32.2.4(a) Indemnities from creditors most likely to benefit from employment

Where assets are insufficient to cover the estimated costs (including possible adverse costs) the official receiver should request either funds or an indemnity for costs from the class of creditor most likely to benefit from the action being considered. Requests for an indemnity should outline the following:-

1. the reason for employment of solicitors;
2. the likely benefit flowing from the employment;
3. an estimate of the cost of retaining solicitors;
4. any potential adverse costs;
5. the amount of the funds or indemnity required; and
6. if legal proceedings are to be entered into a statement should be given to any provider of funds or indemnifier that the official receiver reserves the right to terminate or withdraw from such proceedings at his/her sole discretion.

An indemnity should be obtained in writing and should state the amount of funds that will be provided to the official receiver. Written indemnities can usually be accepted from concerns where their integrity is beyond reproach, e.g. Government Departments, insurance companies and major banks without the need for an advance or bond as detailed in paragraph 32.2.6. It is preferable that an indemnity given by a limited company is under the seal of the company but it is not essential. An indemnity given by a firm should be executed in the name of the firm by any person who is authorised to do so (whether a partner or not).

Notes: [s6 Partnership Act 1890]

32.2.4(b) HM Revenue & Customs (HMRC) litigation budget

HMRC hold a litigation budget, a fund which can be drawn upon by insolvency office-holders who require funding to take legal proceedings to recover assets for the benefit of creditors. Funding can also be applied for in cases where a matter of principle arises which might create a legal precedent. HMRC will consider each application for funding on its merits in the light of the prospects of success and the likelihood of a net benefit. The official receiver will need to provide HMRC with the full details of the matter to be considered. An indication of the likelihood of success of any action to be taken and the possible net benefit to the creditors should also be provided. The official receiver should address correspondence on this matter to HM Revenue & Customs, VAT Operations (VOPS), Legal Recovery Unit, Insolvency Section, Queens Dock, Liverpool, L74 4AA.

An indemnity should be obtained in writing and should state the amount of funds that will be provided to the official receiver. Written indemnities can be accepted from Government Departments, without the need for an advance or bond as detailed in paragraph 32.2.6.

32.2.5 Indemnities from general body of creditors

If indemnities from specific creditors cannot otherwise be obtained, the official receiver may negotiate with the remaining creditors. This may be either on an individual basis, or as a fighting-fund, on the understanding that if proceedings or other recovery steps are successful they will receive repayment of any funds provided under their indemnity as an expense of the proceedings and the balance of the recovery (after settlement of any other expenses) will be distributed to creditors. If the general body of creditors is to be approached then all of them should have an opportunity to comment on or provide a proportion of the indemnity. A written indemnity as outlined in paragraph 32.2.4(a) should then be obtained from those concerned and any deposit of funds dealt with in accordance with paragraph 32.2.7 below.

Notes: [form CINDY]

32.2.6 Creditors funds in advance of employment

If the official receiver is not satisfied that a written indemnity affords sufficient protection to cover the costs of legal advice or proceedings (including adverse costs) he/she should either seek the deposit of the necessary funds in advance or seek from the indemnifying party an insurance company or bank bond as additional security. The money advanced should be paid into a suspense account, unless the funds are to be invested, and in any event should be treated as a first charge on the assets recovered after any costs of realisation.

32.2.7 Investment of third party funds

When cash is deposited with the official receiver he/she must come to clear agreement with the depositor as to whether or not it is to be placed on an interest-bearing account. If the depositor requires the deposit to earn interest whilst in the official receiver’s possession, the official receiver should seek to persuade the depositor that the money be placed in the official receiver’s solicitors’ client account to earn interest under the Solicitors’ Accounts (Deposit Interest) Rules 1988. The official receiver must reach agreement with the depositor that the interest is paid to them. This should ensure that the depositor, and not the official receiver, is liable to HMRC for any tax due on the interest earned. The official receiver should not use the interest element of funds to discharge the costs as this may give rise to a liability for tax on the interest. Only at the request of the creditor, and in exceptional circumstances and with the approval of Technical Section, may the official receiver deposit the funds elsewhere to earn interest.

32.2.8 Appointment of a practitioner

If the official receiver (when acting as liquidator or trustee) receives advice that a civil action should be pursued for the benefit of the estate and the assets are insufficient to pursue the matter he/she should seek indemnities or funds from creditors as considered appropriate (see paragraphs 32.2.4(a) to 32.2.6). Once the official receiver is satisfied that adequate indemnities or funds are available he/she should make application to the Secretary of State (Insolvency Practitioner Unit (IPU)) for the appointment of an insolvency practitioner willing to act as liquidator or trustee. The official receiver may seek the appointment of an insolvency practitioner before he/she obtains funds or an indemnity from creditors if he/she is aware of an insolvency practitioner who is prepared to act.

Notes: [s137 or 296]

32.2.9 Proceedings at the risk of Vote

Generally, proceedings which are not funded by the estate, by creditors or under an indemnity will not be sanctioned. In circumstances where funds from these sources are not available but the official receiver considers that the matter is of importance and should be proceeded with (e.g. because of public interest) he/she should minute Technical Section with full details. Even where an indemnity from BIS is obtained the official receiver is not relieved from his/her responsibility for the proper conduct of proceedings taken and must retain control over them as if they were being conducted at the expense of the estate.

32.2.10 Application for sanction to bring, continue or defend legal proceedings

When proceedings are to be brought or defended sanction is required (see paragraphs 32.1.4 to 32.1.6). An omission to obtain due authority should not be regarded as a formal defect (in re: Geiger (1915) 1 KB 439). Where application is to be made to the Secretary of State it should be forwarded to Technical Section on form AFS together with sufficient detail of the reasons justifying the application thus obviating the need for further correspondence (see below). In cases of urgency the official receiver may seek verbal sanction from Technical Section, but formal written application must then be made for record purposes.

Notes: proceedings [Schedule 4 Part II and Schedule 5 Part I] [R7.55] [s141(4) or302(1)] [form AFS]

32.2.11 Contents of application

When making application to Technical Section particular care should be taken in stating the precise nature of the proceedings proposed including the expected costs (and adverse costs). Details should also be given of the arrangements made for payment of the costs where the estate funds (including future realisations) are inadequate. Where indemnities are to be relied upon details should be stated of the amount, by whom given and the grounds upon which the official receiver considers the guarantors are good for the amount of their guarantees. Reference should be made to evidence in the matter and to any public or private examination, etc so that the merits of the case can be considered. The official receiver should give his/her own opinion on the question in dispute and should state the reason for his/her views. Where appropriate the official receiver should inform Technical Section that he/she is satisfied that at least one defendant is sufficiently solvent to make proceedings worthwhile. Any counsel’s opinion should also be referred to and is particularly important where the case is one of appeal. As outlined in paragraph 32.2.15 the purpose of the solicitor’s employment should be limited to the immediate objective, e.g. action to recover a debt, and should not extend to possible further proceedings which may or may not be required.

Notes: [form AFS]

32.2.12 Granting of sanction by the Secretary of State

When satisfied that it would be appropriate, Technical Section (acting on behalf of the Secretary of State as liquidation or creditors’ committee) will sanction the commencement, continuance or defence of proceedings. A financial limit of the legal costs that may be incurred will be included in the sanction. These costs should not be exceeded without further sanction from Technical Section (see below). Any sanction given does not imply that the official receiver may incur a debit balance in connection with any action or employment (without the express approval of Technical Section) or that there is any undertaking for the payment out of Vote of any expenses (but see paragraphs 32.1.8 and 32.2.9). Technical Section should be informed of the result of all legal proceedings in respect of which sanction has been granted.

Notes: [form AFS]

32.2.13 Application to increase limit in sanction for legal proceedings

The official receiver should apply to Technical Section (acting on behalf of the Secretary of State) for any required increase in the limit that may be incurred in legal costs which has been stated in an earlier sanction. Application should be made prior to costs in excess of a previous limit being exceeded. The official receiver should provide confirmation of the details contained in earlier application(s) and of the extent to which, and reasons for, the change in any of the matters in paragraph 32.2.11. Technical Section will then consider whether to grant or refuse the application.

32.2.14 Retrospective sanction

The official receiver may make application to the court or the Secretary of State (carrying out the functions of the liquidation or creditors’ committee) retrospectively, so that the costs of employing the solicitor may be paid out of the insolvent’s estate. Before ratifying the acts of the official receiver the court or Technical Section (on behalf of the Secretary of State) will wish to be satisfied that the official receiver carried out his/her actions due to the need for urgency and that no undue delay has occurred in applying for sanction retrospectively. If it is necessary to apply for retrospective sanction, application should usually be made to Technical Section and not the court.

Notes: [s314(4)] [R4.184(2)] [form AFS]

32.2.15 Retainer of a solicitor

In general the official receiver, in whatever capacity he/she is acting, should only in exceptional circumstances employ solicitors under a general retainer. If this is envisaged then Technical Section should first be consulted. In any event the official receiver should give written instructions to the solicitors to deal with particular matters arising which are to be covered by that general retainer. The official receiver should not extend a retainer to possible further advice or proceedings which may or may not become necessary following the initial advice.

32.2.16 Wording of a retainer

The wording of a retainer of a solicitor for a company should usually commence with the words: "To act for the company and advise the official receiver as [provisional liquidator/liquidator] in connection with ..............".

In a bankruptcy the wording should usually commence: "To advise and act for the official receiver as [interim receiver/receiver/and manager/trustee] in connection with .......".

The precise wording of the retainer should usually be agreed with the solicitor prior to his/her instruction and, where the official receiver is the liquidator or trustee, prior to any application to the Secretary of State for sanction to take or defend, etc an action.

32.2.17 Retainer for overseas proceedings

If proceedings are to be taken overseas the solicitor’s retainer should additionally recite the details of the overseas agent who will deal with the litigation. The costs of the overseas agent should be included in the estimated costs notified to Technical Section when application is made for sanction to proceed (see paragraph 32.2.11).

32.2.18 Instructions to solicitors

In cases of urgency verbal instructions may have to be given to solicitors but the official receiver should confirm these in writing, stating their precise nature and limits. Particular attention should be drawn to the limit of funds available to discharge the estimated costs and, if applicable, any possible adverse costs. The solicitors’ attention should be drawn specifically to the fact that the costs should not exceed the limit specified by the official receiver without his/her express prior consent. Solicitors should only be instructed to enter into proceedings once the appropriate sanction has been obtained unless the official receiver is satisfied that the conditions of retrospective sanction apply (see paragraphs 32.2.12 to 32.2.14). Details of any solicitors retained should be noted on ISCIS.

32.2.19 Liability for costs where insolvent is a party to proceedings

The official receiver acting as liquidator or trustee should not take or defend an action in his/her own name, but as the liquidator or trustee of the insolvent. The official receiver should be absolutely satisfied that the insolvent’s estate has ample assets to discharge costs, including adverse costs, or has adequate indemnities before taking or defending proceedings. Where proceedings that commenced prior to the appointment of the official receiver are to be continued the official receiver must make allowance for the pre-appointment costs (and any pre-appointment adverse costs) that the court may order to be discharged as an expense of the insolvency rather than as a provable claim against the estate. Reference should be made to paragraph 32.1.3 regarding the continuance of an existing contract. In cases where the official receiver as liquidator or trustee is not a party to an action it is unlikely that the court would order him/her to pay costs, on the same basis that the directors of a trading company would not be ordered to pay costs of a company.

32.2.20 Security for costs

If a claimant successfully obtains permission of the court to commence or proceed with any legal action after the date of an insolvency order, the official receiver should, if the action is to be defended, consider requesting the court to order security for costs. The official receiver should do so particularly where he/she is in doubt regarding the ability of the claimant to discharge the costs if the defence is successful. The relevant authorities for such a request are outlined in the Civil Procedure Rules 1998 (CPR) sections 25.12 to 25.15.  

Notes: [s130(2) and (3); 285(3) or 286(6)] [CPR 25.12 to 25.15]]

32.2.21 Supervision of employment

The official receiver is expected to exercise careful supervision over each step of any proceedings in which he may be involved so that he may judge the propriety of continuing them. Solicitors should therefore be advised to keep the official receiver informed of the progress of proceedings. In particular, attention should be paid to the relevance of the terms of employment and to the funds available to discharge the solicitor’s costs (see paragraphs 32.2.3 to 32.2.5). If the nature of the employment changes then care should be exercised that any necessary sanction to revise the terms of employment of the solicitor or to increase the financial limit in the sanction is obtained (see paragraph 32.2.13).

32.2.22 Professional assistance in a public examination

In the extremely rare circumstances that the official receiver requires the assistance of a solicitor or counsel in conducting a public examination he/she may do so with the consent of the court. Application must be made prior to the court hearing to Technical Section for approval to incur the costs. The expense will be a charge against the insolvent’s estate or to Vote depending upon the case circumstances and Technical Section will indicate which of the two options should be adopted. If the examination is at the request of a creditor the official receiver should seek an order that the costs of employing solicitors or counsel should be paid by the requisitionist.

Notes: [s133(4)(a) or 290(4)(a)] [R4.215(2) or 6.175(2)]

32.2.23 Professional assistance in a private examination

If the official receiver, as liquidator or trustee, intends to make application to the court for a private examination and a solicitor or counsel is to provide assistance, sanction of the Secretary of State (acting as liquidation or creditors’ committee) must first be obtained. The official receiver should advise Technical Section (acting on behalf of the Secretary of State) of the reason for the proposed application for a private examination and provide any other relevant evidence (see also paragraph 32.2.11).

Notes: [s236 or 366] [Schedule 4 part II or Schedule 5] [form AFS]

 
32.2.24 Official receiver appointed receiver by the court

If the official receiver is appointed by the court to act as receiver for a mortgagee or chargee or other creditors (an extremely rare event in recent times) he/she must minute Technical Section and he/she must obtain the sanction of the court for any necessary employment of a solicitor. However, the official receiver appointed by the court may be acting as administrative receiver if he/she is acting on behalf of a debenture holder secured by a floating charge. If so he/she may employ a solicitor without the permission of the court, unless the debenture specifically provides otherwise. If the official receiver is also the liquidator, he/she must consider whether he/she will be employing a solicitor in his/her capacity as receiver or liquidator as he/she may have wider recovery powers as liquidator. An example of this would be where a potential recovery resulting directly from liquidation proceedings could be pursued e.g. recovery of a preference under section 239. The official receiver when acting as liquidator must obtain the sanction of Technical Section (acting for the Secretary of State as liquidation committee) to take legal proceedings (see paragraph 32.2.10). The official receiver as receiver for mortgagees or charge-holders in these circumstances should not take any legal proceedings which may involve personal liability without first consulting Technical Section. Such consultation should take place before any expense or liability is incurred. As a general rule Technical Section will not agree to the official receiver as receiver for mortgagees or charge-holders incurring any risk or liability against which he/she is not either amply secured by the assets or indemnified by the persons interested. If the official receiver acting as receiver considers that his/her duties conflict with those in his/her capacity as liquidator he/she should seek the directions of the court.

Notes: (companies only)[s32][s29(2)][s42(1) and Schedule 1para 4] [s141(4)] [Schedule 4,Part II,para 4] [R10.3]

32.2.25 Payment of costs from estate and detailed assessment of costs

Where the costs of employment or of any legal proceedings are to be discharged by the estate reference should be made to Chapter 32.1. Details of the occasions when costs of employment should be subject to detailed assessment  by the court and of the procedure involved are given in Chapter 39 - Detailed Assessment.

32.2.26 Calling upon indemnities

Where the official receiver is discharging the fees of solicitors from an indemnity he/she should make a demand for the funds required under the indemnity as soon as the total costs are known and any detailed assessment of the costs has been completed. The official receiver should consider requesting funds from the indemnifier to enable a payment to be made on account (see paragraph 32.1.9) if delays are likely in finalising the costs (with or without detailed assessment). Details of the action to be taken by the official receiver as a result of the advice or the outcome of any proceedings should be provided when funds are requested. Normally the official receiver should only discharge the solicitors’ costs and any adverse costs once the funds are received. If long delays are experienced in obtaining funds from an indemnifier, especially where the official receiver is being pressed for payment of costs, the official receiver should consult Technical Section.

32.2.27 Payment of fees from creditors’ funds

The official receiver should advise creditors who provided funds for legal advice, or for legal proceedings, of the action to be taken by the official receiver as a result of the advice or of the outcome of the proceedings. The creditors concerned should be informed of the final costs of the employment of solicitors after any detailed assessment by the court. If a creditor requests a copy of the bill of costs or final costs certificate in connection with the provision of funds for its settlement, it should be forwarded by the official receiver. The costs should be discharged from any recoveries and if they are insufficient then the creditors’ funds should be used. The official receiver should make payment of the costs from the creditors’ funds by endorsing the bill of costs or final costs certificate  and processing it as outlined in paragraph 32.1.12.

32.2.28 Balance of funds and return of interest

If any balance of creditors’ funds remain in hand after payment in full of the costs then it should be returned to the creditors who provided the money in the proportion in which it was provided, without delay. Any interest earned upon the funds deposited not already returned in accordance with paragraph 32.2.7 should likewise be returned.

[Back to 32.1: Agents Generally] [On to 32.3: Employment of Agents]