England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice
		7th April 2009

MRS. JUSTICE PROUDMAN:

1. This is an appeal pursuant to s.375(2) of the Insolvency Act 1986 and Rule 74(2) of the Rules, against the decision of District Judge Sterlini sitting in the Clerkenwell and Shoreditch County Court on 7^th May 2008. I am asked initially for permission to appeal, required by para. 17.6 of the Practice Direction and Insolvency Proceedings applying CPR 52, Rule 3. If that application is successful, to hear the appeal itself.
2. The respondent, Mr. Yearwood-Grazette, was made bankrupt on 5^th May 1999. Mr. Hunt was appointed his trustee on 14^th September 2004. The background to this dispute is that the first respondent, Mr. Yearwood-Grazette, wanted to settle his debts and put the matter behind him. By June 2005 he had fully cleared the bankruptcy debts; these were for the sums of £11,000 to the Inland Revenue and £858 to Essex and Suffolk Water.
3. The first respondent (and I will refer to him as the respondent throughout for the purposes of this application) realised that he had also to pay Mr. Hunt's fees and expenses, but he disputed the sums claimed. In February 2007, Mr. Hunt applied for an order that the court fix the remuneration which he was entitled to receive for acting as trustee. Although the application notice only mentions remuneration, the District Judge also treated the application as one for a determination of what other expenses were properly payable out of the estate.
4. Mr. Hunt also sought an order for possession and sale of property jointly owned by the two respondents, but that part of the claim was adjourned with liberty to restore. That aspect of the District Judge's order is not subject to this appeal. I note that the principal claim, on the face of the application notice, is for the order for sale and possession. The request for the court to approve and fix remuneration is at no. 7, towards the end of the relief claimed, just before the claim for consequential relief and the claim for costs. However, the issue of remuneration was at the heart of the matter as, by the time the application was made, the bankruptcy debts had long since been settled and there was no other reason for a realisation of estate assets. The claim was, and is, for £19,611.75 comprising: £11,420.50 remuneration; £500 for closure; £891.37 trustee's disbursements excluding legal fees; and £6,345.88 legal fees plus £454 legal disbursements.
5. The District Judge decided that Mr. Hunt was only able to recover from the estate the sum of £2,100 in respect of remuneration and the sum of £1,296.43 in respect of expenses and disbursements. He also ordered Mr. Hunt personally to pay the respondent's costs of the application, which he summarily assessed at £4,840.75.
6. The jurisdiction invoked is the court's general control of the bankruptcy under s.363(1) of the Insolvency Act 1986. As the respondent had cleared his debts, this is not a case where the creditors' committee had an interest in stipulating the basis on which the trustee should charge remuneration. It is common ground that, in exercising its discretion to fix the remuneration, the court should have regard to the Practice Statement, The Fixing and Approval of the Remuneration of Appointees 2004, which sets out the principles which govern the fixing and approval of the trustee's remuneration. These principles are reflected in the more limited statement of Insolvency Practice No. 9 and also in the list of factors set out at Rule 138(4) of the Insolvency Rules. I note that, those Rules do not strictly apply because of the absence of a creditors committee. The Practice Statement contains guidelines only. But, as I have said, it is common ground that the court should have regard to them.
7. The objective of the Practice Statement is stated at para.3.2 to ensure that remuneration is "fair, reasonable and commensurate with the nature and extent of the work properly undertaken by the appointee".
8. I quote the following passages from para.3.4 of the Practice Statement:

(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.

(6) "Proportionality":

(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 may be made, to the extent that 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.

The Practice Statement then sets out the criteria and information which the applicant is expected to provide. In particular by para.5.2(l)(v), he should have explained the benefits that accrued as a consequence of his work.

9. 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 Mr. Justice Ferris in Mirror Group Newspapers v. Maxwell 2 and also Cooper v. The Official Receiver. 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.
10. I note the following chronology in the present case: The respondent requested from Mr. Hunt an estimate of his costs and expenses in December 2004. Mr. Hunt did not respond in detail to that request until a letter dated 27^th January 2005 in which he said:

"At present, since your intention is to settle your bankruptcy debts and expenses in full along with our costs, I anticipate that our costs should be no more than £2,100 including VAT."

11. This fee basis of £2,100 including VAT was expressed to be by reference to the Official Receiver's scale, based on a percentage of assets realised and distributed. Of course, it was, by that stage, clear that the percentage basis was likely to yield nothing as Mr. Hunt was unlikely to have to realise any assets. Both outstanding debts in the bankruptcy were settled with third party funds by June 2005.
12. By telephone and letter dated 21^st December 2005, the respondent requested details of Mr. Hunt's remuneration and expenses for the purpose of settling all outstanding matters. Mr. Hunt did not give a substantive reply until 4^th April 2006. Nevertheless, according to his schedule of time spent, he sought remuneration relating to this period for a final review and two annual reviews which took place within a month of each other and various letters. Mr. Hunt was requiring more than £10,000 to bring the bankruptcy to an end, as can be seen from the enclosure to his letter. That included the costs of annulment proceedings and also the Secretary of State's costs.
13. By letter dated 17^th April 2006, the respondent took issue with the quantum of remuneration and the necessity of the solicitors' fees of the order sought. On 25^th May 2006, Mr. Hunt told the respondent to deal directly with his solicitors. On 13^th June, the solicitors queried whether the bankruptcy debts had, indeed, been settled.
14. There were negotiations for a settlement on the question of remuneration which went on for a substantial period, but which did not, in the event, achieve a settlement. It was not until more than eighteen months after settlement of the bankruptcy debts that Mr. Hunt decided to apply to the court to have his remuneration fixed. As I have said, his principal application was an order for sale of the property for the purpose of applying the proceeds solely to Mr. Hunt's fees and expenses.
15. At the first hearing on 10^th May 2007, District Judge Bowles ordered that there be a detailed assessment in Mr. Hunt's charges, disbursements and expenses and gave directions for the filing and serving of evidence. Further directions were given on 26^th October 2007 enabling Mr. Hunt to file further evidence following criticisms of the evidence he had already filed. I should add, for completeness sake, that at the hearing of 7^th May 2008 when the order which is currently being appealed was made, the skeleton argument of Mr. Hunt's counsel addressed the question of both remuneration and solicitors' fees.
16. The basis for Mr. Hunt's appeal is his claim for remuneration. He has now dropped his case that the court's jurisdiction to fix the proper level of fees and expenses was not properly invoked.
17. Under the heading remuneration a number of points arise. Mr. Hunt submits that the Judge's decision, that he should have provided evidence of why each step taken in the bankruptcy was beneficial, amounted to a failure to apply the proportionality of information principle set out in the Practice Statement or, at any rate, a failure to apply due weight to that factor in the balancing exercise. Mr. Hunt had provided extended timesheets covering his fees, a response on an item-by-item basis to the matters raised by the respondent, policy statements on his charging rates and a statement of his historic charging rates.
18. Mr. O'Mahony, on his behalf, asked rhetorically, what else Mr. Hunt could proportionately have done to explain the fees which he had charged by way of remuneration. Mr. Cumming responded, that he could have explained why the estimate that he had provided in January 2005 fell so far short of the time costs which he sought to charge in April 2006. In other words, what had happened in the interim that Mr. Hunt had not been expecting?
19. In my judgment, Mr. O'Mahony's submission does not give full effect to the Practice Statement. Proportionality of information is to be assessed, among other things, by reference to the nature, complexity and extent of the work done, or to be done, by the appointee and the value and nature of the assets, and liabilities, which the appointee will have to deal with or has had to deal with. Mr. O'Mahony says that, because all that was in issue was Mr. Hunt's own fees and expenses, it was disproportionate to expend significant costs in setting out an explanation of how those costs had been incurred and, in particular, what the value of those costs was to the estate.
20. It seems to me to be implicit in his submission, that he submits that the value was to some extent self-evident. However, proportionality of information is only one of the factors to be weighed. It seems to me that, logically, Mr. O'Mahony's submission promotes it to be an overriding one. If no further explanations are provided, the Judge is unable to take into account the other matters and give them their due weight. In this context, I would refer to the observations of Mr. Justice Ferris in the Mirror case where he said:

"If office holders 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."

Pausing there, Mr. O'Mahony submits, correctly, that Mr. Hunt did do more than merely list the total number of hours and multiply it by the charging rate. However, Mr. Justice Ferris went on to say:

"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 to be 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 test of whether office holders have acted properly in undertaking particular tasks, at a particular cost and expenses and 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. That 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."

21. Later on in his judgment, Mr. Justice Ferris refers to the judgment of Mr. Justice Lawrence in Re Carton Limited, where he said of time basis remuneration:

"It is quite impossible to check the charges based on such a system and to gauge the value of odd hours said to have been spent on the affairs of the company. 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."

Mr. Justice Ferris goes on to say:

"In my judgment, it is vital to recognise three things in this field: (1) 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; (2) Time spent is only one of a number of relevant factors. The others being, as I have said, those which find expression in the Rules. The giving of proper weight to these factors is an essential part of the process of assessing the value as are distinct from the cost of what has been done; (3) 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."

22. I now turn to what the District Judge said in the present case. I start at para. 12 of his judgment where he says:

"It has been suggested, by the applicant, that ample explanation has been provided as to how the costs spiralled following the particular assertion in January 2005. However, on the part of the respondents, it is suggested that the evidence provided is simply inadequate to comply with the requirement in the Practice Statement which is that there should, according to s.5.2(l), be a narrative description and explanation of a whole variety of factors."

He went on to say:

"Simply asserting that X amount of time has been expended by the trustee in undertaking work is not of itself sufficient. There has to be more than that. The question then is has the trustee provided more than that? In my judgment, the answer is no. The trustee has not provided sufficient evidence to satisfy the requirements set out in the Practice Direction. The evidence which was provided is in the form of a schedule which has, in some cases, extremely bland descriptions with no explanations as to [and I consider this to be very significant] the benefit to the bankruptcy of any specific step. I am entitled to infer that there is some benefit to the bankruptcy from the work that was done by the trustee, but I am not satisfied that the evidence here even gets the trustee off the ground.

It is more than surprising, it is almost shocking, that having been given an opportunity since October of last year to file just such evidence, which clearly sets out in a narrative format with an explanation, as to why each step or each particular piece of work was required in more general terms, but, certainly in the form of a narrative that somebody could understand, that has not been done.

I take the view, therefore, that the trustee has failed to provide an adequate explanation. There is no doubt that work has been done, but in determining what work is justified, proportionate, reasonable and what value has been provided and so forth, I am left largely in the dark. I am not satisfied that the documentation that has been provided, in any way, clears this particular hurdle. I am, therefore, left trying to work out just how much the trustee ought to be able to charge."

23. Later on, when hearing further legal argument relating to permission to appeal, the District Judge added:

"The issue of proportionality was clearly a very important issue and I have taken it into account. But the important point about that is very little of what evidence was provided in relation to what work was done addressed the issue of benefit/value, which I consider to be particularly important."

24. I accept Mr. Cummings' submission that the District Judge decided correctly that Mr. Hunt had failed to provide the narrative description and explanation of what he had achieved as trustee, and the benefits that accrued, as a result of the work that he had completed, in accordance with the requirements of para. 5.2 of the Practice Statement. What was needed was an outline of how such benefits in principle accrued to the bankruptcy as a result of the work. It is not disproportionate to require more than a schedule of time spent and costs incurred where what Mr. Hunt was supposed to do was to justify his claim on the basis of the value of the service he had rendered. In any event, the proportionality of the information principle is only one of the principles set out in the Practice Statement which need to be balanced in the exercise of the court's discretion.
25. It is asserted, by way of appeal, that the District Judge's use of figures provided by Mr. Hunt in January 2005 as a benchmark for his costs was unreasonable. However, the District Judge did not simply pick those figures out of the air. He had first satisfied himself that the sum which Mr. Hunt sought on 4^th April 2006 had not been justified and was excessive. It is for Mr. Hunt to establish what he claims to be a reasonable figure. All he has done is to assert that his remuneration must reflect the time which he has spent and the cost to him rather than the value of the services rendered to the bankruptcy.
26. All the other grounds for appeal, other than the first, fall it seems to me to be considered together. The trustee says that it was wrong of the District Judge to take the 2005 figure as a benchmark; he should have analysed the subsequent work of the trustee on a detailed basis and he should have given more weight to offers to settle that were made by the trustee. It seems to me that if the Judge was right to take the January 2005 figure as a benchmark, or at least as a starting point, it was reasonable for him to say that the respondent did not have to pay costs which the District Judge had, in any event, found to be excessive to stop costs rising still further and to stop him losing his house. It is also relevant that the offers to settle were above what the Judge himself fixed and they were above that level on both sides of the equation.
27. It seems to me that the remedy was with the trustee to apply earlier to the court to fix remuneration in order to stop the costs continuing to rise. In any event, I do not find that the District Judge was wrong in finding, in the exercise of his discretion, that the January 2005 figure was a reasonable one or, at any rate, that it was reasonable to hold the trustee to a figure that he came up with, when he apparently had all the relevant information before him, in order to anticipate and predict the costs that he was likely to incur in circumstances where he had not justified his increase according to the factors and principles laid out in the Practice Statement. It was for the applicant to demonstrate why the costs which he claimed were reasonable.
28. I therefore find that there is no real prospect of success in disturbing the exercise of the learned District Judge's discretion in this matter. It seems to me, he weighed up all the relevant factors and came to a conclusion which there is no real prospect of demonstrating was unreasonable.