England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
On appeal from Mr Registrar Jones

		Royal Courts of Justice The Rolls Building, London, WC4A 1NL
		13/06/2014

HHJ David Cooke:

1. This is an appeal by the liquidators of a company against the refusal of the Registrar to order that the fees of solicitors employed by the administrators previously in office, which have been agreed and paid by the administrators, should nevertheless be assessed by the court. It raises issues as to the effect of r7.34 of the Insolvency Rules, which provides that such fees may be fixed either by agreement of the responsible insolvency practitioner or by assessment, in circumstances where a liquidator disagrees with the decision of his predecessor.
2. The company is Hellas Telecommunications (Luxembourg) II S.C.A. ("Hellas II"). It was placed into administration by order of Lewison J. on 26 November 2009 ([2009] EWHC 3199 (Ch)). Although established in Luxemburg, it had taken steps to transfer its Centre of Main Interests to the UK in order that it might reconstruct its affairs under the UK insolvency regime. The administrators appointed were two partners in Ernst & Young. Hellas II's main asset was a company incorporated in Greece, WIND Hellas SA. Its liabilities included €1.8 Bn pursuant to an issue of senior notes, which were secured, and €1.24 Bn pursuant to an issue of subordinated, unsecured notes.
3. The administrators had conducted a pre- appointment auction process and disposed of WIND Hellas SA in a prepack sale to Weather III Finance SarL, a vehicle for the Weather group (the owners of the shares in Hellas II) on terms that Weather III assumed liability for the sums due on the senior notes, paid a cash consideration of a nominal €10,000 and established a fund of €10m to be held on trust by Hellas II to meet the costs of the administration and any subsequent liquidation.
4. There were very limited other assets, so the subordinated note holders would lose substantially all their investment unless additional recoveries could be made from any of a number of claims that they considered might be available to Hellas. An informal committee of creditors ("the ICC") was established to represent their interests (the noteholders were not themselves direct creditors of Hellas II because of the trust structure under which the subordinated notes were established). The ICC was legally represented and apparently pressed the administrators hard over the investigations to be made. For that purpose the administrators employed Slaughter and May, who had also advised them before the administration, and agreed and paid them legal fees of about £2.5m.
5. By the end of 2011 however the administrators had come to the conclusion that there were no claims that could be realistically pursued. They therefore applied for the administration to be brought to an end, and for directions as to what should follow. On 30 November 2011 Sales J ([2011] EWHC 3176 (Ch)) ordered that the administrators should present a petition for compulsory liquidation and a few days after that he made an order bringing the administration to a close pursuant to para 79 of Sch B1 to the Insolvency Act 1986, immediately followed by a compulsory winding up order.
6. The liquidators sought to challenge the fees paid to Slaughter and May and made an application that they be subject to detailed assessment either pursuant to the Solicitors Act 1974 or r 7.34 of the Insolvency Rules 1986, or under the court's inherent jurisdiction. That application came before Mr Registrar Jones, initially on a completely inadequate time estimate as a result of which it was adjourned to a further day and even then required extensive written submissions of counsel before it could be concluded. The Registrar delivered a reserved judgment on 12 November 2013 ([2014] BPIR 179) in which he noted that the liquidators had abandoned reliance on the Solicitors Act, held that the power to order assessment under r 7.34 could not be exercised because the administrators had agreed the relevant fees, and, although he held that the court retained an inherent jurisdiction to order assessment, decided that it would be wrong to do so in the present case, relying on the reasoning of Ferris J in Engel v Peri [2002] BPIR 961 that Parliament had left the decision to employ solicitors and agree their fees to the responsible insolvency practitioner and the court should not usurp that function.
7. From that decision the liquidators now appeal, by permission of the Registrar himself.
8. Mr Davies' submissions commenced with a historical analysis of the difference between the position in insolvency proceedings and in a general solicitor-client relationship, which I shall attempt to summarise. Outside the context of insolvency, a client has the right to apply to have his solicitor's bill assessed by the court, that right being regulated presently by s70 Solicitors Act 1974 and prior to 1974 by the various predecessors to that Act. The right is absolute if the application is made within one month, and otherwise discretionary. An agreement by the client as to the amount of such costs is not itself a bar to an order for assessment, though no doubt it would be relevant on the exercise of discretion. The client may in principle make the application even after the bill has been paid, provided he can show "special circumstances" (s 70(3)) but there is an absolute bar if the application is made more than 12 months after payment (s 70(4)).
9. In bankruptcy and winding up proceedings however Mr Davies submitted (without dissent from Ms Stonefrost) that the assessment has always been taken to be conducted under the inherent jurisdiction of the court, subject to the relevant rules for insolvency proceedings for the time being. He referred me to Re Foss, Bilbrough, Plaskitt & Foss [1912] 2 Ch 161, though the passage quoted in his skeleton argument ("Taxation of costs in a winding up whether voluntary or compulsory ought not to be made under the Solicitors Act… but under the general jurisdiction of the Court") is taken from the headnote rather than the judgment of Neville J, and is potentially misleading because the issue in the case seems to have concerned the procedure for the liquidator to tax the costs of solicitors who acted for the company before liquidation (in order that they should prove as creditors) rather than those employed by the liquidator himself. Other cases cited (Ex p Ditton (1880) 13 ChD 318 and Re Allingham (1886) 32 ChD 36) also related to the claims of solicitors as creditors. Re Marsh (1885) 15 QBD 340 however related to the costs of a solicitor instructed by a trustee in bankruptcy, and the Court of Appeal upheld a decision that on taxation of his costs the Solicitors Act did not apply (so that the solicitors were not liable for the costs of taxation despite their bill having been taxed down by more than one-sixth). Mr Davies said he had found no instance of a liquidator seeking taxation or assessment of costs of solicitors employed by him under the Solicitors Acts.
10. Prior to the Insolvency Act 1986 the position in bankruptcy was that taxation of costs of solicitors and other persons employed by the trustee in bankruptcy was mandatory (s 83 Bankruptcy Act 1914). The same applied in compulsory (but not voluntary) winding up, r 195(2) of the Companies (Winding Up) Rules 1949 providing that in a winding up by the court no amount was payable out of the assets in respect of a solicitor or similar agent employed by a liquidator unless the costs had been taxed. The taxation was to be conducted on the assumption that the costs had arisen in the course of proceedings (r 188) and in Re Nation Life Insurance Co Ltd [1978] 1 WLR 45 Templeman J held that this normally meant a taxation on a common fund (rather than solicitor and own client) basis. One effect of that basis would be that the liquidator could not bind the taxing officer by agreeing the amount of costs (see ibid p 49G). The mandatory requirement for taxation would also no doubt have meant that the time limits on the right to apply for taxation under the Solicitors Act could not sensibly apply, and it would be consistent with the theory that the taxation was taking place under the inherent jurisdiction of the court and/or the requirements of the winding up Rules that they should not.
11. It was said in the same case that "the solicitor has no client" (p50A), apparently on the basis of earlier authority to the effect that "there is no such thing as solicitors to the liquidator" (per Vaughan Williams J in In re London Metallurgical Co. [1897] 2 Ch 262) and that the liquidator was not personally liable for the costs. It is not an issue I have to decide, but it seems to me that it may be arguable that the solicitor does have a client, namely the company in liquidation on whose behalf the liquidator exercises his power to employ a solicitor. A fortiori in the case of a solicitor employed by an administrator, who is expressly constituted the agent of the company (see Insolvency Act 1986 Sch B1 para 69).
12. Whether that is right or not, it was on the above basis that Mr Davies had abandoned reliance on the Solicitors Act before the Registrar, which he did not seek to reopen before me. Nevertheless, a number of his submissions referred to that Act.
13. Instead the argument focussed on the exercise of the inherent jurisdiction and the extent to which it was controlled or limited by the Insolvency Rules 1986, as amended from time to time. The 1986 Act and Rules were enacted following the Cork report, which as the Registrar noted contained the following:

"Taxation of Costs

797. This is another matter where the rules relating to different insolvency proceedings vary and where, in our view, they should be harmonised. In bankruptcy and in a compulsory winding up, all bills and charges of "any solicitor, manager, accountant, auctioneer, broker or other person" are required to be taxed before payment. In a voluntary winding up, however, there is no taxation unless required by the liquidator, and we have been informed that this works satisfactorily.

798. … We agree that it is unnecessary to require taxation in every case …

799. We therefore recommend that there should be no requirement for the taxation of costs in any insolvency proceedings unless ordered by the Court or required by the liquidator, the trustee, the administrator, or the committee. "

14. Insolvency Rule 7.34 as originally adopted provided as follows:

"7.34(1) Subject as follows, where any costs, charges or expenses of any person are payable out of the insolvent estate, the responsible insolvency practitioner may agree them with the person entitled to payment or may require them to be taxed by the court …"

15. This language had been amended by the time Hellas II went into liquidation, the relevant provisions (referred to in the proceedings as "the applicable rules") then reading as follows:

"7.34(1) Subject as follows, where any costs, charges or expenses of any person are payable-

(a) in relation to a company insolvency, as an expense of the liquidation, or

(b) …

the amount of those costs, charges or expenses shall be decided by detailed assessment unless agreed between the responsible insolvency practitioner and the person entitled to payment, and in the absence of such agreement the responsible insolvency practitioner may serve notice in writing requiring that person to commence detailed assessment proceedings in accordance with CPR Part 47 …

(2) If a liquidation or creditors' committee established in insolvency proceedings (except administrative receivership) resolves that the amount of any such costs, charges or expenses should be decided by detailed assessment, the insolvency practitioner shall require detailed assessment in accordance with CPR Part 47.

…

(4) In any proceedings before the court, including proceedings on a petition, the court may order costs to be decided by detailed assessment.

…"

16. In addition, Insolvency Rule 13.9 provides as follows:

"13.9 In relation to any insolvency proceedings, "the responsible insolvency practitioner" means –

(a) the person … acting in a company insolvency, as supervisor of a voluntary arrangement under Part 1 of the Act, or as administrator, administrative receiver, liquidator or provisional liquidator;

(b) …"

It was not in dispute that in relation to the costs of solicitors instructed by the administrators they were "the responsible insolvency practitioner", subject to one point as to an approval given after they left office.

17. Although the applicable rules refer only to costs payable "as an expense of the liquidation" in apparent contrast to the original "out of the insolvent estate", the Registrar held at paragraphs 55-56 of his judgment that Rule 7.34(1) must be interpreted so that it also applied to costs and charges incurred in an administration. Neither party challenges that interpretation. In this respect, the original language has been effectively restored by subsequent amendment in 2010.
18. It is to be observed that the rules in force since 1986 apply to the costs of "any person". They are certainly not limited to solicitors, or even to the extent that any limit might have been implied by the non exclusive list set out in the 1949 winding up rules. They might thus apply to any contract for services entered into by the insolvency practitioner, such as those of a builder or commercial agent.
19. In relation to the construction of r 7.34(1) the essence of the Registrar's decision is in the following extracts from his judgment:

"57. The important point is that Rule 7.34(1) expressly provides that a detailed assessment will be ordered "unless" there has been agreement between the insolvency practitioner and the person entitled to payment. This implemented a recommendation of [the Cork Report]…

58. This means Rule 7.34(1) will not apply to the Application in any event because of the agreement reached between the Administrators and Slaughter and May. It also identifies an important and relevant shift in the intention of Parliament. Previous Insolvency Rules had provided that the costs charges and expenses incurred in a compulsory liquidation should be taxed … Parliament expressly provided within Rule 7.34(1) for agreement to exclude the requirement for detailed assessment… "

20. Mr Davies submitted that it was wrong to conclude that agreement of the costs ousted or barred the ability to seek detailed assessment. In part his arguments bear on the question whether the court has, or should exercise, any residual discretion to order assessment despite agreement of costs by the practitioner, but I address here those that bear on the question of the Registrar's construction of the applicable rules.
21. There was no indication, Mr Davies said, that Parliament intended a sea change in 1986 from the position that all costs must be taxed to one in which assessment was barred merely by the agreement of the insolvency practitioner, which might be given without any formality and need not even be in writing. The rule as drafted in 1986 was poorly written, not specifying whether taxation was to be on a solicitor and client basis or some other basis, and did not expressly say that agreement of the insolvency practitioner barred assessment. It did not include the word "unless" relied on by the Registrar, and the further changes in the Rules between 1986 and 2009 were not as a result of any fundamental change in policy. The principle behind the recommendation of the Cork Report was only that taxation should not be required in every case, not that agreement of costs should irrevocably bar the entitlement to tax them. Even if there had been an agreement, the responsible insolvency practitioner could therefore change his mind and later require taxation, on the basis that "there is no estoppel against a statute", and might be required to do so under r 7.34(2) if the creditors committee required him to insist on taxation. The Registrar was said to have failed to have regard to this right of the committee. If the responsible practitioner could change his mind, his successor in office (whether the same office or a different one such as a liquidator) could reach a new decision. It was said that if Parliament had intended to single out costs in insolvency as the only category of solicitors' costs that could not be assessed notwithstanding that they had been agreed it would have said so expressly.
22. In my judgment however the Registrar's interpretation was correct, and none of the matters argued by Mr Davies is a sufficient reason to reach any other construction. The change in the Rules from the pre 1986 position, whether looked at in the 1986 version or the version in force in 2009, was substantial and plainly intended, in my view, to introduce an alternative means by which the amount of costs of solicitors and others payable from the estate could be determined. It was, in the terms he used, a "sea change". The power to decide whether the costs should be agreed or assessed is clearly given to the responsible insolvency practitioner, and the change would be of little if any purpose if it did not mean that a decision to agree costs would have a binding effect.
23. This is in my view equally the case with the language used in the 1986 version ("the responsible insolvency practitioner may agree them… or may require them to be taxed by the court…") as with that in the applicable rules ("shall be decided by detailed assessment unless agreed…"). As to whether the responsible insolvency practitioner might in any circumstances change his mind and require assessment of costs he had previously agreed, it seems to me that is not an issue that arises in this case, since no such decision has been made by the administrators. The Registrar did not make any decision that the administrator could not go back on his agreement, and did not need to do so to answer the question before him. The question whether solicitors costs in insolvency have in some way been "singled out" as being incapable of challenge after agreement on behalf of the client therefore does not arise.
24. The decision to seek to assess the costs in this case is that of the liquidators, not the administrators. But they are not the responsible insolvency practitioners in relation to a decision to agree the costs of Slaughter and May payable as expenses of the administration. R 13.9 defines the responsible insolvency practitioner "in relation to any insolvency proceedings", so there can be no doubt that in relation to the administration the administrators in office for the time being are the "responsible insolvency practitioners". I reject the suggestion that decisions of the administrators in the course of the administration could be retaken or undone by liquidators subsequently appointed; those liquidators become the responsible insolvency practitioners in relation to the liquidation but not the earlier administration. Once the costs payable as expenses of the administration have been determined, there is no remaining issue as to that determination to be addressed in the subsequent liquidation, in relation to which the liquidator is the responsible practitioner.
25. The question as to what would happen if the administrator had agreed costs but the committee of creditors in the administration subsequently resolved that they should be assessed was discussed in argument. Consistently with his general approach, Mr Davies submitted that the administrator would be entitled and bound to go back on the agreement and require assessment. That is also, it seems to me, a question that does not arise on the facts in this case, and I say no more about it than to observe that if the position was previously in doubt it may have been clarified in the language adopted in the 2010 amendments to the rules, which now provide that the committee may require the practitioner to commence assessment proceedings "in the absence of agreement" of the amount.
26. Whether the rules fail to clarify the basis of assessment if the responsible practitioner requires it seems to me to be irrelevant to the question whether he may effectively elect to agree the costs instead.
27. One further point as to construction of r 7.34 arose in relation to s 7.34(4). Mr Davies argued before the Registrar that the administration was a "proceeding before the court" within the meaning of that sub paragraph, with the result that the court had jurisdiction to direct assessment at any time, irrespective of any agreement of costs by the administrator. In his skeleton he submitted that the Registrar had wrongly held that the power under r 7.34(4) was also impliedly limited to cases where the costs had not been agreed.
28. The Registrar held at paragraphs 57-64 of his judgment that r 7.34(4) related only to the costs of litigation, not the general costs incurred in the insolvency procedure. In my view, he was right to do so. He held that r 7.34(4) was derived from r 187 of the 1949 winding up rules, which dealt with the costs of parties to or persons affected by "any proceedings in the winding up of a company" ie litigation in connection with the winding up. The subject matter of the two rules is not the same, but the essential point in my judgment is that both recognised that the court retained power in litigation before it to make an order for assessment of costs relating to that litigation, and that this was distinct from the question of the costs payable from the estate in the general conduct of the insolvency.
29. This interpretation is in my view also clear from the language of the applicable rules, sub para (4) referring to "proceedings before the court" whereas sub paragraphs (1)-(3) refer to "insolvency proceedings" and "the court to which the insolvency proceedings are allocated", with provision for cases where there is no such court. If intended to be a general overriding power in relation to all costs incurred in insolvency proceedings, there would be no reason to distinguish between those insolvency proceedings that were begun by court process and those that were not, so that r 7.34(4) would also refer to "insolvency proceedings" and specify which court could make the order in the same way as r 7.34(1) does. Further, if that had been the intention, it would have been easier to incorporate the power into sub para (1) itself.
30. At para 64 of his judgment the Registrar held that there was jurisdiction to order assessment of solicitors costs under r 7.34(4) if "the bill refers to legal proceedings". One invoice rendered by Slaughter and May was dated 22 December 2012 and related to the proceedings before Sales J in which directions were sought with a view to bringing the administration to an end. The administrators' costs of those proceedings were referred to in the order of 30 November 2011 which provided that they and the costs of the ICC "be treated as an expense in the administration and be paid from [the €10m fund]". Sales J did not make any order for assessment of either set of costs. At paragraphs 65-7 of his judgment the Registrar held that the order of Sales J therefore did not affect the jurisdiction of the court to order assessment on the application before him, but that r 7.34(4) must be impliedly subject also to the qualification that assessment should not be ordered if the responsible insolvency practitioner had agreed the costs, in order to be consistent with r 7.34(1).
31. Ms Stonefrost challenges by Respondent's notice the conclusion that it was open to the Registrar to direct assessment of the 22 December bill under r 7.34(4). I accept her submission that the Registrar was wrong to describe the effect of that rule as applying to any bill "that refers to legal proceedings". Given that the power in r 7.34(4) is to make an order "in … proceedings before the court" it can in my judgment only sensibly be construed as applying to a costs order made in those proceedings (whether in relation to a party or otherwise) by the court seized of the proceedings in question. Thus, if assessment was sought of the costs of the proceedings before Sales J, the application and order ought to have been made in those proceedings and not later by application in the insolvency proceedings. Otherwise, the rule would amount to a general power of the court in the insolvency proceedings to order assessment retrospectively of the costs of proceedings dealt with by another court.
32. If the order is to be made by the court seized of the proceedings, there can in my judgment be no ground for holding that the power of that court is limited to cases where the costs are not agreed. It is true that in very many cases the order made in respect of costs of litigation is that costs are "to be assessed if not agreed", and if an order is made in those terms the "agreement" would be that of the responsible insolvency practitioner as the person with the power to conduct the proceedings on behalf of the insolvent estate. But I do not think the rule intends to exclude the possibility that the court in particular proceedings before it might conclude that assessment of costs was required and so order without leaving the matter to the discretion of the insolvency practitioner. An obvious example might be if the court making a winding up or administration order considered that the costs of the petitioner or applicant were apparently excessive.
33. Sales J did of course make an order as to costs, which directed that the costs of both parties be treated as expenses of the administration. He did not require them to be assessed. The effect of that order, it seems to me, is that they are costs payable out of the estate and fall within r 7.34(1), so that the responsible insolvency practitioner had power either to agree them or require them to be assessed.
34. A further point in relation to this invoice was however taken in Ground 5, which was that the decision to approve it was (as is accepted) made after the administration came to an end, by which time it is said the former administrators had no authority to do so. Ms Stonefrost objected that this was not a point that had been taken before the Registrar, but in my judgment it is a point which should nevertheless be allowed to be taken on appeal. It is a pure point of law, not requiring any finding of fact and not affecting the way in which any party presented its evidence or argument below (see per Arden LJ in Crane v Sky In-Home Ltd [2008] EWCA Civ 958 at para 22). Ms Stonefrost had addressed it in her skeleton, at para 41, submitting that the solicitors costs were expenses of the administration covered by the statutory charge on assets handed over to the liquidator (Sch B1 para 99(3)) and that it was clear from the general scheme of the Insolvency Act and Rules that the conduct of an administration was to be wholly separate from a subsequent liquidation, and clear from Chapter 6 of Part 7 of the Insolvency Rules (ie rr 7.33-42) that the person who is to decide whether costs should be agreed or assessed is the practitioner responsible for incurring those costs, ie in this case the administrators and not the liquidators.
35. It is of course the case that under para 99(3) if the administration comes to an end the amount of the administrators' expenses payable out of the estate but not yet paid is charged on the assets remaining. But that implies nothing about how the amount of those expenses is to be determined, if that remains to be done. That mechanism is provided by r 7.34(1) of the applicable rules, under which the default position is that assessment is required unless the costs have been agreed by "the responsible insolvency practitioner". That expression is defined in r 13.9 and in relation to an administration means "the person acting… as administrator". As a matter of ordinary language, this cannot in my judgment be construed as extending to a former administrator whose period of office has come to an end. The present tense implies that the person concerned must be acting, ie hold office, at the time the relevant decision is taken.
36. Further, since there might be a number of people who have at different times held office as administrator, any other construction would raise the question which of them should take the decision. Suppose the administrator originally appointed had been removed and replaced by another. If Ms Stonefrost is right it would seem that the former administrator would retain power to bind the estate in relation to the expenses he incurred, notwithstanding his removal. That would be a very surprising position, not least because he may have been removed for incurring excessive cost.
37. There is nothing in the language of rr 7.33-42 of the applicable rules to support Ms Stonefrost's submission. Insofar as they identify who is to act in any given circumstances, it is by reference to "the responsible insolvency practitioner" with no further elaboration or qualification as to responsibility for incurring the costs in question.
38. I do not consider that this is altered by the fact that para 111(1) of Sch B1 provides that in that Schedule the term "administrator … where the context requires, includes a reference to a former administrator". This is not a point raised by either counsel, so I have considered it without the benefit of their submissions. On the assumption that this expanded definition also applies in the Rules (curiously, the Rules do not provide expressly that terms defined in the Act have the same meaning in the Rules; see rr 0.2, 2.1 and Part 13) it cannot in my view be said that the "context requires" that the term "responsible insolvency practitioner" must include a former administrator, either generally (since that would extend all the powers of the administrator to periods after he leaves office) or in r 7.34(1).
39. In the latter case, the extended meaning would create the difficulties referred to above of determining which of several successive administrators could agree costs, whether one of them was still in office (as where one had been replaced by another) or all of them were past office holders because the administration had come to an end. The extended meaning could not be confined to cases in which there was only one former administrator, or there was no continuing administration, because the "context" concerned is the context in which the term is used in the relevant rule, not the factual context in which the rule comes to be applied.
40. There is in my judgment no lacuna in r 7.34 requiring to be filled by an extended definition in any event. If an administrator leaves office without the amount of his expenses having been determined, the determination can still take place. If the company continues in administration, any successor as administrator may take as decision as the responsible insolvency practitioner. If it goes into liquidation, the quantification of the amount charged on the assets in the hands of the liquidator is a matter that requires to be dealt with in the liquidation, in relation to which the liquidator is the responsible practitioner, so that he may agree them under r 7.34(1). If he does not do so, the default requirement for assessment takes effect. If the company does not enter liquidation, as may happen if it is solvent and returned to the directors, it may be the Rule has no further application, in which case the directors could exercise the company's right to agree or require assessment, but if the Rule does apply and there is no longer any responsible insolvency practitioner, the costs must be assessed, as no doubt they could be on the application of the creditor.
41. It follows that in my judgment the Registrar was wrong to consider that the 22 December bill was governed by r 7.34(4) and/or had been validly agreed by the administrators or former administrators. Since the liquidators did not agree it, assessment was required by r 7.34(1). I would vary his order accordingly.
42. In relation to the remainder of the invoices, Mr Davies' argument and the grounds of appeal proceeded on the basis that the Registrar had decided that where r 7.34(1) applied the court had no remaining inherent jurisdiction to direct assessment after a decision of an administrator to agree fees. This was expressed in various ways; that "an Agreement removed the jurisdiction of the court to assess insolvency costs", that the Registrar had "wrongly accorded supremacy to an Agreement" or decided "that the court had no inherent jurisdiction to direct an assessment".
43. This is not however a fair reflection of the Registrar's judgment, as shown by the following extracts:

"69. Mr Davies QC submits that the court has an inherent jurisdiction… to order an assessment even if it cannot be ordered under Rule 7.34. There are two sources of law to consider… The second is the inherent jurisdiction to control insolvencies…

74. … the Court of Appeal's decision in Donaldson v O'Sullivan (Official Receiver intervening) [2008] EWCA Civ 879…is of particular relevance to the Application because it explains the extent of the court's inherent jurisdiction to control the insolvency. I refer to paragraph 41:-

"All of those cases seem to me to support the thesis that bankruptcy is a court-controlled process in relation to which the court has wide powers, exercisable for the purpose of the insolvency process as a whole, which are not limited to those conferred expressly by the relevant legislation. There are non- statutory elements in the law of bankruptcy, such as the principle in Ex parte James, even though these may result in an application of assets which is not strictly in accordance with legal rights and obligations. There is also scope for the court to direct that things be done (or not done) in apparent conflict with express provisions of the legislation. Clearly if the Act said in terms that the court could make a certain kind of order only in given circumstances, it would be a very strong construction to hold that it could do so in other circumstances as well. That is not the present case…"

75. Whilst expressly referring to a bankruptcy there is no doubt that passage applies to all insolvencies controlled by the court and therefore to this court appointed administration. As a result it follows from Paragraph 41 that there is an inherent jurisdiction of control to enable the court to ensure that the whole purpose of the insolvency process is achieved. It confers wide powers on the court to achieve this, as demonstrated by the principle in Ex p. James LR9 Ch App 609 which can lead to decisions that do not strictly accord with existing legal rights and obligations.

76. Therefore in principle that inherent jurisdiction can be invoked even when to do so would be in conflict with an Insolvency Rule. However it is also apparent from the judgment of the Court of Appeal that the court will be very cautious in exercising this jurisdiction when it appears to be in conflict with a legislative provision. It will be exceptional… 81. The remaining question therefore is whether the inherent jurisdiction should be applied to order a detailed assessment of bills that have been agreed… "

44. In the following section of his judgment, headed "Application of the inherent Jurisdiction", the Registrar considered whether he should use the court's inherent jurisdiction to direct an assessment. In the course of doing so he made several remarks to the effect that he felt there were circumstances strongly pointing towards doing so. At paragraphs 38-51 of the judgment he set out the criticisms Mr Davies made of the way Slaughter and May were instructed and their fees approved, which in summary were that the solicitors were asked to act without any competitive process or negotiation of their fees in advance because they were well known to and had often worked with the administrators (though he also said "this need not necessarily be of concern") and their invoices were agreed and paid in full without deduction or, on the evidence before him, investigation of the hours recorded on the timesheets provided, save for the final invoice covering matters arising after the final hearing before Sales J which the solicitors apparently of their own initiative reduced by 50%, as they said "to reflect the significant amount of work recorded in connection with extensive but largely administrative post-hearing matters".
45. The Registrar set out and accepted as applying to the application before him an extract from an extrajudicial speech of Lightman J in 1997, in which he said that since administrators acted as fiduciaries it was to be expected that they would carefully select and negotiate the charges of their solicitors, generally conducting a tendering process and closely monitoring the work done and fees charged. These the Registrar said were matters following from the decision of Ferris J in Mirror Group Newspapers v Maxwell (No 2) [1998] BCLC 638. Without downplaying the importance of the administrators' fiduciary role, it is to be observed that Ferris J did not in that case make any statement, still less any decision, as to the procedure insolvency practitioners should adopt in appointing or agreeing the fees of solicitors or other agents. The case concerned mainly the remuneration of the office holders themselves. Where he dealt with questions of their solicitors' fees Ferris J emphasised that primary responsibility for agreeing these fees lay with the office holder, and deprecated any suggestion they should simply pass over the fees to the court for assessment without expressing any view of their own. He said this (p 660):

"… it is, in the first instance, for the receivers as the paying party to decide whether or not they accept Nabarro Nathanson's accounts in full. If they do accept and pay the accounts their conduct may subsequently be attacked if there are grounds for such an attack. It may be said that the charges are excessive and should have been reduced pursuant to negotiation or taxation. If such an attack is made and succeeds the extent to which the charges for which the receivers have become liable can be satisfied out of the estate will be adjusted accordingly. If the receivers are sufficiently confident about their decision to run the risk of such an attack being made there is nothing to prevent them taking such decision, but they will bear the consequences personally if an attack on their decision is made and succeeds."

46. The Registrar remarked that the approach taken gave rise to a perception of a "club mentality", an "unsavoury tang" and "a very unattractive scenario". At paragraph 84 he said that "the law should provide some form of control or remedy". He then referred to Engel v Peri. That case arose from an application by a bankrupt to annul his bankruptcy, in the course of which an application was made under s 303 Insolvency Act 1986 for the court to reverse or modify the decision of the trustee in bankruptcy to approve the fees of his solicitor, on the grounds that they were excessive. The Registrar had cited the following as expressing Ferris J's approach:

"[34] So far in this section of my judgment I have considered the s 303 application only insofar as it relates to the remuneration of the trustee. However it relates also to the legal fees incurred by the trustee and asks that these be 'refixed' by the court. This part of the application seems to proceed on the basis of a misapprehension of the court's powers in respect of legal fees. The court has no power either to fix or to re-fix these. The decision whether to obtain legal advice was one for the trustee to take. Having obtained legal advice it was for him to decide whether to pay or challenge his solicitor's bill. It is not for the court to do any of this. If, however, the trustee acts outside the generous scope of his discretion in these matters it may be possible to challenge his accounts to the extent that they show that the trustee has acted unreasonably or improperly in incurring legal or other costs.

[35] A challenge to the trustee's decision in relation to such costs is therefore possible, although the circumstances need to be quite unusual for the challenge to have a real prospect of success. So far as procedure is concerned, the incurring of legal fees will inevitably have been the result of an act or decision on the part of the trustee, so that s 303 affords a means of bringing the challenge before the court."

47. The Registrar then said this:

" 91. Mr Justice Ferris's reasoning in the context of the trustee's decision to pay legal fees is significant. Parliament conferred the decision-making power on the officeholder. The court should not therefore interfere with the decision. If the decision is based upon an incorrect exercise of that power, a claim lies against the officeholder. The remedy is not for the court to exercise the power and reach a new decision. This is entirely consistent with the approach the court generally takes if asked to give directions upon matters which require the exercise of commercial judgment by an administrator. The agreement of costs thereby avoiding a detailed assessment is such a matter.

92. In my judgment I should and I am bound to apply that reasoning unless there is cause to distinguish this case.

93. The obvious distinction is that Mr Justice Ferris was not concerned with any challenge to the conduct of the officeholder and the solicitors leading up to the agreement of the fees to be paid. He was concerned purely with the merits of the decision to pay the fees. In contrast the criticisms I have identified within this judgment lead me to conclude that the facts are so unsatisfactory and so contrary to the purpose of the statutory process that this would be an exceptional case justifying the application of the inherent jurisdiction if it applies.

94. However, the following points must be taken into account in order to decide if the inherent jurisdiction applies:-

…

95. Whilst I strongly criticise the events leading to the administrators' decisions, in my judgment those points lead me to the conclusion that the application cannot be distinguished. The reasoning of Mr Justice Ferris should be applied not the inherent jurisdiction…"

48. I have not set out in full the factors that the Registrar referred to; in summary they were that the decision of the administrators to agree fees was made in the exercise of power given to them by parliament; in the course of doing so they had made binding contractual agreements with the solicitors, who are independent contractors, and that if the administrators had acted unreasonably or improperly when exercising their power to agree the fees a remedy would lie against them, which he considered to be appropriate.
49. I do not take the Registrar to be holding in these paragraphs either that the court has no remaining inherent jurisdiction to direct an assessment, or that if there would otherwise be any such residual jurisdiction, it is necessarily excluded by the fact that the fees have been agreed. Rather, in considering whether the inherent jurisdiction "applies" and whether Engel v Peri could be "distinguished", it seems to me that he is accepting that in principle the jurisdiction existed and then considering whether it ought to be exercised in the circumstances. He concluded that it should not be, and that the factors which led to the criticisms he had expressed did not outweigh the fact that the regime provided by the Insolvency Rules was for the responsible practitioner, and not the court, to decide whether the fees should be assessed.
50. In doing so, he was exercising a discretion, which can only be interfered with on appeal if it was plainly wrong, took into account irrelevant matters or failed to take account of relevant matters. In my view, he did not fall into any of these errors, for reasons I shall expand on below, so that (save as set out above) his order should be upheld.
51. Given that this is the view that I take of the Registrar's decision, it seems to me that a substantial amount of the argument before me as to whether there was or was not any residual inherent jurisdiction, or whether the Registrar was bound as a matter of authority by Engel v Peri to hold that there was no such jurisdiction, falls away. Accordingly I will record only briefly the submissions made. Ms Stonefrost's submission, in contrast to that of Mr Davies, was that the Registrar had held that in principle the inherent jurisdiction was available and could be invoked, but that he ought instead to have found (as Mr Davies said that he had in fact found) that that jurisdiction had been wholly ousted by the provisions of the Rules conferring the power to decide whether to agree fees on the responsible practitioner. She had referred me to Harrison v Tew [1990] 2 A.C. 523 but accepted that that case decided only that any inherent jurisdiction to order assessment of costs between solicitor and client more than 12 months after the costs had been agreed had been ousted by section 70(4) of the Solicitors Act. Nevertheless she submitted that it would be inconsistent with the provision now made in the Insolvency Rules for there to be any remaining discretion vested in the court. She accepted that Engel v Peri was not a binding decision to that effect, but said that the reasoning expressed by Ferris J in that case supported the conclusion that Parliament intended that the agreement of fees was a matter for the petitioner alone.
52. In that case, Ferris J held that the bankrupt had standing to make an application under s 303, and as is apparent from the passage I have quoted above that in principle the court could, if the circumstances were appropriate, consider a challenge to a decision to incur, or agree the amount of, legal fees on such an application. He emphasised the fact that the circumstances leading to a successful challenge would be exceptional. I am bound to say it is not entirely clear from the above passage whether Ferris J considered that the consequences of a successful challenge would simply be the reopening of the trustee's accounts (so preventing him from recovering from the estate some or all of the costs he had agreed to pay his solicitor) or something more. In principle, it seems to me, if an order were made, for instance, reversing a decision of the trustee to agree fees for the purpose of r 7.34 the consequence would be that that decision was a nullity. The trustee would in principle be entitled to take it again, but no doubt he could be directed, if appropriate, not to agree the costs with the result that they would have to be assessed pursuant to r 7.34(1).
53. It seems to me that this is the context in which Ferris J's statement that the court has no power to fix or refix the remuneration of the solicitors must be understood. There is no power under the Rules to do so directly, where the fees have been agreed by the trustee. But of course if the trustee had not agreed the fees, the court would be required to "fix" them on an assessment as required by the Rules. And in exceptional circumstances, the court may conclude that a decision to agree fees should be reversed, which may result in the fees falling to be assessed by the court.
54. I do not consider that Ferris J was addressing the question whether the court has any residual inherent jurisdiction to direct an assessment of legal costs in circumstances where the responsible practitioner has agreed them and there is no power available to reverse that decision. He cannot therefore in my view be taken to have ruled that there was no such jurisdiction.
55. I cannot exclude the possibility that such circumstances may arise. S 303 has no application to administrations. There may be a question whether there is any equivalent power in administrations to reverse or vary a decision taken by the officeholder. There is power to apply to the court under para 74 of Sch B1 on the ground that an action of the administrator unfairly harms the interests of one or more creditors or members, but even assuming the relief available includes power to nullify the action challenged, the application may only be made by a member or creditor. No such application was made in this case, so I do not have to decide whether it would be open to the liquidator, perhaps on the ground he is a creditor for his own remuneration and expenses.
56. Depending on the circumstances, a decision to approve fees may be capable of being set aside on general principles, for instance if it were taken fraudulently by the practitioner himself, or procured by fraud on the part of the person whose costs would be paid. But it seems to me that it cannot be said that such a remedy would be available in all cases so that there can be no other circumstances in which it may be necessary for the court to exercise an inherent jurisdiction, and in which it may be appropriate to conclude that Parliament had not intended to exclude the possibility of the court so acting. Accordingly, and since I have decided to uphold the Registrar's order on other grounds, that is not a matter I have to decide on this appeal and I decline to express any opinion on it.
57. I consider Mr Davies' criticisms of the Registrar's decision then on the footing that they are challenges to his exercise of a discretion. These were (from the Grounds of Appeal):

i) The Registrar ought properly to have recognised that the restrictions and limitations of the Solicitors Act 1974 were inapplicable to insolvency costs and that the purpose of an assessment of insolvency costs was to protect creditors. This ground is hard to understand. Mr Davies had abandoned any reliance on the Solicitors Act. The Registrar did not base his decision on any limitations on the power to assess costs under that Act, and it is plain from his decision that he was well aware that the reason he was being asked to direct an assessment was because the costs were said to be excessive.

ii) The Registrar had wrongly and unnecessarily placed creditors in a worse position than all other persons entitled to an assessment under the Solicitors Act (pursuant to which agreement and/or payment of costs does not oust the jurisdiction of the court). Mr Davies having abandoned any reliance on the Solicitors Act, I do not see how he can properly suggest that the liquidator has been deprived of advantages he would have under that Act. In any event, for the reasons I have given, the Registrar did not find that jurisdiction had been "ousted".

iii) The Registrar failed to have regard or sufficient regard to the fact that the administrator has no personal liability and therefore no personal interest in ensuring that unreasonable costs are avoided. It is not true to say that the decision of the administrators does not involve any risk of personal liability; he may not be personally contractually liable to the solicitor, but if he acts unreasonably or improperly in agreeing the fees he is exposed to personal liability to the estate, as the Registrar plainly recognised.

iv) The Registrar had taken into account the existence of a potential remedy against the practitioner, but failed to take into account that loss could not be proved without an assessment of the costs of the solicitor. This point I consider to be simply wrong. If the administrators were found to have acted in breach of duty in agreeing the costs in the manner that they did, the court would necessarily have to assess whether any loss had been suffered, and if so quantify it, without conducting an assessment as between the administrators and the solicitor. If necessary no doubt loss could be assessed on the basis of the loss of a chance of having the solicitors' bill reduced on assessment. The exercise would be no different, in principle, to that which the court is required to conduct when solicitors have negligently lost their client the opportunity to pursue proceedings against a third party.

v) The Registrar had promoted the "club mentality" that he had criticised in that his decision meant that once the administrators had agreed the fees the only remedy available to creditors was a claim against the administrator, which could only be brought on the basis that his decision to agree the fees was perverse. This however seems to me to be merely a pejorative way of saying that the Registrar should not have had regard to the fact that the statutory regime placed the decision in the hands of the practitioner, whereas in fact this was plainly a highly relevant consideration and he was right to consider, as Ferris J did in Engel v Peri and Maxwell, that the circumstances in which his decision could be challenged or overridden by the court would be exceptional.

vi) The Registrar had wrongly interpreted either the purpose of the recommendations of the Cork Committee or the decision in Engel v Peri as meaning that agreement of costs by the practitioner would preclude any possibility of the court ordering an assessment. The Registrar did not however in my judgment conclude that jurisdiction to order an assessment was excluded on either of these bases, for the reasons I have given above.

58. I do not consider that the Registrar's decision was wrong, let alone so plainly wrong that it was not a decision he could properly have reached on the material before him. He was, as I have said, plainly right to have regard to the fact that the statutory regime as a matter of policy places the decision in the hands of the practitioner, to be exercised as a matter of commercial judgment. I agree with Ms Stonefrost that there is commercial importance in the position that third parties (not necessarily solicitors) dealing with the insolvency practitioner should have certainty as to their position if they agree their charges with the person they regard as being in the position of their client, and that decisions so made should not be easily overridden at the instance of a subsequent liquidator, or, potentially, by creditors or directors who may have an axe to grind. The practitioner is accountable for the decisions he takes, but should be no more and no less exposed than he would be in the case of any other commercial decision taken in the course of administering the estate.
59. In this case, although the Registrar considered that the criticisms of the way in which the solicitors had been instructed and their fees agreed were substantial, they were essentially as to matters of procedure in that the administrators have failed to follow desirable, but non-mandatory, processes of tendering, negotiation and monitoring of fees. To the extent (if at all, and it is important to remember that the administrators were not party to the application before the Registrar, have not had these criticisms put to them and have therefore had no opportunity to respond to them) that they were at fault in any of these respects, the Registrar was entitled, and in my view right, to take the view that the appropriate remedy lies against the administrators, and not in overriding the statutory procedure by which the solicitors' fees were quantified.
60. In the result, therefore, I allow the appeal to the extent of the variation referred to above in respect of the 22 December 2011 bill, but dismiss it otherwise.
61. I will list a hearing in Birmingham at which this judgment will be handed down. There need be no attendance. I invite parties to agree the resulting order, but if they are unable to do so and require a hearing to deal with matters arising, they should submit an agreed time estimate so that it may be listed.