Expenses in insolvency proceedings



Part 3 Expenses in insolvency proceedings

36.50 Payment of expenses or costs from the insolvent estate assets

In liquidation proceedings any fees, costs, charges and other expenses incurred in the course of the liquidation are to be regarded as expenses of the liquidation [Note 1] and are payable out of the assets of the company (including property comprised in or subject to a floating charge, see paragraph 36.52), prior to any distribution to creditors or contributories [Note 2]. In bankruptcy proceedings the expenses of the bankruptcy are payable out of the assets of the bankrupt’s estate prior to any distribution to creditors [Note 3].


36.51  Order of priority of payment

(Amended May 2012)

The priority for payment of costs and expenses must be followed in order, as set out in the Insolvency Rules 1986 at Rule 4.218(3) [Note 4] (company liquidations) and Rule 6.224 (1) [Note 3] (bankruptcies). Rule 4.218(3) is subject to the provisions of rules 4.218A to 4.218E, which deal with litigation expenses and property subject to a floating charge.

To summarise, the primary expenses or costs which must be paid are those which are chargeable and incurred by the official receiver or liquidator or trustee in:

  • Getting in assets, including preserving, realising and pursuing or defending legal proceedings relating to assets.
  • Continuing a business (e.g. employing a special manager).
  • Employing a shorthand writer appointed by order of the court.
  • Paying remuneration and expenses to a provisional liquidator or interim receiver, or to a liquidator or trustee.
  • Paying the costs of the petitioner whose costs are allowed by the court.
  • Paying amounts authorised to be paid for a person employed to assist with preparing a Statement of Affairs.
  • Liquidator or creditor committee expenses.
  • Corporation and Capital Gains Tax where appropriate.
  • Any other expenses properly chargeable by the liquidator or trustee in carrying out his/her functions.
  • Payment of any person who has been employed to perform a service for the company or bankrupt, as required or authorised by the IA86 or IR86.


36.52 Expenses where there is a floating charge account in a liquidation case.

(Amended February 2012)

With effect from 6 April 2008, section 176ZA was inserted into the Insolvency Act 1986 [Note 5].  This section has the effect of reversing the decision in Re Leyland Daf Ltd, Buchler v Talbot [2004] UKHL 9; [2004] 2 A.C. 298; [2004] B.C.C 214 (known as the Leyland DAF case). For more detailed information on this case refer to Chapter 36A paragraphs 36A.66 to 36A.69 [Note 6].  Section 176ZA applies to all compulsory liquidation cases where the winding-up order is made on or after 6 April 2008,  except where the winding-up order is made following a resolution for a voluntary winding up,  passed by that company before the commencement date (6 April 2008) [Note 7].

The effect of section 176ZA is to allow unpaid general liquidation expenses to be recovered from the floating charge account as well as the general estate account [Note 8].   


36.53 Expenses of previous voluntary liquidation

(Amended February 2012)

If a creditors’ or members’ voluntary winding up precedes a winding up by the court, the remuneration of the voluntary liquidator and the costs and expenses of the voluntary liquidation that may be allowed by the court, rank in priority with those of the provisional liquidator, official receiver or liquidator referred to in the Insolvency Rules 1986 Rule 4.218(3)(a)[Note 4][Note 9]. 


36.54 Expenses of provisional liquidator

Where a provisional liquidator causes a company to continue trading until the business of the company is sold as a going concern, and has collected VAT and deducted PAYE income tax and national insurance contributions from staff wages, these expenses are given superior priority to the expenses at paragraph 36.51 Re: Grey Marlin Limited [1999] All ER (D) [Note 10].  In this case, the High Court also ordered that other expenses incurred by the provisional liquidator in preserving, realising or getting in any of the assets should be paid in priority to the expenses of the official receiver or liquidator in undertaking the same type of work [Note 4], but after the payment of the tax liabilities.


36.55 Expenses incurred in an existing voluntary arrangement

(Amended February 2012)

If a winding-up order is made when there is at the date of the presentation of the petition a company voluntary arrangement (CVA) in force, the expenses properly incurred as expenses of the administration of the CVA should be paid in priority to any expenses of the liquidation [Note 11].

In the same way, if a bankruptcy order is made on a debtor’s petition, and at the time the petition is presented the debtor is subject to an individual voluntary arrangement (IVA), or a fast track voluntary arrangement (FTVA) which is in force, any expenses properly incurred as expenses of the administration of the IVA or FTVA become a first charge on the bankrupt’s estate [Note 12] [Note 13]. See also Chapter 20, paragraphs 20.19 and 20.20.


36.56 Payment of administrator’s remuneration and expenses upon vacating office

(Amended February 2012)

Where a person ceases to be the administrator of a company,  which could be as a result of resignation, death, removal from office or cessation of appointment (for example where a winding-up order is made) [Note 14],  the former administrator holds a first charge in respect of his/her remuneration and expenses incurred during his/her appointment, on any assets over which he/she had custody or control  immediately before the cessation of e administration [Note 15].  This also applies to any assets held by the administrator which are subject to a floating charge [Note16] [Note 17].  

In practice this means the former administrator is likely to transfer to the liquidator any assets he/she is holding net of his/her remuneration and  expenses.  For details of the priority of payment of administration expenses see Rule 2.67(1) [Note 18].


36.57 Administrator’s charge over assets held immediately prior to cessation of appointment

Any sum payable in respect of a debt or liability arising out of a contract entered into by the former administrator is also a first charge on assets over which he/she had custody immediately prior to the cessation of his/her appointment [Note 19].  This includes any liability arising under a contract of employment adopted by the former administrator (or a predecessor) [Note 20]. The charge on the assets in respect of these debts arising out of contracts entered into, takes priority over any charge in respect of the former administrator’s remuneration and expenses [Note 19].


36.58 Assets received by liquidator following prior administration

(Amended February 2012)

Where an administrator was in office prior to the liquidation of the company,  any remuneration and expenses owing to the administrator are charged on and payable out of assets of which the administrator had custody or control immediately before cessation of appointment. However, there may be instances of funds refundable to the company prior to cessation but paid after cessation which do not fall within this as they cannot be said to have been within the custody or control of the administrator. An example of this would be a refund of business rates due prior to cessation but paid after cessation.


36.59 Payment of expenses of winding up proceedings

(Amended February 2012)

In the event of assets being insufficient to satisfy the liabilities, the court may make an order as to the payment out of the assets of the expenses incurred in the winding up, in such order of priority as it thinks just [Note 21].  In a normal case, the priorities laid down by IR86 rules 4.218 [Note 4]and 4.219 [Note 9] will apply. The court will only in exceptional circumstances exercise its jurisdiction under IA86 section 156 [Note 21] to confer on the liquidator’s remuneration, or any part of it, priority over liquidation expenses which would normally rank before it (Re Linda Marie (In liquidation) (1988) 4 B.C.C. 463 [Note 22].


36.60 Payment of former liquidator or trustee’s costs (official receiver acting ex-officio)

(Amended February 2012)  

Where an insolvency practitioner vacates office following appointment as liquidator or trustee,  he/she may have unbilled costs still to be charged to the estate. If the official receiver, acting in an ex-officio capacity,  realises further assets, the former liquidator or trustee’s unbilled costs can be paid from these further realisations following the usual order of priority [Note 4][Note 3].


[Back to Part 2 Fees on recall, rescission, stay or annulment of insolvency proceedings] [On to Part 4 Petition Deposit and costs (excluding partnerships)]