Future expenditure not capable of being liquidation expense

United Kingdom

In the case of Re Demaglass Ltd,  the court has again adopted a strict interpretation of rule 4.218 of the Insolvency Rules 1986 in relation to liquidation expenses.

The administrative receivers of Demaglass Ltd and Demaglass Holdings Ltd were asked to make payment of floating charge realisations to the subsequently appointed liquidators in respect of the cost of proposed investigations and conduct of claims. The claims included potential causes of action which were vested in the company (e.g. misfeasance claims) and those which vested in the liquidator only (e.g. preferences and transactions at undervalue).

The principal issues before the court were:

(1)     whether the liquidators were entitled to call for payment out of floating charge realisations in respect of anticipated future expenditure; and

(2)     whether such expenditure was capable of being liquidation expense.

The court held that there was nothing in the Insolvency Act or Rules which entitled the liquidator to claim in advance of the costs expense or liability being incurred.  The categories of costs recoverable as liquidation expenses were set out in rule 4.218. Each of these categories was couched in the past tense.  Moreover, expenses of preserving, realising or getting in the company’s assets, must be “properly” chargeable or incurred (rule 4.218(1)(a)) and whether expenses were properly incurred could not be determined prospectively. 

The court also held that the categories of costs claimed in this case were not recoverable as liquidation expenses even retrospectively.  Following the principles laid down in Lewis v Commissioner of Inland Revenue and Re M C Bacon Ltd, claims in respect of preferences and transactions at an undervalue were not assets of the company and that, therefore, the costs of such claims were not within rule 4.128(1)(a). 

Even if the costs of successfully bringing a claim on behalf of the company were capable of coming within such rule, the costs of an unsuccessful claim were not.  Further, although rule 4.128(1)(m) provided that any “necessary disbursements” by a liquidator in the course of his administration were capable of being liquidation expenses, the expenditure claimed by the liquidators in this case could not be said to be “necessary” even if they were otherwise capable of being disbursements. 

It was suggested that liquidators should form their own view on the recoverability of the cost of any proposed course of action.  A liquidator may, however, seek declaratory relief from the court that the costs of a particular course of action would be categorised as liquidation expenses, in advance of those costs being incurred, provided the application is supported by sufficient evidence.

For further information, please contact Janet Currier at janet.currier@cms-cmck.com or on +44 (0)20 7367 2326.