The recent decision from the Guernsey Royal Court in DM Property Holdings (Guernsey) Limited (in Liquidation)(1) is of fundamental importance to Guernsey insolvency practitioners as it provides cautionary guidance on the practical implications of Practice Direction 3/2015.
This practice direction provides for the submission of fee estimates by liquidators and administrators in advance of applications to wind up companies or place them into administration and for those estimates to be varied if additional information comes to light. The implications are that an accurate revised fee estimate must be submitted in a timely manner if such fees are to be recoverable where there is information or circumstances which were previously unknown or "out of the ordinary". If the information or circumstances could have been envisaged or were already known by the liquidator or administrator, there is a danger that the court will not permit the revised estimate of fees.
At first blush, the scope of work assigned to the liquidator appointed over DM Property Holdings (Guernsey) Limited appeared to be a relatively straightforward exercise. The company's primary asset was the residential home of the directors of the company.
An initial cost cap of £15,000 was set with liberty to apply. A second application for an increase to the cost cap was granted for £36,851.50, on the basis that the liquidator incurred additional fees when evicting the occupiers from their residence. Those fees had not and could not have been foreseen by the liquidator at the time of appointment. On preparation of the final report, the professional fees incurred exceeded the revised cap and the total stood at £55,193. The justification advanced by the liquidator for not having approached the court to seek a further increase to the cost cap before these fees were incurred was an effort to save fees. Several months after the final report was submitted, the liquidator sought to revise the fee cap. The court declined the increase and awarded fees in the reduced amount of £45,000.
The court suggested that the circumstances that the liquidator relied on to justify the increase should have been foreseeable, particularly at the time of the application of the revised fee estimate.
The guidance offered by the court in relation to the practice direction was that it may, in its judicial discretion to restrict fees, introduce a "level of discipline" into a liquidation (or administration process, as the case may be).
The practical lesson to take away from the decision is that where an insolvency practitioner is faced with circumstances that appear to be out of the ordinary – and especially where they could not have been reasonably contemplated by the insolvency practitioner at the outset of the appointment – a pragmatic and proactive approach must be followed to seek an increase to the cost cap as soon as possible.
In those circumstances, not only should the insolvency practitioner set out a detailed and comprehensive affidavit for those additional and unforeseen fees, but it should also apply for the fee increase before fees are incurred. Failure to bring this to the court's attention may not be a total bar to obtaining future anticipated fees, but invariably the court has given guidance that it may create an otherwise avoidable level of difficulty for their recovery, particularly if brought late in the day and in circumstances where there has already been an application for an increase. It should also be considered that even if the creditors agree to an officeholder's fees, this is not determinative for the court as it is settled law that that officeholders owe duties to the court which will override the creditors agreement to the level of fees.
During the course of an insolvency process, an insolvency practitioner may uncover a myriad of information which previously may not have been readily available. That information may lead to supplementary causes of action, shed light on entities related to the structure or point the finger at an officer of the company who had not previously been implicated. Under those circumstances and on a full and comprehensive explanation to the court justifying an increase to the fee estimate pursuant to the practice direction, there is a good chance that the court will grant an increase.
It is well known that there are fairly advanced plans to introduce a revised insolvency law into Guernsey legislation. Such plans include developing a new set of insolvency rules similar to that in place in the United Kingdom, albeit not as extensive. Thought should be given to incorporating some of the UK provisions on the methods by which fees are approved by creditors and the information needed for approval. Notably, in the United Kingdom there is no need to seek court approval unless the creditors cannot agree to the level of fees. Arguably, where sophisticated corporate creditors are involved, they are the best judges of whether an officeholder's fees are acceptable.
For further information on this topic please contact Alex Horsbrugh-Porter or Michael Rogers at Ogier by telephone (+44 1534 514 000) or email (firstname.lastname@example.org or email@example.com). The Ogier website can be accessed at www.ogier.com.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.