Solicitors and insolvency

The current recession has damaged a wide range of business and professional sectors. Recently it was announced that many larger firms of solicitors have increased their bank borrowing. This is a pattern that is likely to be repeated in both medium and smaller size firms across the country.

Julian Dobson Solicitors recently gave a presentation to an audience of solicitors on the particular problems solicitors’ firms face in the event of insolvency. In addition to identifying the procedures applicable to the various structures through which solicitors currently practise, the seminar focused on the regulatory considerations that must be taken into account when advising solicitors in such circumstances.

With more and more firms practising as Limited Liability Partnerships, detailed consideration was given to the options facing members of an LLP and the effect of the claw-back provisions.

Whilst LLPs are now the vehicle of choice, it has been noted that in reality the members of some LLPs often have little more protection than the more traditional partnership model. This is because lenders, landlords and other creditors dealing with LLPs increasingly insist on personal guarantees being provided in any event.

The firm’s experience of dealing with solicitors has included advising on liquidation, partnership voluntary arrangements and advising individual partners/members on bankruptcy and individual voluntary arrangements.

The seminar generated both questions and discussion from the floor afterwards. A copy of the seminar notes can be downloaded here.

The extension of administration orders

The extension of administrations beyond the initial one-year period is now commonplace and routine in nature. Usually, this is done by obtaining the consent of creditors to extend the administration for a further period of six months.

In doing so, careful regard should be had to the provisions contained in paragraph 78 schedule B1 of the Insolvency Act 1986 which defines “consent”. Where required the consent of all secured creditors must be obtained and where appropriate, the consent of unsecured/preferential creditors should be obtained in the manner prescribed. Similarly care should be taken to comply with the procedural requirements including those relating to reporting and the giving of notice.

If subsequently an administrator applies to court for a further extension of the administration, then in many cases this is regarded as a formality. Such applications are usually processed by the court on paper. However, the court may on occasion require that the matter be considered at a hearing. In the face of such a review, the administrator will wish to be confident that he has fully complied with the procedural requirements and that the hearing of the extension application will be limited to a consideration of the merits of the application only.

Pre-appointment administration costs

On 6th April 2010 the Insolvency (Amendment) Rules 2010 SI No. 686 will bring in new provisions relating to the claiming of pre-appointment administration costs by practitioners.

This is primarily achieved by the insertion of a new sub paragraph (ka) after rule 2.33(2)(k) of the Insolvency Rules 1986. This provides that pre-administration costs incurred, with a view to the company entering administration by either the administrator or an insolvency practitioner may be recovered as an administration expense provided that the procedural requirements have been complied with.

The administrator’s proposals must set out the nature and cost of the work carried out and how the work done would further the achievement of the objective of the administration as required by para 3(1) of schedule B1 of the Insolvency Act 1986.

The changes include the insertion of a new rule 2.67A which provides that pre-administration costs may be approved by the creditors’ committee.

Alternatively, where there is no creditors’ committee or it does not make the necessary determination or the administrator considers the amount determined to be insufficient, then payment shall be approved by a resolution of a meeting of creditors.

Where the administrator has made a statement that there will be no distribution to unsecured creditors, in that case the approval of the costs shall be by each secured creditor or if the administrator proposes to distribute to preferential creditors by the approval of each secured creditor and preferential creditors to the value of more than 50% of the preferential creditors disregarding those who do not respond.

In the event that satisfactory approval has not been obtained, then the administrator/insolvency practitioner may apply to court for determination of the pre-appointment costs.

Obtaining retrospective sanction for proceedings

The requirement to obtain sanction to issue or defend proceedings in certain types of insolvency procedure can get overlooked in the litigation process. This has not gone unnoticed, and in the recent Jackson Report, it recommends a requirement to file evidence that the officeholder has sanction to bring or defend proceedings at the outset of the proceedings.

Previously there was no such requirement, and proceedings could reach an advanced stage before it was realised that the appropriate sanction had not been obtained. One of the consequences of such a failure is that the officeholder may be penalised on costs and in particular their ability to recover them from the estate as occurred in the case of Gresham International Ltd and others v Moonie and others [2009] EWHC 1093 (Ch). In that case, the court granted retrospective sanction, but did not approve the officeholder’s recovery of certain costs from the estate.

It is nevertheless possible to obtain retrospective sanction without such penalty. Julian Dobson recently acted for a Trustee in Bankruptcy, who, having reached a relatively advanced stage of the proceedings, applied to court for retrospective sanction. In that particular instance the court accepted that creditors would not be prejudiced by the granting of sanction and that there were factors that distinguished it from the decision Gresham v Moonie.

The question of sanction should be reviewed regularly and checked to ensure that both the course of action being taken and the financial limit applicable are being complied with. If sanction has not been obtained, then steps should be taken to obtain it as soon as possible. If the Jackson Report ultimately results in further legislation, then officeholders will be required to file evidence of the obtaining of sanction effectively from the outset of proceedings in any event.


April 2010

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Julian Dobson Solicitors
1 Frederick Terrace
Frederick Place

Tel: 01273 766 355
Fax: 01273 766 350

Regulated by the Solicitors Regulation Authority

SRA No. 133119