The facts briefly were that the joint official liquidators (JOLs) of DLIFF sought the Court’s approval of certain fee applications. Those fee applications were opposed by the liquidation committee (LC). Relevantly, the LC’s concerns were that particular workstreams had not been implemented in a proportionate and appropriate matter, and that, in one instance, a particular workstream should have been approached in a fundamentally abridged manner. Ultimately, the Court granted the JOLs’ fee applications. Justice Segal decided that, broadly speaking, the time spent and remuneration sought by the JOLs was justified in the circumstances of the liquidation.
This decision gives welcome clarification on the law following Justice Kawaley’s judgment last year in Herald Fund SPC and provides valuable practical guidance to both official liquidators and liquidation committees in relation to the conduct of fee approval applications. The following key principles can be drawn from the decision:
1. Where an official liquidator makes a fee application, he/she should remember that the burden lies with the official liquidator to place sufficient evidence before the Court to justify their fees and to meet any challenge from the LC. If the official liquidator fails to provide sufficient evidence, they run the risk that the Court will disallow the relevant fees. Although there is a tension for official liquidators to not run up significant costs in preparing a fee application, they should be very cautious in taking a “light touch” approach to the supporting evidence provided to the Court – the officeholder should not assume that the Court will give him/her an opportunity to file further evidence. For this reason, official liquidators should ensure that all requisite evidence is filed at the outset. This is particularly so when the LC has opposed the application, as the Court will be required to consider the application far more closely, and in depth and detail. The Court even noted that such an in-depth analysis may require the appointment and use of an assessor.
2. If the LC opposes the fee application, the legal test that applies will depend on the nature of the challenge. Broadly speaking, a challenge will fall into one of two categories, those are: (i) challenging only the resources deployed, and the time spent in implementing a particular decision (we will refer to this as a “resources challenge”) or (ii) challenging a core decision made by the officeholder in relation to the exercise of their powers (we will refer to this as a “core challenge”). A core decision can be understood as a high-level or operational level strategic decision.
a) Where a resources challenge is made, the Court will apply what is known as the prudent man – or woman! – test: that is, whether a prudent man faced with similar circumstances would lay out or hazard his or her money in the way that the official liquidator has done. As Justice Segal put it, “the Court’s focus is on whether the resources used, and the resulting costs, are proportionate to what is needed (having regard to the complexity of the task) and in particular to the benefits that have resulted and will result from the work, and on what is the fair value of the liquidator’s work in the circumstances”. Usefully for insolvency practitioners, the Court noted that the Practice Direction: Insolvency Proceedings  BCC 698 provides helpful guidance to the approach to be followed on a remuneration application (see in particular paragraph 21). Any well formulated fee approval application (or opposition to such an application) should be made with this Practice Direction squarely in mind.
b) Where a core challenge is made, the Court will apply a test akin to what is known as the Wednesbury unreasonableness test: that is, the Court will not interfere with the official liquidator’s decision unless the decision is such that no reasonable liquidator could arrive at in the circumstances, acting on proper instructions and advice. As the words suggest, this is a relatively high standard for an objecting LC to meet. There is good logic to applying this high standard to a core challenge because, as the Court notes, a fee approval application is generally not the appropriate forum to bring a challenge of this nature. Rather, the proper avenue (and time) to make a core challenge is by objecting to the Court sanctioning the official liquidator’s exercise of his or her powers, where such approval is sought, or otherwise by applying to the Court for directions.
3. The Court noted that LCs should not hesitate to challenge a fee approval application and that the Court will welcome an LC’s participation in this process. However, where a challenge is brought (on either basis noted above), the Court made clear that an LC should ensure that it has identified with reasonable precision its points of dispute, with suitably detailed explanations and by reference to the evidence. If it seeks to challenge the official liquidators’ professional judgement regarding resource allocation, the Court noted that an LC’s position should be supported by the views of another professional (presumably by way of expert evidence), at least in cases where a substantial part of the official liquidators’ activities and remuneration is challenged.
4. As to an LC’s costs of opposing a fee application, if the Court considers that the LC’s position was “wholly unreasonable”, then the LC’s costs may not be paid out of the assets of the Company. However, where this is not the case, the usual rule will apply, resulting in both the official liquidators’ and LC’s costs being paid out of Company assets in accordance with CWR O.24, r.9. On the facts, although the JOLs’ fees were approved in full and the LC’s opposition rejected, this did not amount to the LC’s position being wholly unreasonable (rather the Court noted that it considered that the LC’s views were genuinely held and based on genuine concerns). This finding is consistent with the Court’s view, as noted in the decision, that the role of an LC in reviewing an official liquidators’ remuneration is an important one, and its independent and commercial judgment is relied on by the Court and creditors.