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Re Aston Lloyd & Partners International Limited [2022] EWHC 3006 (Ch), otherwise known as Rosler v Shah, three court orders were found to unfairly  benefit a liquidator, at the expense of secured creditors of the company.

The creditors in question were the former administrators, whose remuneration and expenses were automatically charged but who had not been paid by the subsequent liquidator. The liquidator relied upon the prejudicial court order; the former administrators relied upon paragraph 99(3) of Scheduled B1 Insolvency Act 1986 (the "Statutory Charge") and the expectations upon office-holders outlined in this note. 

Trowers & Hamlins, instructing Stephen Davies KC of Enterprise Chambers, acted for the successful Respondents.

The case is an important examination of office-holders' duties when applying to court for directions, particularly where an office-holder's remuneration is concerned. It also considers Berkeley Applegate principles and the court's discretion to amend previous orders. Any insolvency practitioner applying to court for directions would do well to bear this judgment in mind. 

Key Takeaways for Insolvency Practitioners

When seeking directions from the court, an office-holder is under a fiduciary duty to give disclosure of the full factual and legal position to the court.  

Office-holders are under certain additional duties when making an application to court for their remuneration. They must ensure the court is fully informed of the facts and legal issues which the office-holder is, or ought to be, aware of.

If an office-holder fails to comply with these duties, they cannot rely upon their rights pursuant to the court orders, where it is unfair for them to do so. This was "ex parte James in action" [1].

The Statutory Charge operates automatically upon cessation of the administration. It charges all the company's property over which the administrator had custody or control immediately before cessation of his appointment. A subsequent office-holder should be aware of it, if he knows an administrators' costs have been incurred and approved, but not paid.  

Where a company holds property on trust for itself and others, the Statutory Charge only charges the property held beneficially by the company.

Failure to bring the Statutory Charge to the court's attention (even though liquidator was not actually aware of it) can be a breach of duty, giving rise to the court's power to retrospectively amend previous court orders under Rule 12.59 Insolvency (England and Wales) Rules 2016 ("IR 2016").

The Background

Aston Lloyd & Partners International Limited (the "Company") was a property investment company.  It took funds from investors to develop holiday accommodation in Turkey, Slovakia, Bulgaria, Cyprus and elsewhere, including two developments known as Tuzla Lake and Central 22. The Company failed to complete its various developments and became insolvent. 

The Company has been subject to three insolvency processes since 6 April 2010: 

  • Administration - Mr Shah and Mr Patel (the "JAs"), the Respondents, were appointed joint administrators from 6 April 2010 to 6 July 2010;
  • Creditors Voluntary Liquidation ("CVL") - on 7 July 2011 the Company entered creditors voluntary liquidation and the JAs became CVL liquidators;
  • Compulsory Liquidation - On 28 February 2013 a winding up petition was presented and the Company was placed into compulsory liquidation on 22 April 2013, bringing the CVL to an end. The  JAs were replaced by the Official Receiver. Mr Rosler (the "Liquidator") was then appointed as sole liquidator on 24 July 2014 and he remains in office.

The assets of the Company were various properties acquired for the failed developments.  An application brought by the JAs in 2012 established that these properties were partially held on trust. The beneficiaries of that trust were the various investors in each property.  Much of the work required in the administration was to realise trust properties for the benefit of investors.

Following the Liquidator's appointment, he sought court orders regarding payment of his remuneration, costs and expenses pursuant to Berkeley Applegate principles[2], for his work in relation to realising/distributing trust funds for investors. This was a continuation of the work undertaken by the JAs, who had realised Tuzla Lake and Central 22 in the administration and obtained detailed directions on payments from the trust assets and from the company's share of such assets.

Office-holders are entitled to be paid their remuneration and expenses out of the beneficial interests in trust property, if the court exercises its Berkeley Applegate jurisdiction, where the costs relates to investigating, identifying and realising beneficiaries’ interests in trust property. Office-holders are also entitled to recover their costs of realising non-trust assets from the Company's interest in those assets.

Following the Liquidator's appointment he made various applications to court for directions, which resulted in Orders modifying the 2012 Order: on 18 June 2018 (the "2018 Order"), 12 March 2019 (the "2019 Order") and 14 July 2020 (the "2020 Order"). These Orders involved the court's consideration of the Liquidators' work regarding trust assets.  Through these orders and the 2012 Order, the court identified the portion of each site which was held on trust for investors, or formed part of the Company's estate outside these trusts.

What emerged was two 'pots' of funds from which the Liquidator could draw his professional costs:

  • The proceeds of realising trust assets for trust beneficiaries (the "Trust Pot"), where permitted on Berkeley Applegate grounds;
  • The proceeds of realising Company assets for the Company's creditors in the insolvency (the "Company Pot").

Further to the 2012 Order, as modified by the 2018, 2019 and 2020 Orders, Investors received payments from the Trust Pot, with a deduction made for the Liquidators' costs of realising trust assets in accordance with Berkely Applegate principles. The JAs did not received their own costs in realising those assets.

As for the Company Pot, only secured creditors are ordinarily entitled to receive payment in priority to the Liquidators' ordinary costs, remuneration and disbursements. Other creditors would rank after these costs.  In this case, the 2018, 2019 and 2020 Orders provided for the Liquidator to use all of the Company Pot towards discharging his costs, leaving nothing for creditors. This would not be a fundamental problem if all the Company's creditors were paid separately from the Trust Pot as trust beneficiaries.

The Statutory Charge

The issue was there was a secured creditor of the Company who was not an investor, albeit one not registered at Companies House and which the court was not aware of in 2018, 2019 and 2020. This was the JAs, pursuant to the Statutory Charge. Under paragraph 99(3) to Schedule B1 Insolvency Act 1986:

"The former administrators’ remuneration and expenses shall be charged on and payable out of property of which he had custody or control  immediately before cessation, and payable in priority to any security to which paragraph 70 applies"

The Statutory Charge arises automatically on cessation of the administration and attaches to all the property beneficially owned by the Company of which the JA's had custody or control before they left office. Its nature is considered in Walker v National Westminster Bank PLC [2017][3]. In the Company's case, the Statutory Charge secured the JA's approved remuneration, costs and expenses (as administrators) of £500,000.

The Statutory Charge was not referenced in the 2018, 2019 and 2020 Orders or considered by the court when those Orders were made.The court was simply not aware it was relevant.  As a result, charged funds had already been distributed in accordance with those Orders.

Following correspondence between the JA and the Liquidator in 2020 and 2021, the Liquidator made an application in December 2021 to obtain relief, including directions on the amount, if any, due to the JAs under the Statutory Charge.  In addressing this application in an ex tempore Judgment, Her Honour Judge Claire Jackson (sitting as a Judge of the High Court), considered in some detail:

  • The scope of the Statutory Charge;
  • The duties incumbent on office-holders when seeking directions from the court, particularly with regards to their remuneration.

The Disclosure Duty

Office-holders are entitled to apply to the court for directions and guidance in discharging their functions, including directions regarding their remuneration.  However, when seeking the court's direction, they must comply with the principles in Ex parte James[4].

This means the court must be aware of the full factual and legal position. Otherwise, an office-holder will not be entitled to stand upon their strict legal rights when it is unfair for them to do so[5], such as where there has been material non-disclosure in a court application. When dealing with trust assets, the office-holder must comply with all the duties and obligations of a fiduciary when seeking directions[6]. The court would only be in a position to give directions which the Liquidator could rely upon in claims for breach of duty against him, if the court knew the full facts[7].

A Liquidator is also under additional, related duties when seeking his remuneration, as an officer of the court, as made clear in Brook v Reed [2012][8].  A Liquidator's status as an officer of the court requires him to make applications in a balanced way, explaining how the property he was dealing with would be affected by the proposals for remuneration. So, a liquidator should give full disclosure to the court when seeking directions, by virtue of his position as a court officer seeking his remuneration be paid from the assets of the Company[9].

In this case the court did not have the full facts in 2018, 2019 or 2020. The court was not aware of the Statutory Charge when giving directions for payments out of the Trust Pot and the Company Pot. It did not know the JAs were a secured creditor with a stake in the Company Pot. The Judge concluded that there had been breach of the Disclosure Duty by the Liquidator and this had led to the JAs being made entirely secondary to the costs, remuneration and expenses of the Liquidator; the Statutory Charge was "obliterated by the breach[10]". On the facts, the Judge found that the failure to disclose the Statutory Charge was not deliberate, but "an office-holder… should have been able to work out that there was a statutory charge and it needed to be brought to the attention of the Court[11]."

Where the Disclosure Duty is not complied with, the trustee cannot rely upon the resulting court orders as relief against a party who has suffered loss as a result of those orders.

Remedial Order

The court relied upon its power to review, rescind or vary a previous court order under Rule 12.59 IR 2016, affording the Judge a very wide discretion to rectify the position where there is new information, evidence or a change in the case, which was not before the court when the original orders were made.  In this case the new information was the court's awareness, for the first time, of the Statutory Charge and the JA's positions as beneficiaries of that charge[12].

The Judge therefore considered she had the power to rescind or vary the 2018, 2019 and 2020 Orders and it was appropriate to do so:

"It would be inappropriate for a court of law and a court of equity to uphold orders obtained by an office-holder and a fiduciary which breaches the rules of law, which breaches the provisions of equity and where the main beneficiary is the party in the wrong."[13]

A liquidator is not always prohibited from using funds subject to the Statutory Charge for his own remuneration, but court permission on Berkeley Applegate principles (complying with the Disclosure Duty) would be required first – see Re Sports Betting Media Limited [2007][14]. For this to be appropriate, the court must be satisfied that the sums expended by the liquidator were part of the execution and administration of the Statutory Charge and that it is fair[15].

The resulting order in Rosler v Shah was complicated. It involved the Judge unpacking the various distributed pots and the work they each relate to, to see what portion of the Tuzla Lake and Central 22 proceeds might be retained by the Liquidator under a new retrospective Berkeley Applegate Order, notwithstanding the Statutory Charge. The balance of the Company Pot is to be returned by the Liquidator and paid to the JAs as the Company's creditors.

Closing Comments

When considering costs, the Judge closed with some strongly worded remarks on the public perception of Insolvency Practitioners, which many practitioners and professionals will recognise and work hard to refute:

"In many ways this case highlights what the public wrongfully think of insolvency practitioners. The public thinks that all insolvency practitioners just in it for their own money and that they will take every penny they can. That a payment to anybody else, a dividend, costs, is a bad outcome for an insolvency practitioner.

As I say, that is wrong. That is not what insolvency practitioners do, that is not why they do their job. It is a wrong view but it is the view the public have. Applications like this by the Applicant seeking to retain £170,000 he wrongfully got in an unfair situation caused by him and which he sought right through to the midnight hour to defend, is extraordinary, outside of the norm, and calls firmly and squarely for an indemnity costs order in favour of the Respondents, for all of their costs and not just a proportion of their costs."

This case therefore serves as a warning, not only on how office-holders should present applications for directions to court, but also the severe judgment the court may make in situations where there the public perception of the insolvency profession is at risk.

[1] Rosler v Shah at paragraph 81

[2] Re Berkeley Applegate (Investment Consultants) Ltd (No 2) [1988] 4 BCC 279.

[3] Walker v National Westminster Bank plc [2017] 1 BCLC 124 at paragraphs 26-28

[4] Condon Ex p. James, Re (1873-74) L.R. 9 Ch. App. 609, [1874] 7 WLUK 50

[5] Rosler v Shah at Paragraph 31

[6] Public Trustee v Cooper [2001] WTLR 901

[7] Rosler v Shah at Paragraph 47

[8] Brook v Reed [2012] 1 WLR 419

[9]Rosler v Shah at Paragraph 50

[10] Rosler v Shah at Paragraph 56

[11] Rosler v Shah at Paragraph 67

[12] Rosler v Shah at Paragraphs 53-55

[13] Rosler v Shah at Paragraph 60

[14] Re Sports Betting Media Limited [2008] BCC 177

[15] Rosler v Shah at Paragraph 76