We have recently seen modifications proposed by HMRC in an administration that appear to conflict with either the law or public policy, depending on how they are interpreted. We have started to go through the appropriate channels to see if we can find a solution, but for now we want to find out how many IPs have seen this. The modification may be a one-off by an overzealous officer at HMRC or it may be a standard modification that they are using more widely and we’d appreciate it if you would let us know if you have seen it before.
The offending modification says:
"Pre appointment fees and expenses unpaid at the commencement of administration may only be paid to the extent permitted by Rule 2.67(c) IA 1986. The administrator if not already provided will provide creditors with a detailed account of such expenses paid from administration funds. Pre appointment fees and expenses not payable within R2.67(c) shall rank as an unsecured claim alongside other ordinary creditors.”
This modification is trying to refer to “costs of the application” – rule 2.67(1)(c) of IR 86. It approves them but goes on to say that the balance can only be taken as an unsecured claim.
If they are approving the fees that are not just “costs of the application”, then putting it in a different priority to 2.67(1)(h) is contrary to the legislation and would not be effective.
If they are not approving the fees that are not “costs of the application”, then they are right that you would only have an unsecured claim for them, but this creates an ethical problem. You would become a creditor in your own proceedings with the obvious self- review and other threats. An unscrupulous IP could, in an extreme case, front load his pre-appointment costs to give himself a significant proportion of the unsecured pot or prescribed part, so that he is certain of recovering the normal level of pre-appointment fees anyway. More to the point, however, in our opinion, is that the government signalled its intention for IPs to be able to draw pre-appointment costs by amending the legislation to develop an approval route and payment priority and HMRC are seeking to circumvent it, contrary to public policy.
While we continue to ask questions to get this issue resolved, please let us know how big the potential problem is. In the end it may be that HMRC need to talk to the Insolvency Service to decide whether the policy implication of the revised legislation is such that some or all of the modification needs to be varied or withdrawn.
