to hourly rates. To do so assumes that whatever time was in fact spent on a particular task was necessarily and properly spent by a person of the seniority and experience of the person who actually carried out that task. Although in an ideal world this would be the case, it is foolish to suppose that this ideal is invariably, or perhaps even frequently, achieved. We emphasise strongly the need for the body which fixes the remuneration of an office-holder to take account of all the factors stated in the PL [provisional liquidator] formula. Where the assessment of the other factors indicates that the overall results of the office-holder's activity are mediocre or disappointing this may cast doubt upon the effectiveness of the time spent.
6.10 A corollary of this is that it must be part of the office-holder's duties, when preparing and presenting his claim for remuneration, to take a look back over the general performance of his duties and to ask himself conscientiously whether, if he is remunerated as he proposes, he can say that he has given value for money. We do not shrink from the further corollary that, in a case where the office-holder has performed particularly efficiently and attained a specially good outcome, he may be able to claim a rate of remuneration which represents more than his standard charging rate for the time he has spent. We hasten to add that, where such a claim is made, it is for the office-holder to substantiate it."
"I shall examine the main work streams and some of their subcategories and consider the time spent and whether it was justified; I shall have regard, insofar as I can, to the level at which work has been done; I shall consider the benefit of the work done and, to any extent appropriate, whether it was necessary. I shall then look at the larger picture and consider the case in terms of value. In doing so I shall have regard to the factors set out in the rules and to other factors peculiar to this case. I shall bear in mind that time spent is a measure not of the value of the service rendered but of the cost of rendering it. I do not propose, therefore, to allow myself to be influenced to any real extent by the final figures which the administrators claim, since, it seems to me that, prima facie, they reflect the cost of time rather than the value of the service provided. I shall resolve any doubts I have against the administrators."
The Practice Statement
"The objective of this Practice Statement is to ensure that the remuneration of an appointee which is fixed and approved by the court is fair, reasonable and commensurate with the nature and extent of the work properly undertaken by the appointee in any given case and is fixed and approved by reference to a process which is consistent and predictable."
"any application by a person who may be permitted to apply under the Insolvency Act, the Insolvency Rules, or otherwise including by reference to the jurisdiction of the court to supervise the conduct of one of its officers and the inherent jurisdiction of the Supreme Court and is dissatisfied with the remuneration of an appointee that has otherwise been fixed and approved on the basis that such remuneration is excessive."
Paragraph 3.3 refers to:
"the guiding principles by reference to which applications for the fixing and approval of the remuneration of appointees are to be considered both by applicants, in the preparation and presentation of their application, and by the court which is required to determine such applications."
"(1) 'Justification': It is for the appointee who seeks to be remunerated at a particular level and/or in a particular manner to justify his claim and in order to do so the appointee should be prepared to provide full particulars of the basis for and the nature of his claim for remuneration.
(2) 'The benefit of the doubt': The corollary of guiding principle (1) is that on any application for the fixing and approval of the remuneration of an appointee, if after considering the evidence before it and after having regard to the guiding principles (in particular guiding principle (3)), the matters contained in paragraph 5.2 (in particular paragraph 5.2(10) and the matters referred to in paragraph 5.3 (as appropriate) there remains any element of doubt as to the appropriateness, fairness or reasonableness of the amount sought to be fixed and approved (whether arising from a lack of particularity as to the basis for and the nature of the appointee's claim to remuneration or otherwise) such element of doubt should be resolved by the court against the appointee.
(3) 'Professional integrity': The court should give weight to the fact that the appointee is a member of a regulated profession (where such is the case) and as such is subject to rules and guidance as to professional conduct and (where such is the case) the fact that the appointee is an officer of the court.
(4) 'The value of the service rendered': The remuneration of an appointee should reflect and should be fixed and approved so as to reward the value of the service rendered by the appointee, not simply to reimburse the appointee in respect of time expended and cost incurred.
(5) 'Fair and reasonable': The amount of the remuneration to be fixed and approved by the court should be fair and reasonable and represent fair and reasonable remuneration for the work properly undertaken or to be undertaken.
(i) 'proportionality of information': in considering the nature and extent of the information which should be provided by an appointee in respect of an application for the fixing and approval of his remuneration the court, the appointee and any other parties to the application shall have regard to what is proportionate by reference to the amount of remuneration to be fixed and approved, the nature, complexity and extent of the work to be completed (where the application relates to future remuneration) or that has been completed by the appointee and the value and nature of the assets and liabilities with which the appointee will have to deal or has had to deal;
(ii) 'proportionality of remuneration': the amount of remuneration to be fixed and approved by the court should be proportional to the nature, complexity and extent of the work to be completed (where the application relates to future remuneration) or that has been completed by the appointee and the value and nature of the assets and/or potential assets and the liabilities and/or potential liabilities with which the appointee will have to deal or has had to deal, the nature and degree of the responsibility to which the appointee has been subject in any given case, the nature and extent of the risk (if any) assumed by the appointee and the efficiency (in respect of both time and cost) with which the appointee has completed the work undertaken;
(7) 'Professional guidance': In respect of an application for the fixing and approval of the remuneration of an appointee, the appointee may have regard to the relevant and current statements of practice promulgated by any relevant regulatory and professional bodies in relation to the fixing and approval of the remuneration of an appointee. In considering an application for the fixing or approval of the remuneration of an appointee, the court may also have regard to such statements of practice and the extent of compliance with such statements of practice by the appointee.
(8) 'Impracticability': where the appointee has not, either upon or shortly after the commencement of his appointment, sought to have the basis upon which his remuneration is to be fixed approved by the members of the partnership or the company, the creditors' committee, the liquidation committee or the general body of creditors (as appropriate) and in circumstances where the appointee considers that it will be impracticable to have his remuneration fixed and/or approved in such a manner, he may, as soon as reasonably practicable after his appointment, apply to the court to have the basis upon which he is to be remunerated fixed and for directions as to the manner in which his remuneration is to be approved (which may include provision for payments to be made on account). In circumstances where such an application is not made but the appointee subsequently makes an application to the court for the fixing and approval of the whole or any part of his remuneration, an explanation as to why no earlier application was made shall be provided to the court."
Application of the Practice Statement to a challenge to remuneration
Status and application of the Practice Statement
"The task for the court is to arrive at a level of remuneration which balances the various criteria of the value of the service rendered, the proportionality of remuneration and a fair and reasonable remuneration for the work properly undertaken, as these criteria are explained in the Practice Statement. The result must resolve the conflict which may in a particular case exist between these criteria. The conflict is likely to be the more acute in cases such as the present, where substantial costs have been incurred in relation to a relatively small estate."
In Hunt v Yearwood-Grazette at , a decision cited by Lloyd LJ when giving permission to appeal in the present case, Proudman J said:
"The court's task is to balance all the various criteria, resolving any conflict between them arising in the particular case, in order to arrive at the proper level of remuneration. In doing so, it is settled law that the court has to reward the value and benefits of the services rendered rather than the cost of rendering such services. Thus, in fixing the remuneration, time spent is less relevant than value provided. I was referred to the judgment of Ferris J in Mirror Group Newspapers plc v Maxwell and Others (No 2)  1 BCLC 638,  BCC 324 and also Cooper v The Official Receiver  NICh 1. The onus of demonstrating such value or benefit is on the applicant and the court must resolve any element of doubt in favour of the estate."
Remuneration relative to the circumstances of the case
The case under appeal
"As I have only recently been appointed, neither I nor my staff have incurred significant time costs at this stage. It is not yet appropriate, therefore, to provide a breakdown of time costs. This will be provided in due course, when the information will be more meaningful."
Application to annul the bankruptcy
"Following the last hearing of your annulment application on 11 March, I wrote to you on 13 March, 27 March and 10 April. On all three occasions and on numerous occasions before the hearing on 11 March I requested evidence regarding payment of the bankruptcy costs, debts and expenses. To date, the only creditor who has independently confirmed that they have been paid is HM Revenue & Customs although their solicitors have advised that there were some legal costs outstanding. I have no confirmation from either them or you that those costs have been met. You claim that other creditors have been paid but I have received nothing from them confirming final settlement. The one creditor you accept has not been paid is HSBC but I have not received anything from you as to how you intend to re-pay their debt nor have I anything in relation to how you intend to meet the costs and expenses of the bankruptcy."
Proceedings at first instance on the remuneration challenge
The first appeal
"4. It was immediately apparent that the decision of DJ Barraclough could not stand and I gave an oral judgment setting out my reasons. In summary DJ Barraclough did not in fact carry out an assessment of costs at all. He ruled that because Mrs Brook had not filed detailed points of objection the whole of the 2 bills were to be allowed in full. For reasons that I gave I think that was an abrogation of his duty to assess the costs in the circumstances of the case where the costs appeared to be very high and where Mrs Brook was a litigant in person. In those circumstances I ruled that it was open to the Appeal Court (with the assistance of the assessors) to carry out its own assessment of the 2 bills of costs."
"Before considering the Bills of Costs in detail there are a number of observations that seem to me to be relevant:
1. DJ Barraclough commented that the amount of the costs claimed seemed disproportionately high. Both the assessors and I agree with that comment. Indeed we would go further; they seem exorbitantly high. They are the sort of costs that give the insolvency profession a bad name.
2. This was about as simple an insolvency as it was possible to imagine. There were 2 creditors with debts totalling less than £20,000. There were 2 assets – the matrimonial home and the business. The assignment of the lease was to the debtor's husband. The consideration was only £10,000. The landlord had no wish to forfeit the lease.
3. The conduct of Mrs Brook in relation to the application to annul the bankruptcy plainly did increase the costs of the trustee. It may be that if she had followed the advice of DJ Barraclough and taken proper professional advice it might not have been necessary for there to be the 5 hearings that took place. As already noted Mr Shaw did not in reality provide Mrs Brook with points relevant to the points at the heart of the dispute.
4. Mrs Brook's failure to provide a detailed criticism of the 2 bills of costs did not make the matter easy for DJ Barraclough. However there were a number of matters in the 2 bills that cried out for investigation.
5. The decision of the Court of Appeal in Lownds v Home Office (2002) 4 ALL ER 775 establishes that when considering proportionality the court will have regard to CPR 1.1 (2)(c) where proportionality refers to:-
1. the amount of money involved
2. the importance of the case
3. the complexity of the issues
4.the financial position of each party
6. If the global costs are considered disproportionate, then the court will consider the individual items of the bill and allow only those costs that are considered necessary and reasonable in amount. "
"In our view the overall costs in this case are wholly disproportionate to what was involved and what has been achieved. One asset has been realised in the sum of £10,000. The asset was largely realised before the appointment of the Trustee. Furthermore the Trustee has had to deal with the application to annul.
In all the circumstances I propose substantially to reduce the hours claimed on the grounds that they have not been properly and proportionately spent and to apply the hourly rates in the letter."
Submissions and discussion on the present appeal
Lady Justice Black
Lady Justice Arden