Scottish Court of Session Decisions

Noters: Martin QC, McIlvride; Lindsays WS

Respondents: Sellar QC, Ms Ower; Halliday Campbell WS

17 May 2011

[1] The noters are the former joint liquidators of Echelon Wealth Management Limited ("the company"). They were appointed joint interim liquidators on 11 November 2008 and joint liquidators at a meeting of the creditors of the company on 16 December 2008. At a creditors' meeting on 22 July 2009, the noters were removed from office as joint liquidators, and the respondents, Annette Menzies and Eileen Lightbrown, were appointed as joint liquidators in their place. The removal of the noters from office and their replacement by the respondents occurred in light of a failure by the noters and the creditors of the company to reach agreement as to the remuneration and outlays properly payable to the noters in respect of the first accounting period in the liquidation.

[2] By their Note, the noters seek a waiver of their failure to comply with the statutory provisions concerning the lodging of their claim for remuneration; a remit to a Reporter and to the Auditor; and, thereafter, payment of such remuneration as may be adjudged suitable. A waiver was granted and a remit was duly made to a Reporter and to the Auditor. They have both reported, and the noters have been paid the recommended sum, subject to a deduction in respect of the only outstanding matter in dispute. That is the dispute dealt with in this Opinion.

[3] Part 4 of the Insolvency (Scotland) Rules 1986 ("the Rules") deals with Winding Up by the Court. Chapter 1 thereof deals with the role of the provisional liquidator. Rule 4.5 deals with his remuneration. I shall return to consider this Rule in due course. The position of the liquidator is dealt with in Chapter 6. Rules 4.32 to 4.35 are concerned with the liquidator's outlays and remuneration. As is well known, those Rules include a reference to certain provisions of the Bankruptcy Act 1985. It was in respect of their failure to comply with these Rules that the noters sought a waiver; and it was under these Rules too that they sought and seek payment.

[4] The Rules expressly contemplate that a liquidator may be removed and replaced by another liquidator, as happened in the present case. The relevant Rule is Rule 4.21. This provides as follows:

4.21         Hand-over of assets to liquidator

(1)              This Rule applies where a person appointed as liquidator ("the succeeding liquidator") succeeds a previous liquidator ("the former liquidator") as the liquidator.

(2)              When the succeeding liquidator's appointment takes effect, the former liquidator shall forthwith do all that is required for putting the succeeding liquidator into possession of the assets.

(3)              The former liquidator shall give to the succeeding liquidator all such information, relating to the affairs of the company and the course of the winding up, as the succeeding liquidator considers to be reasonably required for the effective discharge by him of his duties as such and shall hand over all books, accounts, statements of affairs, statements of claim and other records and documents in his possession relating to the affairs of the company and its winding up."

[5] In the present case, when the noters were removed as liquidators and the respondents appointed in their place, in compliance with Rule 4.21(2) they handed over to the respondents all the assets of the company which were within their possession, but with one exception. That exception was this: they withheld a sum of just over £400,000, that being the sum claimed by them by way of remuneration and outlays and in respect of which they were in dispute with the company's creditors.

[6] In opposing the noters' claim to be paid the full amount of the remuneration recommended by the Reporter and the Auditor, the respondents contend that, by withholding this sum, the noters were in breach of the Rules. They say that this has caused loss and damage to the company; and they contend that the remuneration awarded to the noters should be reduced from that recommended by the Reporter and the Auditor so as to "reflect" the consequences of that breach of the Rules.

[7] Two questions arise for decision. First, were the noters in breach of Rule 4.21(2) of the Rules by withholding that sum? And, second, if so, what consequences, if any, should flow from that breach. I take these issues in turn.

[8] Mr Sellar QC, who appeared for the respondents, submitted that there could be no doubt that the noters were in breach of the Rule. The Rule was unambiguous. The former liquidators were obliged, on the appointment of their successors, forthwith to do "all that is required for putting [them] into possession of the assets". That provision did not allow the former liquidators to withhold an amount by way of security for payment of their remuneration. Nor was there any need for such security. He contrasted this with the terms of Rule 4.5 which deal with the remuneration payable to a provisional liquidator. Rule 4.5(3) provides that the provisional liquidator's remuneration should be paid out to him (a) if a winding up order is not made, out of the property of the company, and (b) if a winding up order is made, as an expense of the liquidation. Rule 4.5(4) goes on to say that in a case falling within paragraph (3)(a) above, i.e. a case where a winding up order was not made and therefore the provisional liquidator was to be paid out of the property of the company, then in those circumstances he "may retain out of the company's property such sums or property as are or may be required for meeting his remuneration and expenses." The intention behind the Rule was plainly that where the provisional liquidator has to look to the company to pay him his remuneration, he should be able retain from the assets of the company an amount by way of security for such payment; but there was no need for such security where the company goes into liquidation, since its assets are under the control of the court, through him or a successor acting as provisional liquidator, interim liquidator or liquidator. In the case of Rule 4.21(2), where the former liquidators were replaced as liquidators, and the assets simply had to be handed over to the succeeding liquidators, there was likewise no need for any security and no basis for any right of retention. Mr Sellar accepted, on the authority of Liquidators of Highland Engineering Limited v Thomson 1972 SC 87, that at common law there would be a right of retention. But that case had been decided before the Insolvency (Scotland) Rules 1986 had codified the position. The Rules now superseded the common law in that regard. There was no scope any longer for a right of retention to exist in circumstances such as the present.

[9] For the noters, Mr Martin QC submitted that there was no reason to regard Rule 4.21(2) as having superseded the common law right of retention exemplified in Highland Engineering. The Respondents needed to argue that the Rules required the former liquidators always to hand over the whole of the assets of the company to their successors. But clearly they did not have that effect. For example, if an arrestment were served on the former liquidators, clearly they would not be entitled to hand over the sums arrested to the succeeding liquidators. If the Rule was not as comprehensive as that, why it should be said that it overrode the common law right of retention? He contrasted Rule 4.21(2) with Rule 4.22(4) which, in the context of a liquidator being under an obligation to take possession of the whole assets of the company as soon as may be after his appointment, specifically entitled the liquidator to seek delivery to him of any title deed or other documents notwithstanding that a right of lien was claimed over such documents by a third party. That specifically overrode the third party rights, though the position of the third party was protected by the concluding words of that paragraph. By contrast, he argued, Rule 4.21(2) did not seek to override the common law right of retention. As to Rule 4.5(4), Mr Martin suggested that that was of no assistance. The specific creation of a right of retention when the assets reverted to the company was necessary, since the right would not otherwise exist; by contrast, there was already a common law right to retain where the winding up order was made and the assets under the control of the liquidator. This had been established in Highland Engineering.

[10] I am satisfied that the respondents are correct on this point. Rule 4.21(2) is clear in its terms. The former liquidators must forthwith do all that is required for putting the succeeding liquidator into possession of the assets. That is inconsistent with them being entitled to refuse to put the succeeding liquidators into possession of the assets because of a desire to retain some part of those assets as security for their own claim for remuneration. Mr Martin's reference to the position that the former liquidators would be in if an arrestment were placed on the debt in their hands is, in my view, misplaced; that is an entirely different situation, since in those circumstances the former liquidators would not be entitled to hand over the assets, and they could not be required to act unlawfully or do the impossible. In the present case it is perfectly possible for them to hand over the whole assets of the company to the succeeding liquidators. They have chosen not to do so because they wish to retain a sum by way of security.

[11] I would go further. There is no reason, to my mind, why the framers of the Rules should have thought it right to give the former liquidators a right of retention in such circumstances. As is shown by the distinction made in Rule 4.5(4), there might be a need for a right of retention if the assets were being returned to the company and the liquidators were as a result left unsecured. But where the assets are being transferred by the former liquidators to succeeding liquidators, and remain under the control of officers of the court, the situation is very different. Having regard to the terms of Rule 4.5(4), it seems to me that in drafting Rule 4.21(2) in the way they have, the framers of the Rules were deliberately excluding any common law right of retention that might otherwise have existed.

[12] I am therefore satisfied that the noters were in breach by retaining that sum from the assets which they transferred to the respondents. The question is: what consequences follow from that. This gives rise to two separate issues. The first is: what are the court's powers? The second is: how should it exercise them?

[13] Mr Sellar submitted that the court had an inherent power as regards the remuneration payable to liquidators. He referred, in support of this, to the decision of the sheriff principal in International Factors v Ves Voltech Electronic Services Ltd 1994 SLT (Sh Ct) 40 and to the decision of the Lord Ordinary (Johnston) under consideration by the Inner House in R D Simpson v Beare (1908) 15 SLT 375. He referred to a passage in Wilton, Company Liquidation, Law and Practice at p.65 where, after noting that the remuneration of a liquidator is fixed by the court, the author goes on to say that the court in its discretion may deprive him for any mistake of his right to "costs", even though such a mistake was not sufficient to disentitle an ordinary trustee to his expenses. There is a reference in the footnote to the case of Simpson v Beare (supra), which makes it clear that the discussion is about remuneration as well as simply "costs" in the sense of legal expenses. This was consistent with the position in England: see Gore-Browne on Companies at para. 56[31], where it is stated that a liquidator's remuneration may be disallowed on account of his conduct. As to the position in the Commonwealth, he referred me to In re New Zealand Times Co Ltd (in liquidation) [1941] NZLR 677 at p.680 and re Timberland Ltd (in liquidation), Commissioner of Corporate Affairs v Harvey (1979) 4 ACLR 259, a decision of the Supreme Court of Victoria, cited by Gore-Browne as authority for his observation concerning the discretion in England and Wales.

[14] Mr Martin disputed the existence of any such power. He submitted that the function of the court was to fix a suitable remuneration for the work carried out as liquidator. For that purpose, the court had ordered a remit to a Reporter and to the Auditor to advise on what remuneration was suitable. They had duly reported to the court. It was not for the court thereafter to "fine" the liquidators for their failure to comply with the Rules, which is what a reduction of their remuneration would amount to. He referred me to Hyndman v Readman 2004 SLT 959 in which, at para.[12] the Lord President (Cullen), giving the Opinion of the court, noted that the remuneration to which a liquidator was entitled related to work done by him rather than to any other work which he might have done but did not do, so that complaints about the liquidator's competence had no bearing on fixing the level of his remuneration. Mr Martin submitted that if there were complaints that the liquidators had acted in breach of duty and had thereby caused loss to the company or its creditors, those complaints should be raised in proceedings under section 212 of the Insolvency Act 1986 rather than by way of a summary fine exacted by the Court by way of a deduction from the liquidator's remuneration.

[15] I am satisfied that (in a case where the remuneration is not fixed by a liquidation committee) the court has a general discretion to fix the remuneration payable to a liquidator, and in so doing to reflect in the level of remuneration some sanction, in an appropriate case, for any breach by the liquidator of his duties as such. In the case of Dempster, Petitioner 2011 SC 243, I noted that, in the absence of a liquidation committee, the task of fixing the remuneration payable to the liquidator falls on the court. As a matter of practice, the court will usually remit to a Reporter and to the Auditor for them to report on what would be a suitable figure for such remuneration. In arriving at their recommended remuneration in their reports, the Reporter and the Auditor both have regard to a detailed account of the work performed, submitted by the liquidator, an account of the hours charged and the hourly rates sought to be applied. Their recommendation of a suitable remuneration will be based on that material together with such expertise and experience which they may bring to bear upon it. But ultimately it is for the court to be satisfied as to the appropriate level of remuneration; and it seems to me plain that; in considering the matter, the court may have regard to issues which go wider than those which have been considered by the Reporter and the Auditor.

[16] The cases to which I was referred point in this direction, though it has to be said that none can be regarded as conclusive. In International Factors Ltd v Ves Voltech Electronic Services Ltd, the sheriff principal was concerned with the fees of a provisional liquidator. He criticised the conduct of the provisional liquidator in failing to comply with his obligation to advertise his appointment. He considered that he had a discretion, which he exercised, to refuse payment of the provisional liquidator's fees and expenses. At p.42G-J he said this:

"This leaves the question of liability for payment of the provisional liquidator's fees and expenses, and those of his law agents. In my opinion, this is a matter on which I have a discretion in terms of Rule 4.5(3) in Part IV, Chapter I of the Insolvency (Scotland) Rules 1986, and I propose to exercise that discretion so as to refuse payment of these expenses from the property of the Respondent Company".

He then discussed the failure of the provisional liquidator to advertise his appointment and the fact that the liquidation proceedings, even if necessary, had proved to be abortive. He continued

"In these circumstances, I consider that an exception properly falls to be made from the general application of the Rules, and that no order should be made for payment of the provisional liquidator's fees and outlays or those of his law agents out of the property of the Respondent Company".

Mr Martin submitted that, in deciding that he had a discretion, the sheriff principal appears to have relied upon the opening words of Rule 4.5(3), which provides that the provisional liquidator's remuneration shall be paid to him "without prejudice to any order of the court as to expenses". It seems to me that if the sheriff principal was relying upon these opening words in order to justify his view that he had a discretion, his reliance was misplaced. Rule 4.5(3) draws a clear distinction between expenses and remuneration. In my view, the opening words of Rule 4.5(3) simply mean that the right of the provisional liquidator to be paid his remuneration and the expenses incurred by him in the liquidation is without prejudice to any Order the court may make as to any expenses of process, which may be in his favour or against him (in the latter case resulting in a reduction of his overall recovery). I note, in passing, that the equivalent provision in Rule 4.30(3) of the (English) Insolvency Rules 1986 makes this distinction clear, by introducing the right of the provisional liquidator to be paid his remuneration and expenses incurred in the liquidation with the words "without prejudice to any order the court may make as to costs", the word "costs" showing that the word "expenses" in the opening part of Rule 4.5(3) of the Insolvency (Scotland) Rules 1986, though not where it appears elsewhere in that Rule, is intended to refer to expenses of process. However there may be, I do not think that the sheriff principal was necessarily founding upon those opening words as the basis for the court's discretion. I am inclined to think from the way in which he expresses himself in the passage quoted that he regarded himself as having a discretion at large.

[17] In R D Simpson v Beare, the Lord Ordinary (Johnston) criticised the liquidator's conduct of the liquidation and, in consequence, made a deduction from the fee allowed to him. The matter went to the Inner House, where it was held that the liquidator's conduct was undeserving of such strong criticism. In those circumstances the court recalled that part of the interlocutor which, in the words of Lord Stormonth-Darling (at p.878) "practically imposes a fine upon the liquidator". It was held that it would be sufficient sanction for the error committed by the liquidator in his conduct of the liquidation if he were simply disallowed his expenses of the reclaiming motion as a charge against the funds. However, nothing in the opinions in the Inner House suggest that the members of the court thought that the Lord Ordinary was wrong in considering that he had power to disallow part of the fees of the liquidator - it was simply that the Inner House considered that the errors committed by the liquidator did not justify such sanction.

[18] I have already referred to the passage in Hyndman v Readman relied upon by Mr Martin. It seems to me that that passage must be read in the context of the facts of the case before the Inner House. The criticism of the liquidator was that he had failed, through lack of professional competence, to pursue matters which he ought to have pursued. It was this criticism which was the subject of comment in para.[12] of the opinion of the Court. As I understand it, what was said in that paragraph was that the complaint that the liquidator ought to have done more, which presumably would have justified further remuneration had he done it, was not relevant to a consideration of his remuneration for what he had done. I do not take from this passage any general proposition that the court has no power, in the appropriate case, to take any failings by the liquidator into account in fixing his remuneration.

[19] None of these authorities are determinative of the question before the court. I note that in para.[145] of my opinion in the note of the joint liquidators of Arakin Ltd (unreported, 13 October 2010, [2010] CSOH 138) I approached the question of the liquidators' remuneration on the basis that complaints about their conduct were relevant. Having considered the submissions and the authorities in this case, and having regard to the fact, as I have already mentioned, that, in the absence of a liquidation committee it is for the court to fix a suitable remuneration for the liquidator, I adhere to that view. I am comforted in that view by the fact that Mr Wilton, in his book on Company Liquidation, Law and Practice, appears to take the view, under reference to Simpson v Beare, that the Court, in its discretion, may deprive a liquidator of his right to remuneration for any mistakes he may have committed during the liquidation. I am further comforted in the view which I take by the fact that that view appears to be consistent with the practice both in England and in Australia and New Zealand.

[20] On the basis that the court has this power, the question arises how it should be exercised in the present case. The respondents submit that as a result of the failure of the liquidators to remit to them the whole of the assets of the company in accordance with Rule 4.21(2), and their withholding of just over £400,000 in respect of remuneration which they claimed to be due to them, the noters have caused the company to incur losses amounting to something in excess of £45,000. This is made up of two components, the first being a sum of just over £24,000 paid to the respondents by the company, on the basis that the liquidation committee agreed that their remuneration would be calculated as a percentage of "realisations" and the £400,000, when eventually recovered from the noters, amounted to such a realisation; and the second being legal fees, in excess of £21,000, incurred by the respondents in dealing with this problem. The respondents suggest that the appropriate course is for the court to remit to a Reporter to report on what losses have been suffered by the company as a result of the noters' failure to comply with their obligations under Rule 4.21(2), upon receipt of which Report the court should deduct the amount of the loss, as thus ascertained, from the remuneration payable to the noters. The noters, for their part, question whether any such loss has in fact been incurred, or in any event reasonably incurred, so as to justify that course of action. Under reference to Wilson v Dunbar Bank plc 2008 SC 457, they submit that, in general, the failure to pay money on the due date is adequately compensated by an award of interest. When eventually, under pressure from the respondents, they paid the sum which they had withheld, they also paid interest on that sum. In those circumstances, they submit that the court should make no reduction of the remuneration otherwise due to them on account of their wrongful withholding of that sum. If the respondents wish to take their complaints further, they should do so by making an appropriate application under s.212 of the Insolvency Act 1986.

[21] On this matter I consider that the submissions of the noters are to be preferred. Prima facie, any wrongful withholding of money is compensated by an award of interest. If interest has been paid, then subject to any question of legal expenses, the person entitled to the money will, in the ordinary case, have been adequately compensated for the late payment. I accept that that is not an invariable rule. But I am not persuaded that I ought to prolong the current exercise by remitting to a Reporter the claims put forward by the respondents for the losses allegedly suffered by the company. I have, of course, not seen any evidence for or against such claims but at first glance it seems surprising that the respondents were entitled to have the eventual transfer to them of the sums withheld by the noters treated as a "realisation" so as to entitle them to remuneration thereon calculated as a percentage of the sum paid. It also seems surprising that they have incurred legal expenses of over £20,000 simply dealing with this issue. It is, of course, not for me to judge the rights and wrongs of these matters, but it seems to me that if the respondents wish to pursue these claims, they should be left to do so by making an application under s. 212 of the Act, at their risk as to expenses.

[22] In addition, since the decision as to appropriate remuneration is, to some extent at least, discretionary, I consider that I should take account of the fact that the noters' retention of a sum as security for payment of their disputed claim for remuneration, which I have found to be in breach of Rule 4.21(2), was a course of action taken by them on legal advice and in good faith. That is the factual position put forward by Mr Martin on their behalf, and it was not contradicted by Mr Sellar. In those circumstances, and since, when legal proceedings were threatened, they paid over the money withheld together with interest thereon (in an amount which it is not, so far as I am aware, the subject of complaint), I see no reason to punish them by reducing the remuneration recommended by the Reporter and the Auditor of Court. They may have been in breach of the Rules, but not every breach of the Rules merits that sanction.

[23] I shall put the case out By Order for consideration of what interlocutor should follow from this opinion.