Reporters examining liquidators' accounts should take note of a recent sheriff court judgment, and keep more closely to their proper role than is sometimes seen in practice

In Scotland, the Insolvency (Scotland) (Receivership and Winding Up) Rules 2018 provide that where there is no creditors' committee, the remuneration of a liquidator shall be fixed by the court. In practice, the court appoints a reporter to examine and audit the liquidator’s accounts and to report on the amount of remuneration to be paid.

In the recent cases of Equal Exchange Trading Ltd (in liquidation) [2018] CSOH 35 and Thomas Auld & Sons Ltd (in liquidation) [2019] CSOH 83, Lord Bannatyne sought to clarify the role and remit of the reporter. In his opinion, the remit of the reporter was not limited to checking that the work claimed for had been carried out; the reporter was required to consider whether the work done was necessary and appropriate.

He was also of the opinion that while the reporter was entitled to raise wider concerns regarding the conduct of the liquidation, the role of the reporter was not to oversee the conduct of the liquidation in general and mere disagreements between reporter and liquidator in respect of a course of action or strategy should not be raised as concerns.

This guidance from Lord Bannatyne was much welcomed, but it nevertheless remained to be seen how it would be applied in practice by both reporters and judges.

One Optical Ltd (in liquidation)

The latest decision on this topic has been issued by Sheriff Anwar in the note in the liquidation of One Optical Ltd [2020] SC GLA 22 (17 March 2020) and provides further helpful guidance.

In this case, the work in progress incurred by the liquidators amounted to just over £216,000, but they sought to have their remuneration restricted to approximately £107,000, being the extent of the funds in hand.

The first reporter appointed by the court recommended approval of their remuneration in this restricted sum. However, the sheriff was not satisfied that his report contained sufficient information to allow the court to be properly informed as to the correct level of remuneration. In particular, the sheriff noted that the report was very brief, and did not explain why the level of remuneration was justified. As a consequence, the sheriff took the unusual step of remitting the liquidators’ accounts to a second reporter.

The report issued by the second reporter contained a number of criticisms of the work undertaken by the liquidators and recommended that their remuneration be fixed in the much lower sum of £62,000. Following representations from the liquidators, the sheriff fixed a hearing.

Liquidators’ position

With reference to the decisions of Lord Bannatyne, the liquidators submitted that the reporter’s criticisms were unfounded and that he had exceeded his remit as court reporter.

It was noted by the liquidators that the reporter was the same reporter as in the earlier Lord Bannatyne cases and that, notwithstanding the observations made by Lord Bannatyne, the criticisms made by the reporter were similar to those made by him in those cases.

In particular, his criticisms, in the main, arose out of his view as to the steps which he might have taken if he had been appointed as liquidator. The liquidators were also concerned that the reporter had not engaged in meaningful discussions with them to ascertain whether his concerns could be addressed.

The sheriff’s decision

The starting point for the sheriff was to adopt the approach taken by Lord Bannatyne, highlighting that the type of concerns which ought properly to be drawn to the court’s attention are concerns which may have consequences – either because of a failure to discharge professional duties, or because they are or could be to the detriment of the creditors of the company.

Sheriff Anwar also made the point that the court expects there to be a constructive dialogue between the reporter and the liquidator in relation to any matters of concern, with such matters only being raised with the court if that dialogue does not satisfy the reporter’s concerns. While a reporter should robustly challenge the liquidator, he should also work constructively with him for the benefit of the court.

The sheriff considered that the majority of the concerns raised by the reporter were either matters of strategy or were concerns which, had the reporter discussed them with the liquidators, would have been addressed. In reaching her decision and in addressing some of the specific criticisms made, the sheriff also provided some helpful guidance for both liquidators and reporters going forward:

  • Absence of narratives in time recording records: the sheriff’s view was that for there to be meaningful scrutiny and an informed judgment of the level of remuneration sought, a description of the work carried out ought to be recorded. Although the liquidators had restricted the level of remuneration sought, the court must still have confidence in the headline WIP figure presented to it, otherwise a significant reduction in the level of remuneration will be merited.
  • Delay in submitting accounts and a claim for outlays and remuneration: the Scottish insolvency rules require these to be submitted within 14 days after the end of an accounting period. However, the liquidators had not submitted their accounts and claims for over six years. Although the sheriff recognised that the court is often invited to dispense with this requirement in order to avoid the costs of repeated court applications, she said that inordinate and unnecessary delays may lead to the court fixing a level of remuneration which reflects some sanction for failure to submit accounts timeously. However, in light of the restricted remuneration sought and lack of any prejudice to creditors, the sheriff did not consider a sanction to be appropriate.
  • The reporter’s recommended reduced fee: the reporter advised that his figure of £62,000 was simply an indicative figure and not the result of a definitive forensic exercise. However, the sheriff advised that in the absence of details such as the number of hours and the chargeout rate applied by the reporter to arrive at his figure, she could not be satisfied that his suggested figure was reasonable.

Having been satisfied with the explanations provided by the liquidators, the sheriff ultimately approved their remuneration in the restricted sum of the funds in hand. However, for reason of the delays in submitting accounts and bringing the liquidation to a close, as well as the absence of time recording narratives, she ordered that the expenses of the hearing and written responses be borne by the liquidators personally and should not form expenses in the liquidation.

Concerns

The sheriff expressed concern at what she described as the “stark contrast” in approaches taken by the two reporters in this case, which she said served to highlight the differences in the quality and content of the reports received by the court. In doing so, she referred to the ICAS court reporter pack which was issued in September 2019 and which provides helpful guidance on the work to be carried out by court reporters.

What this decision serves to highlight, however, is that notwithstanding the recent guidance, both from the courts and ICAS, matters which are outwith the remit of the reporter continue to be raised with the court. It is hoped that the detailed guidance set out in this new court decision will further help to ensure compliance with the remit and role of the court reporter.

The Author

Stuart Clubb is a partner and Joint Head of Litigation for Shoosmiths in Scotland

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