Full fathom five

Sometimes it is not enough for a solicitor to win a case for a client and to recover substantial awards of damages and costs in order to get paid. This is not only because clients can and do refuse to pay: they can and do lapse into insolvency and in such circumstances both the damages and the costs might be sucked into the event horizon of the black hole constituting the insolvency proceedings.

An often underused provision permitting a solicitor to take security for their fees, over awards of damages and costs (and other property too) in litigation in which they are instructed, is section 73 of the Solicitors Act 1974. That provision and how it may be utilised (or defeated) is worth an article in its own right.

But sometimes solicitors wish to take more extensive security for their fees, which may be way of a fixed charge or a floating charge. It is the latter type of charge which featured in the case of  Crumpler and Bower v Candey Limited [2019] EWCA Civ 345. The case is a salutary example of the limitations of such a charge when judged against the mechanisms in the insolvency legislation which can avoid such charges.

The Court of Appeal began by noting the scope of the appeal that had been brought before it.

1. Part VI of the Insolvency Act 1986 contains a group of sections (sections 238 to 246) which enable the relevant office-holder of a company in liquidation or administration to apply to the court for an order adjusting certain types of prior transaction entered into by the company during a specified “twilight” period before the onset of insolvency. The subject matter of these sections comprises (in England and Wales) transactions at an undervalue (section 238), the giving of preferences (section 239), extortionate credit transactions (section 244), avoidance of certain floating charges (section 245) and the avoidance of liens on the company’s books and records (section
246).

2. This appeal concerns a floating charge created within the specified period by a company which is now in liquidation in the British Virgin Islands (“BVI”), Peak Hotels and Resorts Limited (“PHRL”). It is also no longer in issue that the charge was created at a time when PHRL was unable to pay its debts within the meaning of section 123 of the 1986 Act. It follows that the provisions of section 245 would be directly engaged if PHRL were an English company being liquidated in England. The position is less straightforward than that, although not materially so, because PHRL is a company registered in the BVI and it was wound up in that jurisdiction after the contested hearing of a creditor’s petition. Two foreign-based members of KPMG, Sarah Bower and Russell Crumpler, were appointed as joint liquidators. Ms Bower has recently been replaced by Christopher Farmer, but nothing turns on that. I will refer to them collectively as “the Liquidators”.

What makes the case of particular interest to solicitors (or lawyers generally) is that the floating charge had been created in order to secure the fees of a firm of solicitors.

5. The deed of charge with which we are concerned was executed by PHRL on 21 October 2015, in favour of PHRL’s London-based solicitors, Candey Limited (“Candey”). Candey was the respondent to the Liquidators’ originating application and is now the respondent in this court. The deed was also duly executed by Candey, through its director and managing partner Mr Ashkhan Candey. The charge was expressed to be given as “continuing security for the payment and discharge of all liabilities to” Candey pursuant to a fixed fee agreement of even date, defined as “the
Fixed Fee Agreement”. The charge purported to operate (a) “by way of fixed charge” over all assets and undertakings of PHRL “including all monies in Court in all jurisdictions worldwide”, as well as over all recoveries from the claims referred to in the Fixed Fee Agreement, and (b) “by way of floating charge” over all or any of PHRL’s assets that were not capable of being charged by way of fixed charge (including the assets already described, if the fixed charge were for any reason defective).

The fees for which security was sought, were substantial, and reflected a commercial deal that had been struck in respect of substantial commercial litigation and interestingly had been incurred on the basis of what was termed a fixed fee. Often “fixed fee” is a term of abuse for lawyers, but in this case the fixed fee was itself substantial:

6. The Fixed Fee Agreement is the document which lies at the heart of the present dispute. I will need to examine some of its terms in more detail later in this judgment, but at this stage a summary will suffice:

(1) The document is headed “Confidential Fee Agreement between CANDEY Limited & Peak Hotels & Resorts Limited dated 9 October 2015”, but the judge found that it was signed on behalf of PHRL on 10 October 2015 and by Candey on 21 October 2015. Clause 1 recorded that it superseded and replaced any previous agreement between Candey and PHRL in respect of fees, and that PHRL had obtained independent legal advice before signing it.

(2) Clause 2 provided that, subject to the terms of the agreement, Candey would continue to act for PHRL in four specified sets of proceedings (two English High Court claims, some Hong Kong arbitration proceedings, and proceedings in the BVI Commercial Court), as well as “other matters expressly agreed from time to time
(including ongoing general advice)”.

(3) Clause 3 then recorded that, as a consequence of a number of developments in various jurisdictions, Candey’s previous estimate of costs had been “revised to £5 to £6 million”, and “[t]he actual figure could be significantly higher or it could be substantially lower if an early settlement is achieved.”

(4) Clause 4 then said this:
“PHRL does not wish to pay CANDEY’s invoiced and unbilled costs incurred to date or provide further funds in advance on  account on a weekly basis and wishes instead to agree a fixed liability fee payable at a future date. It is therefore agreed that PHRL will pay CANDEY a fixed fee of £3,860,637.48 (“the Fixed Fee”). It is agreed that to assist PHRL’s cash flow PHRL is not obliged to pay the Fixed Fee before judgment on liability is handed down or a settlement is agreed in the Tarek proceedings [i.e the main English High Court proceedings] unless PHRL obtains cash from elsewhere as set out in this agreement. Interest at 8% per annum will accrue from judgment
or settlement.”

(5) Clause 5 stated that PHRL would pay Candey’s outstanding unpaid invoiced costs of £941,358.94 (“Outstanding Costs”) in three tranches, time to be of the essence in respect of each payment. It was also made clear that disbursements were not included in the Fixed Fee, and PHRL was to remain liable for them, including all counsel’s
fees.

(6) Clause 8 provided for termination of the agreement, as follows:
“CANDEY may terminate this agreement at any time for any reason without liability to PHRL. In those circumstances, or if PHRL wishes to terminate this agreement, PHRL will remain liable for the Outstanding Costs, plus the Fixed Fee and all disbursements, subject of course to all its legal rights. The Fixed Fee and Outstanding Costs become immediately due for payment in the event that PHRL is subject to any bona fide insolvency proceedings or arrangement or insolvency related Court order.”

(7) Clause 9 stated that the agreement was “subject to English law and the exclusive jurisdiction of the English Courts”.

7. After the Fixed Fee Agreement and the charge had been entered into, Candey continued to provide legal services to PHRL in accordance with the agreed terms. On 8 February 2016, however, a winding-up order was made against PHRL in the BVI, by Bannister J sitting as a High Court Judge of the Eastern Caribbean Supreme Court,
and the Liquidators were appointed. The position confronting the Liquidators in relation to the Tarek proceedings in London was described as follows by Judge DavisWhite at [46]: “When [PHRL] entered liquidation in February 2016, the London Litigation was at a critical stage. There was a liability in respect of Counsel’s brief fees and an outstanding obligation pursuant to a court order to pay additional security for costs. There was a risk of adverse costs in respect of the Defendants’ costs in the London Litigation, which was covered neither by insurance nor fully covered by the existing sums paid into court. Having unsuccessfully attempted to obtain a third party fortified indemnity in respect of adverse costs, the Liquidators decided that the appropriate course was to seek to settle the London Litigation. Ultimately they were successful in this endeavour. The terms of settlement provided for the release to [PHRL] of the two sums paid into court of US $10 million and £1,648,000. These sums were paid to the Liquidators by order of Asplin J dated 7 March 2016.”

8. The effect of the winding-up order was to make the Fixed Fee become immediately due for payment under clause 8 of the agreement; and even in the absence of that provision, PHRL would have become obliged to pay it in full upon the settlement of the Tarek proceedings, together with interest at 8% from the date of the settlement. The Liquidators were unwilling, however, to pay the Fixed Fee, because although Candey had done a considerable amount of work since the Fixed Fee Agreement was entered into, application of Candey’s standard hourly charging rates to that work would have resulted in the payment of a much smaller sum, later quantified in the region of £1.2 million. Nothing turns at this stage on the precise figure, although I should mention that the Liquidators in fact continued to use Candey’s services for some time after 7 March 2016, before finally deciding to dispense with them.
According to the second affidavit of Mr Crumpler served with the originating application, the total fees payable to Candey on the basis of Candey’s time sheets and standard charging rates amounted to £1,212,851, comprising £704,626 from 1 October 2015 until the commencement of the liquidation on 8 February 2016, and £508,213 for work done thereafter on behalf of the Liquidators. The important point is that the amount of the Fixed Fee exceeded the costs which Candey would have been entitled to charge on a conventional time cost basis for work done since 1 October 2015 by an amount of the order of £2.5 million.

The fee structure is an interesting example of how a “fixed fee” can work to the benefit of solicitors in preference to charging on the basis of a traditional hourly rate: depending of course, on the amount of the fee.

9. For its part, Candey sought to prove in the liquidation as a secured creditor for the full amount of the Fixed Fee, together with contractual interest at 8% from 2 March 2016. The Liquidators were unwilling to agree to this, contending that, insofar as the charge created a floating charge, it was invalid under section 245 of the 1986 Act, save to the extent of the value of the services supplied to PHRL on and after 21 October 2015, and that the value of those services was to be ascertained in accordance with section 245(6). On the latter point, the Liquidators further contended that the appropriate figure was in fact substantially less than £1.2 million, because Candey’s standard hourly rates were in various respects unreasonably high, and there were also issues about the extent to which work done after the liquidation could properly be charged for.

10. In broad terms, this was the background to the issue of the Liquidators’ ordinary
application in September 2016 and the hearing which took place before Judge DavisWhite QC over three days in March 2017. I have already summarised the main points which the judge determined in his judgment of 23 June 2017: see [3] above. There was then an appeal to this court on the question whether the monies which PHRL had paid into court, and which were subsequently paid out to the Liquidators upo n the settlement of the London litigation, were subject to the charge. The appeal was dismissed, on the basis that PHRL retained the property in the money that it paid into court, with the consequence that the money continued to be one of its existing assets and therefore fell within the scope of the charge: see [2018] EWCA Civ 2256. The judge also held that the floating charge given to Candey was invalid under section 245 of the 1986 Act “save to the extent of the value of the services supplied to [PHRL] by Candey on or after 21 October 2015”: see paragraph 2 of the judge’s order dated 17 July 2017. There has been no appeal by Candey against the judge’s conclusions that the charge was a floating charge created at a time when PHRL was unable to pay its debts, and therefore at a “relevant time” for the purposes of section 245(3) and (4).

11. The remaining issue, which it was agreed would have to be dealt with at a subsequent hearing, was therefore the valuation of the services supplied by Candey to PHRL on or after 21 October 2015. Trial of this issue took place before His Honour Judge Raeside QC (sitting as a judge of the High Court) on 22 November 2017. The judge heard argument from Stephen Robins for the Liquidators and Benjamin Williams QC for Candey. The following day he delivered an oral judgment, of which we have a written version approved by the judge: [2017] EWHC 3388 (Ch). In short, he rejected the Liquidators’ submissions, and held that the value of the relevant services, within the meaning of section 245(2)(a) and (6), was the whole of the Fixed Fee, namely £3,860,637.48.

12. The Liquidators now appeal to this court, with permission granted by the judge. As he pointed out at the start of his judgment, there is apparently no previous authority on the question.

In the Court of Appeal things became unstuck for the solicitors, and the position at first instance rapidly started to unravel:

32. As I have already explained, section 245 is one of a group of sections which enable transactions entered into during a specified period before the onset of insolvency to be set aside or adjusted. Parliament has decided that these powers are needed in order to strike a fair balance between the creditors of a company which enters liquidation or
administration. As Ms Toube QC reminded us, the general position in a liquidation, absent adjustment, is that creditors’ debts which are secured by fixed charges rank first for payment, followed by the expenses of liquidation, followed by debts secured by floating charges, leaving the remaining assets (if any) to be distributed on a pari
passu basis among the unsecured creditors.

33. The critical distinction between fixed and floating charges, at least in the present context, is that a fixed charge necessarily attaches from its inception to existing property of the company, whereas a floating charge remains in suspense until the happening of a crystallising event, whereupon it will attach to the company’s assets of the types specified in the charge as at the date of crystallisation, whether or not they were in existence when the floating charge was created. This has the potential to cause unfairness between the holder of a floating charge and the company’s unsecured creditors if the charge is created at a time when the company is of doubtful solvency and it later goes into liquidation or administration. In particular, the secured creditor would be likely to gain an unfair advantage if it were thus able to obtain priority for any part of the company’s indebtedness to it which in substance preceded the date of the charge, or which post-dated the charge but exceeded the further value actually provided by the creditor to the company before the charge crystallised. In general terms, that is the mischief which section 245 seeks to combat. It does so, like its predecessors in the Companies Acts of 1908 and 1948, by providing that a floating charge over the company’s property or undertaking, created during the specified “relevant period”, is invalid except to the extent specified in the section. Before the 1986 Act, the exception was confined, broadly speaking, to cash paid to the company at or after the date of creation of the charge. Since 1986, as I have explained, the scope of the exception has been widened to include the supply of goods or services, but again the supply must take place on or after the creation of the charge. In short, therefore, the effect of the section is to invalidate the floating charge, save to the extent that it secures the value of new money paid, or new goods or services supplied, to the company on or after the date of the creation of the charge, and as part of the consideration for its creation.

The Court of Appeal continued, noting the limited, though devastating effect within its sphere of operations on the efficacy of a floating charge:

34. The next important point to note is that the effect of the section is only to invalidate the charge to the specified extent. The section has no effect on the underlying contractual relationship of debtor and creditor between the parties, or on the ability of the creditor to prove for its debt as an unsecured creditor to the extent that the floating
charge is invalidated. Accordingly, if the Liquidators’ arguments in the present case were to prevail, Candey would remain free to prove in the liquidation of PHRL for the unsecured balance of the Fixed Fee and contractual interest thereon. This reflects the underlying purpose of the section, which is to place the holder of a floating charge created during the “twilight” period on the same footing as the unsecured creditors, save to the extent that the charge secures the provision of new money, goods or services.

It followed that attempts to fix a price for future work and obtain priority under a floating charge to other creditors could not succeed:

36. In my judgment, these submissions are clearly correct. The focus of the section is indeed on the services actually supplied by Candey to PHRL from 21 October 2015 until the Liquidators terminated their relationship. Those services were supplied pursuant to the Fixed Fee Agreement, but for the purposes of section 245 the question
is not what sum was contractually due from PHRL to Candey in return for those services. That question is relevant only to the extent of Candey’s claim in the liquidation as an unsecured creditor. The relevant issue is the extent to which Candey is entitled to enforce its charge, and for that purpose what has to be ascertained is the value, calculated in accordance with section 245(6), of the services actually supplied by Candey to PHRL during the relevant period. That is the measure laid down by Parliament to ensure a fair balance between the interests of Candey as the holder of a floating charge, on the one hand, and the interests of the general body of unsecured creditors (including Candey, to the extent that the charge is invalid) on the other hand. It has nothing whatever to do with the commercial fairness, as between Candey and PHRL, of the contractual terms of the Fixed Fee Agreement.

39. This must also mean, in my opinion, that the whole concept of provision of the services in return for a fixed fee has to be disregarded, because such a concept is incompatible with the exercise which section 245(6) requires to be performed. The point of a fixed fee is that it provides the parties with certainty in advance, before the precise amount of work needed to provide the relevant services has been ascertained. That uncertainty is reflected in the express recognition in the Fixed Fee Agreement that the actual costs ultimately incurred by Candey in providing those services might turn out to be significantly higher or lower than Candey’s revised estimate of £5 to £6
million. But the exercise required by section 245 is of a fundamentally different nature. It is retrospective, and requires a valuation with the benefit of hindsight of the work which has actually been done. Only to that extent may Candey be regarded as a validly secured creditor. To allow the concept of a fixed fee to return again at this stage of the analysis would in my view be incompatible with the hypothetical enquiry mandated by subsection (6), and would be likely to lead (as it has in the present case) to the circular conclusion that the fixed fee should be upheld in its entirety, regardless of the objective value to the company of the services actually provided.

The court made the point that the question of the fairness or reasonableness of the arrangement between solicitor and client is simply irrelevant to the question of priority amongst creditors, which is the real issue concerning the use of a floating charge:

40. The basic fallacy in the approach adopted by the judge, if I may say so, is that he allowed the underlying commercial fairness, as between PHRL and Candey, of the Fixed Fee Agreement, together with the opinion evidence on that point of Mr Hurst, to influence not only his assessment of the statutory purpose and language of section
245, but also his analysis of the retrospective valuation exercise required by subsection (6). Once that misapprehension has been cleared away, the application of the statutory language to the facts of the present case is in my judgment reasonably clear. The charge is rendered invalid, save to the extent of the value of the services
actually supplied by Candey on or after 21 October 2015. That value must be ascertained in accordance with the hypothesis in subsection (6), which requires an objective and retrospective assessment of the amount that Candey could reasonably have charged for those services in the ordinary course of its business, and on the same terms (apart from those relating to the consideration, including payment of the Fixed Fee) as those on which they were in fact supplied. By clause 1, the Fixed Fee Agreement was expressly made subject to Candey’s attached standard terms of
business, although the terms of the agreement were to prevail if and to the extent that they were in conflict. The standard terms provided for Candey’s services to be charged on a time basis and to be invoiced monthly, with payment due within 7 days of receipt. Accordingly, that approach is likely to provide an appropriate basis for
valuation of the services under subsection (6), once the provisions relating to payment of the Fixed Fee have been eliminated.

41. In reaching this conclusion, I am not of course suggesting that the standard terms annexed to the Fixed Fee Agreement formed part of the agreement between the parties insofar as they related to the consideration for Candey’s services. To that extent, the standard terms were overridden by the express terms of the agreement; and
even if they were not overridden, they would anyway have to be disregarded by virtue of section 245(6). The point which I am making is a different one. Once the Fixed Fee has been eliminated, an alternative basis for valuing Candey’s services has to be found, on the footing that the services were supplied in the ordinary course of
Candey’s business. For that purpose, it is in my view both legitimate and helpful to look at Candey’s standard terms for guidance, although they are in no sense conclusive, because the test is an objective one and it does not necessarily have to be assumed that the supplier of the services would have been Candey itself rather than
another firm with comparable expertise and resources.

Thus a prudent attempt to obtain security not only for work done, but in respect of work yet to be done, for which a price had been agreed, failed, foundering on the reef of the insolvency legislation and leaving the balance of the solicitors bargain, after a time and rate assessment of the work untouched by section 245 in the same pool of priorities as the unsecured creditors.

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