Recovery of legal costs in insolvency proceedings can be a difficult procedure, as the ability of counsel to claim costs depends on the work performed, the timing of the work, and for whom the work was done.
Subsection 197(4) of the BIA permits the recovery of costs from the estate of the bankrupt only where such costs have been authorized by the trustee in writing or where such costs have been awarded against the trustee. If there is no written authorization for legal fees, such fees will not be payable out of the bankrupt’s estate. In the event that the estate has insufficient costs to cover the permitted legal fees, the BIA sets out, in subsection 197(6), a priority structure as follows:
- Commissions on collections;
- Costs incurred by the trustee after bankruptcy, but prior to the first meeting, where such fees are authorized by either the court or the creditors;
- Costs on an assignment or incurred by the application creditor up to the issue of a bankruptcy order;
- Costs awarded against the estate or the trustee;
- Costs for legal services otherwise rendered to the trustee or the estate.
Counsel acting for the bankrupt prior to the assignment into bankruptcy for work done in connection with the assignment into bankruptcy will be entitled to have their legal costs payable out of the estate, even though such costs are not approved by the trustee.26 Additionally, the legal costs for a creditor who petitions a debtor into bankruptcy will generally be payable out of the estate of the bankrupt, unless the court otherwise orders.27
Counsel is not entitled to submit claims for fees for legal services provided to the debtor post‐bankruptcy. Such fees may be claimed against the debtor and will survive a discharge of the bankrupt, but may not be claimed against the estate.28 The Court also does not have the jurisdiction to give counsel a charge over the assets of the bankrupt for past or future legal fees incurred by the bankrupt.29 However, if a debtor plans to make a proposal under section 50 of the BIA, the terms of such a proposal could include the payment of legal fees incurred or future legal fees.30
If counsel is preparing to request a stay to put forward a plan of arrangement under the CCAA, counsel should request a super‐priority administrative charge in the initial order to cover the legal fees it expects to incur on behalf of the debtor in relation to the plan. Under section 11.52 of the CCAA, the court is permitted to make an order granting a charge over all the debtor’s property for certain administrative fees incurred by the debtor company during CCAA proceedings. As the court is entitled to fix the amount of such a charge at a level they consider appropriate, Counsel should ensure that they provide a thorough estimate of administrative fees in their request. Subsection 11.52(1) of the CCAA permits the court to award an administrative charge for the following fees:
- The monitor’s fees, including the any legal, financial or expert fees incurred by the monitor in the performance of their duties.
- Any financial, legal or expert fees incurred by the debtor company for the purpose of the CCAA proceedings.
- Any financial, legal or expert fees incurred by any other interested party, provided they satisfy the court that such a charge is necessary for effective participation in the proceedings.
In light of the fact that several fees are covered by the administrative charge, counsel making the request for the charge should ensure that they incorporate estimates from all other parties eligible to claim against the charge into their request. Some of the factors that the Court may take into consideration in determining the appropriateness of both the administrative charge itself and the amount are:
- the size and complexity of the businesses being restructured;
- the proposed role of the beneficiaries of the charge;
- whether there is an unwarranted duplication of roles;
- whether the quantum of the proposed charge appears to be fair and reasonable;
- the position of the secured creditors likely to be affected by the charge; and
- the position of the Monitor.31
As this list is by no means exhaustive, counsel should, in addition to addressing these factors, address any other factors that may be relevant to the court’s decision to grant or deny the order. Finally, it is important to note that such a request cannot be made ex parte. Subsection 11.52(1) specifically requires that notice be given to all secured creditors likely to be affected by the charge before the Court may grant such an order.
Ensuring that counsel has requested such super‐priority in the initial order is essential, as counsel will be an unsecured creditor in respect of its fees if it does not make this request and the plan fails. If this happens, counsel will be far less likely to recover than they would if they had requested and received a super‐priority charge on the assets.