E: BW ESTATES LTD; RANDHAWA AND ANOTHER V TURPIN AND ANOTHER  EWHC 517 (CH) (“RVT”)
This decision followed an application by creditors (“the Randhawas”) of BW Estates Ltd (“the Company”) against the administrators of the Company that their remuneration should be deemed excessive and either disallowed entirely or reduced to such extent as the court thought appropriate.
Following the Randhawas obtaining a freezing injunction over the assets of the Company, the Company was unable to make payments to Nationwide (a secured creditor) in respect of sums due in relation to five investment properties owned by the Company.
Nationwide made demands of the Company for payment and subsequently appointed LPA Receivers in relation to the properties. The directors thereafter resolved to place the Company into administration.
During the course of the administration the administrators undertook an extensive investigation into a potential creditor’s claim, the veracity of which was in doubt. This included making an application to the Court for directions. During the course of that application an order was made which led to the Company exiting administration and being returned to the control of its directors (the Randhawas were appointed as directors in place of the existing board of directors). No distribution was made to creditors and the administrators had incurred costs of over £80,000.
The Randhawas accepted that the appointment of administrators was valid in the sense that the Company was unable to pay its debts at the time of appointment (as demonstrated by demands made by Nationwide and the appointment of LPA Receivers over various properties). However, their overall contention was that there was no good reason for the Company to enter administration at all.
As a result the Randhawas considered that the administrators had incurred expenses which they saw as excessive and only had the result of reducing the assets of the Company and diminishing any potential return to creditors.
The Randhawas made an application pursuant to Rule 2.109 IR 1986 in relation to the Court’s powers to make orders to deal with administrators’ entitlement to their expenses pursuant to Rule 2.109(4), namely in this case that the remuneration of the administrators should be deemed excessive and either disallowed entirely or reduced to such extent as the court thought appropriate
In reaching his decision to refuse the application, the following comments of HHJ David Cooke are of interest:
- The Act gives the directors power to appoint an administrator and the responsibility for the decision falls upon them. However, the Act does not expressly oblige them to carry on trading whenever they could properly do so. Therefore, it is not necessarily improper to appoint an administrator in circumstances where the directors could equally properly have taken some other course of action.
- Notwithstanding the above, claims may arise against the directors if they acted for an improper purpose, or in breach of their duties, in deciding to appoint an administrator. The same may be said for the administrators’ firm prior to their appointment when giving advice to the Company with regards to an appointment or generally if such advice is found to be defective.
- When deciding whether the statutory purpose can be achieved, administrators may look to what may or will happen during the administration, but not the motives of the directors seeking their appointment.
- In the present case, it was correct for the administrators to take steps to investigate the assets available to them, as well as seeking to clarify whether certain liabilities were genuine in order to determine how assets will be dealt with once they are in control of them. However, the Judge questioned whether the administrators should have incurred the costs they did in seeking to assess the potential creditor’s claim in circumstances where the company to which the liability was purportedly owed had been dissolved.
The Judge refused to order that the administrators should not be entitled to any remuneration at all for their services. However, in relation to the quantum of fees the Judge refused to approve all of the time incurred by the administrators on the basis that they should not have incurred the time they did in assessing the potential creditor’s claim given that the entity in question had been dissolved. The Judge stated that, alternatively, the potential creditor claim could have been dealt with easily and cheaply by advertising for claims once there were assets available for distribution. The Judge left the parties to agree the quantum of remuneration to be reduced in relation to work undertaken in relation to the potential creditor claim in the first instance, subject to a detailed assessment if required.
The decision is “officeholder friendly” in that the Judge agreed with the general approach and work undertaken by the administrators and refused to make an order that they were not entitled to any remuneration at all.
However, it is nonetheless a careful reminder that the Court will expect officeholders to be able to demonstrate that the work they undertake is necessary and of value to the estate. This is clear from the Court’s comments on the strategy adopted by the administrators in seeking to assess the veracity of a purported creditor claim which the Judge saw as a task which could have been undertaken in a significantly more cost efficient manner.
Separate to this case, but nonetheless relevant to the remuneration of officeholders, is the requirement from 1 October 2015 (in all insolvency cases commencing after that date) for insolvency practitioners to provide a written fee estimate and details of expenses that will or are likely to be incurred. An accurate and updated estimate could well serve to decrease the potential for challenges such as the one brought in this case.