(Capitol Films Ltd (in administration) [2010] EWHC 3223 (Ch))
In correlation with the principles applied by the Courts in liquidation cases, the High Court recently prevented administrators from recovering their remuneration and costs as an expense of the administration following their failed application for permission to dispose of assets subject to a fixed charge under paragraph 71 of Schedule B1 of the Insolvency Act 1986 ("the Act").
This is the first decision in which the Court has prevented an administrator from recovering his costs in this way. The Court held in this case that the administrators made a serious mistake by failing to consult and engage with the holder of fixed charges over the assets of the company to which they were appointed.
The Facts
Capitol Films Ltd (CFL) was a film production company and its main assets were its rights to produce films. These rights were subject to fixed charges in favour of a number of creditors.
Before going into administration, CFL assigned its rights to produce a number of films ("the Disputed Films") to another company ("X") which was controlled by a major shareholder in CFL. Despite expressing doubts about the validity of this assignment, the administrators did not carry out any investigatory work to assess whether the assignment was capable of challenge on the basis that there was a lack of funding.
The administrators agreed a sale of CFL's assets to X. The sale included any residual rights that CFL may have had in the Disputed Films. It was clear therefore that, even if the assignment above were set aside, CFL would not receive any monetary benefit from the return of the rights to the Disputed Films.
The administrators had not apportioned the sale price between CFL's assets and so it was impossible to put any value on the rights it may have had to those films.
The fixed charge holders refused to release the charges over the assets of CFL. One secured creditor applied under Paragraph 43 of Schedule B1 of the Act to appoint a receiver over certain of the rights to the Disputed Films. Although the administrators originally consented to the appointment of a receiver, they withdrew their consent a day later, without explanation.
The administrators then applied for an order to sell assets as if they were not subject to fixed charges (Paragraph 71 of Schedule B1). The secured creditors resisted this application. Shortly after the start of the hearing, the administrators withdrew their application. The Court permitted the secured creditors to appoint a receiver.
The secured creditors then applied to Court for an order that the administrators pay the costs incurred by the secured creditors in relation to the applications on an indemnity basis and for the administrators to be prevented from recovering any costs (either their own or the costs they were ordered to pay) as an expense of the administration of CFL.
The Ruling
The High Court made the order sought by the secured creditors holding that a disputed application under paragraph 71 (for an order to sell the assets subject to fixed charges) or paragraph 43 (to appoint a receiver) was no different from any other adversarial hearing. Accordingly, it was held appropriate that the losing party should pay the winning party's costs.
The High Court based its decision on the basis that the administrators' conduct in the applications under Paragraphs 71 and 43 were neither reasonable nor rational and considered that the Paragraph 71 application itself was misconceived.
The High Court held, in analogy with liquidation cases, that the Court can disallow administrators' costs as an expense of an administration where:
- The administrator is guilty of misfeasance.
- The administrator has made a serious mistake in his conduct of the administration.
- Allowing the administrator to recover his costs would be, in the Court's opinion, unjust.
Conclusion
In making an application under Paragraph 71 of Schedule B1 of the Act, the onus is on the administrators to show that the Court should interfere with the ordinary rights of a fixed charge holder. A burden is therefore placed upon the administrators to identify which assets they propose to sell and demonstrate that the proposed disposal represents the realisation of a proper price for the assets.
In this case, the High Court held that the administrators did not discharge that burden and, in particular, the administrators' failure to explain the withdrawal of their consent to the appointment of a receiver was significantly unreasonable conduct. Further, they were criticised for not engaging with the fixed charge holders. In the circumstances the court found that it was sufficiently outside the norms of litigation to justify an award on the indemnity basis.
The High Court placed some emphasis on the fact that the administrators had stated in their report to creditors that there was no realistic possibility that a sale of assets would raise sufficient funds to repay all secured creditors in full. Consequently, their failure to effectively communicate with the secured creditors (i.e. the only creditors who had a real commercial interest in the outcome of the judgement) was not looked upon lightly. The Judge actually commented that the administrators had no constituency to serve other than the secured creditors.
It would seem on this basis that the facts of this case are somewhat extreme and the question of indemnity costs being appropriate will clearly depend on the administrators' conduct and the commercial circumstances of each case.
Healys can offer a full range of advice and assistance on administration applications under Paragraph 71 or generally. Should you have any queries regarding the contents of this news item or on any aspect of insolvency or corporate recovery, please contact Melanie Badain on melanie.badain@healys.com or on 01273 685888.
