Sheriff rules £35 charge for data storage by insolvency practitioner not recoverable as estate charge

The appeal by insolvency practitioner Samantha Warburton was brought as a test case, with the sheriff noting it was one of thousands in which the issue had arisen. The position of the AIB was that the charge was a basic overhead and was not recoverable under the statutory framework.

The case was heard by Sheriff William Holligan in Edinburgh Sheriff Court. Roxburgh, advocate, appeared for the appellant and Thomson QC for the respondent.

Specific service

The appellant was the trustee in a Protected Trust Deed executed by a debtor, PS, in January 2016. As part of a scheme of division of the trust estate, she sought to recover as an outlay a £35 charge for the storage of secure data and call recordings. It had been the policy of the appellant’s firm, Carrington Dean, to delete call recordings after three months. However, following a 2019 advisory notice from the Insolvency Practitioner’s Association stating that such recordings should be retained, they contracted with a company, Creditfix, to store customer data at a rate of £35 per debt relief contract.

It was submitted for the appellant that, as the payment related solely to storage costs related to the trust deed and was made to an independent third party at market value, it was a category 1 disbursement for the purposes of the legislation. The AIB’s determination that the sum was an “basic overhead” was incorrect in that overheads in their ordinary sense were incurred in connection with the general running of a business and could not be tied to any specific service as this payment could be.

In response, counsel for the AIB submitted that it was not at all obvious that the charge was appropriate or reasonable, nor that it was directly connected to the specific trust deed. The charge was an overhead because it constituted consideration for performance of a service to the trustee which was required for services which the trustee required in order to operate her business. Further, there was no explanation for how the trustee, part of the Carrington Group, had herself incurred the outlay.

Directly referable

In his decision, Sheriff Holligan noted generally: “From a factual point of view, as the definition of ‘Customer Services’ in the contract shows, the service which the £35 funds is more than just the storage of phone calls, albeit the storage of phone calls appears to have been the catalyst for the contract. I accept that the trustee requires to have this facility in order to comply with the requirements of her professional body.”

He continued: “The administrative mechanism by which the £35 comes to be paid is opaque but I am satisfied that, by one route or another, it is the trustee of this PTD who causes to have paid the sum of £35. It appears to me that the arrangement with VB is akin to a drawdown process: the facility is organised by reference to each individual PTD. On what I would regard as a basic analysis the cost is directly referable to the appointment in question. It was incurred for the purpose of the PTD.”

Addressing whether the charge could be properly classed as an outlay, the sheriff said: “I accept that payment of £35 is payment of an outlay. To my mind, using the analogy of a solicitor’s judicial account in a litigation, an outlay is something paid by the professional in furtherance of the client’s affairs; it appears in an account as monies expended by the solicitor on behalf of the client. An example might be fees paid to the court service to raise an action; the cost of instruction of an expert witness; or the instruction of counsel. On that basis the payment of the £35 is an outlay; it is paid by the trustee to a third party.”

Part of good business

Turning to whether it was reasonable to recover the charge, Sheriff Holligan observed: “I confess determining whether the charge is appropriate is not easy to resolve. There is a dividing line between an outlay and an overhead but where the line rests is less clear.”

However, he went on to say: “These days data protection, whether of phone calls or other materials, is an increasing part, not just of commercial, but of daily life. Securing its protection, as well as its storage, is increasingly a fundamental part of good business and professional practice; it is not a matter of choice. I would regard it as an essential part of the business of an insolvency practitioner and should be treated as a cost of the business and not as an outlay.”

For these reasons, while the appeal was allowed on the basis that the AIB’s direction was issued pursuant to the wrong statutory provision, it was concluded that the £35 charge was not a recoverable outlay.