The Court reminded insolvency practitioners of fiduciary duties to creditors when refusing application for further payment on account of costs. Ferris J considered the principles applicable to fixing the remuneration of receivers of the estate of Robert Maxwell appointed by the court under section 37 of the 1981 Act. Their total recoveries before their remuneration and legal fees amounted to pounds 1,672,500. The total of their remuneration (pounds 744,289), legal fees (pounds 705,283) and other disbursements was pounds 1,628,572, most of which was calculated on a time basis.
Held: The figures were in his judgment ‘profoundly shocking’ and he described the result of the receivership as ‘shameful’.
Ferris J regarded the 1986 Rules and other regulations as ‘somewhat sketchy, ill-expressed and consequently liable to be misunderstood’ but ‘if the matter is approached from the standpoint of general principle . . a much firmer picture emerges’ and ‘The essential point which requires constantly to be borne in mind is that office-holders are fiduciaries charged with the duty of protecting, getting in, realising and ultimately passing on to others assets and property which belong not to themselves but to creditors or beneficiaries of one kind or another. They are appointed because of their professional skills and experience and they are expected to exercise proper commercial judgment in the carrying out of their duties. Their fundamental obligation is, however, a duty to account, both for the way in which they exercise their powers and for the property which they deal with.’
With a fiduciary duty to account it was for the office-holder who seeks remuneration at a particular level to justify his claim. Ferris J identified three consequences as following from this general equitable principle: ‘First, office-holders must expect to give full particulars in order to justify the amount of any claim for remuneration. If they seek to be remunerated upon, or partly upon, the basis of time spent in the performance of their duties they must do significantly more than list the total number of hours spent by them or other fee-earning members of their staff and multiply this total by a sum claimed to be the charging rate of the individual whose time was spent. They must explain the nature of each main task undertaken, the considerations which led them to embark upon that task and, if the task proved more difficult or expensive to perform than at first expected, to persevere in it. The time spent needs to be linked to this explanation, so that it can be seen what time was devoted to each task. The amount of detail which needs to be provided will, however, be proportionate to the case.
The charging rate claimed must also be proved by evidence; and what is relevant is not the charging rate of the particular individual but the broad average or general rate charged by persons of the relevant status and qualifications who carry out this kind of work (cf in relation to solicitors’ charges Jones v Secretary of State for Wales [1997] 2 All ER 507, [1997] 1 WLR 1008 and the cases there referred to).
Second, office-holders must keep proper records of what they have done and why they have done it. Without contemporaneous records of this kind they will be in difficulty in discharging their duty to account. While a retrospective reconstruction of what has happened may have to be looked at if there is no better source of information, it is unlikely to be as reliable as a contemporaneous record. Office-holders whose records are inadequate are liable to find that doubts are resolved against them because they are unable to fulfil their duty to account for what they have received and to justify their claim to retain part of it for themselves by way of remuneration.
Third, the test of whether office-holders have acted properly in undertaking particular tasks at a particular cost in expenses or time spent must be whether a reasonably prudent man, faced with the same circumstances in relation to his own affairs, would lay out or hazard his own money in doing what the office-holders have done. It is not sufficient, in my view, for office-holders to say that what they have done is within the scope of the duties or powers conferred upon them. They are expected to deploy commercial judgment, not to act regardless of expense. This is not to say that a transaction carried out at a high cost in relation to the benefit received, or even an expensive failure, will automatically result in the disallowance of expenses or remuneration. But it is to be expected that transactions having these characteristics will be subject to close scrutiny.’ Though the aim is to reward the value of the services rendered by the office-holder, this need not equate to time spent, as to which Ferris J said: ‘In my judgment it is vital to recognise three things in this field. First, time spent represents a measure not of the value of the service rendered but of the cost of rendering it. Remuneration should be fixed so as to reward value, not so as to indemnify against cost. Second, time spent is only one of a number of relevant factors, the others being, as I have said, those which find expression in r 2.47 and similar rules. The giving of proper weight to these factors is an essential part of the process of assessing the value, as distinct from the cost, of what has been done. Third, it follows from the first two points that, as the task is to assess value rather than cost, the tribunal which fixes remuneration needs to be supplied with full information on all the factors which I have mentioned.’
As regards controls, he regarded the Rules and other regulations as ‘somewhat sketchy, ill-expressed and consequently liable to be misunderstood’ but he took the view that ‘if the matter is approached from the standpoint of general principle . . a much firmer picture emerges’. He continued: ‘The essential point which requires constantly to be borne in mind is that office-holders are fiduciaries charged with the duty of protecting, getting in, realising and ultimately passing on to others assets and property which belong not to themselves but to creditors or beneficiaries of one kind or another. They are appointed because of their professional skills and experience and they are expected to exercise proper commercial judgment in the carrying out of their duties. Their fundamental obligation is, however, a duty to account, both for the way in which they exercise their powers and for the property which they deal with.’
It is a feature of the fiduciary duty to account that it is for the office-holder who seeks remuneration at a particular level to justify his claim. Ferris J identified three consequences as following from this general equitable principle: ‘First, office-holders must expect to give full particulars in order to justify the amount of any claim for remuneration. If they seek to be remunerated upon, or partly upon, the basis of time spent in the performance of their duties they must do significantly more than list the total number of hours spent by them or other fee-earning members of their staff and multiply this total by a sum claimed to be the charging rate of the individual whose time was spent. They must explain the nature of each main task undertaken, the considerations which led them to embark upon that task and, if the task proved more difficult or expensive to perform than at first expected, to persevere in it. The time spent needs to be linked to this explanation, so that it can be seen what time was devoted to each task. The amount of detail which needs to be provided will, however, be proportionate to the case.
The charging rate claimed must also be proved by evidence; and what is relevant is not the charging rate of the particular individual but the broad average or general rate charged by persons of the relevant status and qualifications who carry out this kind of work (cf in relation to solicitors’ charges Jones v Secretary of State for Wales [1997] 2 All ER 507, [1997] 1 WLR 1008 and the cases there referred to).
Second, office-holders must keep proper records of what they have done and why they have done it. Without contemporaneous records of this kind they will be in difficulty in discharging their duty to account. While a retrospective reconstruction of what has happened may have to be looked at if there is no better source of information, it is unlikely to be as reliable as a contemporaneous record. Office-holders whose records are inadequate are liable to find that doubts are resolved against them because they are unable to fulfil their duty to account for what they have received and to justify their claim to retain part of it for themselves by way of remuneration.
Third, the test of whether office-holders have acted properly in undertaking particular tasks at a particular cost in expenses or time spent must be whether a reasonably prudent man, faced with the same circumstances in relation to his own affairs, would lay out or hazard his own money in doing what the office-holders have done. It is not sufficient, in my view, for office-holders to say that what they have done is within the scope of the duties or powers conferred upon them. They are expected to deploy commercial judgment, not to act regardless of expense. This is not to say that a transaction carried out at a high cost in relation to the benefit received, or even an expensive failure, will automatically result in the disallowance of expenses or remuneration. But it is to be expected that transactions having these characteristics will be subject to close scrutiny. ‘
Judges:
Ferris J
Citations:
Times 15-Jul-1997, [1998] 1 BCLC 638
Statutes:
Supreme Court Act 1981 37, Insolvency Rules 1986
Jurisdiction:
England and Wales
Cited by:
See Also – Mirror Group Newspapers Plc v Maxwell and Others ChD 30-May-2000
The settling of remuneration paid to a court-appointed receiver was not an assessment of costs in the Chancery Division, and the court fee normally payable for such an assessment did not apply. . .
Cited – In Re Cabletel Installations Ltd 1-Jul-2004
The court criticised the remuneration claimed by the insolvency office-holder were work had been carried out at too senior a level, and the calculation was an uncritical application of the time spent, and where there were more and lengthier meetings . .
Cited – Brook v Reed CA 25-Mar-2011
The court was asked ‘What relation should the costs and remuneration bear to the circumstances, and in particular the size, of the bankruptcy?’ The bankrupt had considered that the costs first awarded to the trustee in bankruptcy and the trustee’s . .
Lists of cited by and citing cases may be incomplete.
Insolvency, Costs
Updated: 05 June 2022; Ref: scu.83755