The Statutory Order Of Payment In Insolvency Proceedings Sets Out The Priority Of Expense Payments

Statutory Order of Payment in insolvency proceedings is a post about the division of duty between the duty to realise assets and the duty to distribute them.

It is a stand-alone duty of the Insolvency Practitioner in Liquidations, Administration and Bankruptcy to realise the assets, to realise ‘property’ including ‘things in action’.

This is, in essence, separate from the duty to ‘account’ for the realisations to creditors. This has become a bit of a hot potato recently in relation to the use of funds realised in typically a Liquidation, where such funds may have originated from the Bounce Back Loan Support Scheme and may have gone in payment of Insolvency Practitioner‘s fees.

SUMMARY OF KEY FACTS

  • The Statutory Order of Payment in insolvency proceedings sets out the priority for payment of expenses of insolvent estates.
  • The payment of fees and expenses of the insolvent estate is separate from the duty to realise the assets of the estates.
  • It is in the interests of creditors that the expenses of the insolvent estate are paid.
  • It maintains the integrity of the insolvency process if good claims are brought even if all the funds are hoovered up from the estate.
  • Bounce Back Loan creditor claims are not an exception to the order of payment and rank after the costs and expenses of a Liquidation.
  • A Liquidator who has deducted fees is not necessarily entitled to retain them if there are expenses of equal or no lower rank.

What Is The Statutory Order Of Payment In Insolvency Proceedings?

The statutory order of payment is set out in various provisions in the Insolvency (England And Wales) Rules 2016 for example:

This sets out in detail how the expenses ought to be paid in order of priority across each category of expense such that there are funds available to discharge the same.

Duty To Realise Claims

So if the claim is a good one it should be brought even if there is no return to creditors at the end of it. This would be somewhat consistent with the notion that an asset of value should be realised. Of course, that does depend upon avoidance of prejudicing any of the existing returns to creditors without them having a say in the matter. That position prevails regardless of whether or not it is known to be the potential position at the commencement of any such litigation. This does not compel the Insolvency Practitioner (“IP”) to bring the claim if they do not wish to place themselves at personal risk.

Commercial considerations will come into play because it would be difficult for the IP to progress litigation if an award of damages would be dwarfed by the costs (after anticipated recovery of legal costs from an opponent). Lawyers would in all likelihood be unwilling to act in such a matter. Indeed it is likely that the Insolvency Practitioner would be unwilling to devote time to a matter for which they would not recover their own time costs.

Bowe v Bowe [1997] BPIR 747 (“Bowe”) and Official Receiver v Negus [2011] EWHC 3719 (Ch) (“Negus”) suggests that it is in the interests of creditors that the expenses of the insolvent estate be discharged. The statutory order of payment places the expense creditors at a higher priority to that of the unsecured creditors and therefore it would odd if expense creditors (such as the Insolvency Practitioner) were to be put into a worse position.

In Bowe the following was said:

 

In my judgment, it is clear that the bankrupt’s creditors have an interest in an order for sale being made, notwithstanding that it may be the case that the entirety of the bankrupt’s share in the net proceeds of the property may be swallowed up in defraying the expenses of the bankruptcy. If that be the case then the interests of the creditors under s 336(5) will prevail over the other factors listed in that subsection.

 

The reason why, in my judgment, the bankrupt’s creditors have an interest in an order for sale being made, notwithstanding that the order may not result in any direct distribution to them, is that it is in the interests of the creditors that the expenses of the bankruptcy, as defined in the 1986 Act, which will in any event include the costs of the petitioning creditor, be discharged so far as possible out of the assets of the bankrupt. In the first place I accept Mr Sellers’ submission that if there be after-acquired property, or a possibility of after-acquired property coming to light, then plainly the discharging of the expenses of the bankruptcy, which inevitably will take priority to the preferential or other provable debts, is in the interests of the creditors, who may find themselves in receipt of a distribution following the realisation of any such after-acquired property.

 

In the second place, even if there be no question of after-acquired property to be brought into account – and I have to say in this case there is no evidence of the existence of any future property, or any further property, of the bankrupt – in my judgment it remains in the interests of the bankrupt’s creditors that the expenses of the bankruptcy, including the remuneration of the official receiver and the remuneration of the trustee (who the creditors themselves have appointed and who has carried out his statutory duties as effectively their representative in the context of a bankruptcy process devised for their benefit) should be discharged so far as possible out of the assets of the bankrupt.

In Negus the following was said:

 

It is noteworthy, moreover, that, in the context of s 336, the ‘interests of creditors’ have been held to include ‘their interest in having the expenses of the bankruptcy discharged so far as possible out of the assets of the bankrupt’, even where there is ‘no question of after-acquired property to be brought into account’: see Trustee of the Estate of Eric Bowe (A Bankrupt) v Bowe [1997] BPIR 747, [1998] 2 FLR 439, at 754 and 446 respectively.

 

[11] Secondly, the scheme of the 1986 Act provides no warrant for treating the fees payable to the Official Receiver and Secretary of State as less important than the claims of unsecured creditors. To the contrary, Parliament has chosen to give the fees priority over unsecured debts. Had Parliament instead decided that the fees should rank no higher than unsecured debts, the district judge’s concerns could not have arisen: an income payments order would have been likely to benefit creditors as well as the Official Receiver and Secretary of State. It would be very odd if the Official Receiver and Secretary of State were in a worse position as a result of the priority they have been given. Parliament can hardly have intended that to be the case.

 

[12] A third point is that the bankruptcy regime is not concerned exclusively with the distribution of assets among creditors. It has a public aspect. As was pointed out in the Report of the Review Committee on Insolvency Law and Practice Cmnd 8558 (1982) (at para 1734), insolvency proceedings ‘have never been treated in English law as an exclusively private matter between the debtor and his creditors; the community itself has always been recognised as having an important interest in them’. Bankruptcy also has the advantage from the bankrupt’s point of view that he is released from his debts. It does not strike me as inconsistent with the ‘idea … of bankruptcy’ (to use the district judge’s words) that a bankrupt should be required to contribute to the costs associated with his bankruptcy if his income exceeds the level ‘necessary for meeting the reasonable domestic needs of the bankrupt and his family’ (to quote from s 310(2) of the 1986 Act). That is especially so where (as in the present case) the bankrupt presented the bankruptcy petition himself, presumably with a view to securing the benefits that the regime affords to debtors.

 

[13] A fourth point, though I think one of lesser significance, is that, even if the sums payable under an income payments order are not of themselves going to be sufficient to allow a distribution to be made to unsecured creditors, they could prove to be of benefit to such creditors if the ‘bankrupt’s estate’ were otherwise augmented, for example by a claim for after-acquired property under s 307. Mr Head argued that a person in Mr Negus’ position is unlikely to acquire property within the scope of s 307, but the possibility cannot be excluded. Even the impecunious sometimes win money on the lottery, for instance.

Bounce Back Loan Support Scheme Funds

The nature of the Bounce Back Loan Support Scheme is that such funds become an asset of the company and can properly be used as with any other asset to discharge the proper costs and expenses of an insolvent company.

The issue that has sprouted is the ethical consideration for an Insolvency Practitioner in advising a Director to separate such funds so that the costs and expenses of a Liquidation can be discharged which will include the practitioner’s fees. If the funds are not ring-fenced then in most cases the bank that has lent the funds would apply set-off and no funds would be available for the insolvency process.

It appears that the statutory order of payment in insolvency proceedings directs that unsecured creditors, including a bank that has provided a Bounce Back Loan pursuant to the government back scheme, do not rank ahead, for example, of the fees of the Insolvency Practitioner. There has been no variation to the general order of priority of payment in insolvency proceedings when the Bounce Back Loan Scheme was introduced by the government.

It appears in the interests of creditors that an insolvent company that has ceased trading ought to have an orderly winding up and this will include an investigation of the conduct of the Directors in respect of their Director Duties.

If however such funds were not deployed for the purposes of the insolvency and a Director cannot afford to repay the Bounce Back Loan or the Insolvency Practitioner’s fees, then a creditor may have to pay for the winding up. Alternatively, the company might be struck off or dissolved by Companies House if it failed to file accounts and confirmation statements. That does seem to have been the intention of Parliament, particularly at a time when it has recently now afforded the Insolvency Service the new power to investigate dissolved company directors.

Liquidators’ Fees In Priority

There can be occasions when an insolvent estate has resulted in the creditors seeking to remove a Liquidator.

The Insolvency Practitioner‘s fees are an expense of the insolvency estate. The fact that a Liquidator is replaced does not mean that he or she is not entitled to their fees but that cuts both ways. The successor Liquidator is also entitled to his or her fees.

A problem can arise if there are insufficient realisations to pay all of the costs and expenses of the insolvency. In such an instance how do they get carved up?

Liquidator Fee Order

Re Salters Hall School Ltd [1998] 1 BCLC 401

This problem was considered in the case of Re Salters Hall School Ltd (in liq), Merrygold v Horton [1998] 1 BCLC 401 when the assets of a Liquidation were handed over to a successor Liquidator and the Court had this to say on the application of Mr Merrygold:

In my judgment, a liquidator who has properly deducted his remuneration under r 4.138(1) is not entitled by virtue of that rule to retain the remuneration if it subsequently emerges that there are insufficient assets to pay other expenses of the liquidation ranking no lower in the order of priority specified in r 4.218(1) than the remuneration in question. If, in such circumstances, a liquidator seeks to retain what he has deducted, it is for him to make out, if he can, a claim for relief under s 156 of the 1986 Act.

Mr Merrygold sought to argue that his fees ranked ahead of Mr Horton but the Court flatly rejected that proposition:

Mr Isaacs referred me to Re Beni-Felkai Mining Co Ltd [1934] Ch 406, [1933] All ER Rep 693. That case concerned the question of priority as between the remuneration of the liquidator in a voluntary winding up and income tax to which the company had been assessed since the commencement of the winding up. In order to determine that question Maugham J had to consider inter alia, ss 171 and 196 of the 1908 Act and r 187 of the 1909 Rules. He concluded ([1934] Ch 406 at 418-419, [1933] All ER Rep 693 at 697) that rates and taxes falling due subsequently to the winding up were part of the ‘expenses’ of the winding up within the meaning of ss 171 and 196 of the 1908 Act and r 187 of the 1909 Rules. (I might add in passing that, on this point, his decision was followed in Re Mesco Properties Ltd [1979] 1 All ER 302, [1979] 1 WLR 558, and in the Court of Appeal [1980] 1 All ER 117, [1980] 1 WLR 96.) Maugham J went on to consider how the court ought to exercise its discretion under s 171 of the 1908 Act. He said ([1934] Ch 406 at 422, [1933] All ER Rep 693 at 698):
‘Prima facie and in a normal case my opinion is that the whole of the expenses of the winding up ought to be paid before the remuneration of the liquidator. It seems to me, in the normal case, expenses which he has incurred … are things for which he is bound to provide out of the assets of the company as far as he is enabled to recover them. If his position is that, having provided for them, there will be no remuneration left for him, then he is entitled to say: “I cannot go on unless the creditors and shareholders or others will put up a fund for my benefit.” He is the person who can see what the position is. The people to whom the company in liquidation has incurred a liability for expenses have not got the materials which he has for ascertaining the true position. There may, however, be cases in which the Court, under the power which I hold the Court has under s. 171 of the Companies (Consolidation) Act, 1908, will provide for the liquidator’s remuneration to the extent to which that remuneration ought to be given for services which he has rendered by way of salvage, in a case where the realization of property has long been delayed or has become impossible. Nor do I think the Court ought to be unwilling to declare that the liquidator is entitled to retain the remuneration which he has paid himself out of the assets of the company at a time when he had no reason to suppose that there would be an insufficient amount available for the payment of the costs, charges and expenses incurred in the winding up.’

In the final sentence, as it seems to me, Maugham J quite clearly recognised that, unless granted relief by the court under s 171 of the 1908 Act (now s 156 of the 1986 Act), a liquidator is not entitled to retain remuneration he has previously been paid if there subsequently turn out to be insufficient assets to pay expenses ranking in priority to the remuneration. The whole of that passage was cited with approval, and the general principle set out in it was applied, by Warner J in Re Linda Marie Ltd [1989] BCLC 46 at 56-57, a case, it should be noted, in which it was said that only in exceptional circumstances would the court exercise its powers under what is now s 156 of the 1986 Act to confer on the liquidator’s remuneration priority over liquidation expenses which would normally rank before it.

In my judgment, a liquidator who has properly deducted his remuneration under r 4.138(1) is not entitled by virtue of that rule to retain the remuneration if it subsequently emerges that there are insufficient assets to pay other expenses of the liquidation ranking no lower in the order of priority specified in r 4.218(1) than the remuneration in question. If, in such circumstances, a liquidator seeks to retain what he has deducted, it is for him to make out, if he can, a claim for relief under s 156 of the 1986 Act.

Mr Isaacs said that this cannot be right because it would leave a liquidator at the mercy of his successor and put him in a position where he was, in effect, paying his successor’s remuneration. Whilst very properly making it clear that in the present case there was absolutely no question of any impropriety on the part of Mr Horton, he submitted that if Mr Briggs’s argument was correct the consequence would be that a subsequent liquidator would be at liberty to continue incurring his own fees, knowing that in doing so he was reducing the assets available to pay his predecessor’s remuneration already fixed in accordance with r 4.127. That, he said, could not be right. Leaving aside the improbability that, in the kind of case postulated by Mr Isaacs, a successor liquidator would recklessly go on doing work and incurring fees in circumstances where he would know that he was not going to be paid in full, there are, as it seems to me, three short answers to Mr Isaacs’ concerns. In the first place, any liquidator is always subject to the control of both the creditors and the court, who can be expected to prevent any abuse or misuse of his position. Second, and for reasons which I have already explained, a successor liquidator is simply not in a position to fix his own remuneration; it has to be fixed by others in accordance with rr 4.127, 4.129 and 4.130. Third, and in any event, s 156 of the 1986 Act gives the court all the powers it needs to ensure that the balance is held justly and fairly as between the competing claims of successive liquidators.

Statutory Construction

It is often put forward that the facts of the case will influence the end result. Certainly, this is correct, however, the facts and particular circumstances of a case do not influence statutory construction.

An example of how the Court approaches this point was articulated in the case of The Financial Conduct Authority v Carillion Plc [2021] EWHC 2871 (Ch) in which the following was notably said:

The OR’s evidence explained why it had been raised in this liquidation. This was because Carillion was the largest trading liquidation in UK history with a massive deficiency in relation to creditors. Proofs of debt received by the OR exceed £7.1 billion while realisations as of last year totalled only some £575 million. The cost to the public purse will be considerable. The income received by Insolvency Service under the Insolvency Proceedings (Fees) Order 2016 has already been expended and all the realisations have been accounted for by way of liquidation expenses. Any costs that would have to be incurred if Carillion, acting by the OR, was required actively to participate in FCA enforcement proceedings would necessarily have to be met from public funds, as would other existing and contemplated litigation. Therefore, Ms Addy QC submitted, it is important that these matters have the scrutiny of the insolvency court before such costs have to be incurred.

Clearly the scale of the liquidation and the particular facts in relation to Carillion cannot influence the proper interpretation of s.130(2) of the Act. But they do provide some perspective and explain why the point has been taken.

Are you a creditor looking to recover your money?

If you are a creditor of an insolvent company or a bankruptcy, Oliver Elliot can help you address your claim and concerns arising from the insolvency.

Find out how

What Next?

Expert Advice Is Just A Click Away

If you have any questions in relation to Statutory Order Of Payment In Insolvency then contact us as soon as possible for advice. Oliver Elliot offer a fresh approach to insolvency and the liquidation of a company by offering specialist advice and services across a wide range of insolvency procedures.

Our expertise is at your fingertips.

By submitting this form you agree with the storage and handling of your data by Oliver Elliot. For more details, please read our Privacy Policy.

Disclaimer: Statutory Order of Payment In Insolvency

This page: Statutory Order of Payment In Insolvency is not legal advice and should not be relied upon as such. This article Statutory Order of Payment In Insolvency is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.