Administrators’ remuneration—value is more important than time

How will the courts assess remuneration costs for administrators? Frances Coulson of Moon Beever considers the Companies Court’s decision in RE Brilliant Independent Media Specialists Ltd.

Original news

Re Brilliant Independent Media Specialists Ltd [2014] Lexis Citation 201, [2014] All ER (D) 111 (Oct)

The Chancery Division, Companies Court, considered an application by the former joint administrators of Brilliant Independent Media Specialists Ltd (In Liquidation) (the company) for the court to fix their remuneration pursuant to the Insolvency Rules 1986, SI 1986/1925, rr 2.106 and 2.108. Taking into account the outcome of the administration and the benefit achieved the court held that £233,147.25 was a fair, reasonable and proportionate sum.

What issues did this case raise?

In short, the issues were:

Issue 1

Whether and, if so, to what extent can the administrators receive remuneration for work carried out if the creditors’ committee always made clear that the company was to move into liquidation as soon as practicable and that investigatory work in particular was to be carried out by the liquidators?

Issue 2

Whether remuneration should be fixed for work which:

  1. fell outside the parameters of the proposals per se, and
  2. especially if it was carried out after 31 May 2012 notwithstanding the proposals provided that ‘the Company will move from administration to liquidation within 6 months of the commencement of the administration, or at such earlier time that in the opinion of the joint administrators the purpose of the administration has been achieved’

Issue 3

Whether remuneration can be fixed for work during the period after cessation of the administrators’ appointment on 12 August 2012 when the company had been placed into creditors’ voluntary liquidation and the liquidators requested those services.

Issue 4

Whether the joint administrators could justify the remuneration claimed applying the Insolvency Rules 1986, r 2.106 and the Practice Direction: Insolvency Proceedings [2012] BCC 265 (the PD), including the costs incurred in respect of the application.

The administrators relied on the Insolvency Rules 1986, r 2.106 which provides that the administrators are entitled to receive remuneration fixed in one or more of the following bases:

  1. asset value basis
  2. time cost basis, and
  3. fixed fee basis

Different bases can be applied to different items of work and the Insolvency Rules 1986, r 2.106(3C) says where there is a creditors’ committee it is for them to determine the basis(es) and the percentages, if relevant, to be applied, but in each case, the same criteria apply and the basis of remuneration must be appropriate to the work for which the administrator seeks remuneration, having regard to the requirements of the Insolvency Rules 1986, r 2.106(4).

The creditors’ committee had approved fees to be charged on a time cost basis and had previously agreed fees from 1 December 2011 (appointment) to 17 February 2012 of £180,173 and pre-appointment costs of £32,806.91. So the fees being sought post the requirement of the creditors for a hastening to liquidation with the liquidators being preferred to undertake investigatory work, were significantly higher than those preceding that requirement. There had been an apparently hostile relationship between the committee and the administrators.

What did the court decide on these issues?

Issue 1

The court said, in effect, that creditors’ committees could not run the administration and tell the administrators what to do as Parliament had given the administrators those powers (and responsibilities), so the administrators could be paid for work done under all the headings.

Issue 2

The court dismissed the creditors’ arguments that it had no jurisdiction to fix remuneration, which the creditors said was for the committee. However, the court was more sympathetic to the creditors’ arguments that the remuneration should only be fixed insofar as the work it related to complied with the objective and other parameters of the proposals, or was required by statute.

The administrators exercise statutory powers, but set out in the proposals how the statutory purpose is to be achieved and that is for creditors to approve. Once approved, the Insolvency Rules 1986, Sch B1, para 68(1) requires the affairs, business and property of the company to be managed in accordance with the proposals. The court said they should not therefore authorise administrators to do anything contrary to the proposals approved by the creditors, and that restriction should equally apply to approving their remuneration.

The court said it took into account the ability to vary proposals as well as its own inherent jurisdiction to control the insolvency process. The court, however, concluded that while the pre-pack sale achieved the main objective, none of the work done could be said to be outside the proposals per se, and that any challenge would rely on looking at specific facts under issue 4 (ie a proper review of the charges made and work done as guided by the PD).

Issue 3 (post liquidation work)

The creditors argued that the work done was simply the administrators complying with their duty to co-operate with the liquidators. The court found that remuneration did not extend to the post administration period. Counsel for the administrators argued that the Insolvency Rules 1986, Sch B1, para 111 applied which says ‘“administrator” has the meaning given by paragraph 1 and, where the context requires, includes a reference to a former administrator’.

Schedule B1. para 1 provides: ‘For the purposes of this Act “administrator” of a company means a person appointed under this Schedule to manage the company’s affairs, business and property’. However, the court held that the context of the Insolvency Rules 1986, r 2.106 (as opposed to the context of the administrators’ submission) does not require the meaning of administrator to include a former administrator, further that, as Parliament is not slow to refer expressly to ‘former’ when that is considered appropriate, it would have done so specifically in the Insolvency Rules 1986, r 2.106 had it meant to do so.

Issue 4

The court summarised the creditors’ complaints and said it would take into account the PD and bases for consideration set out in r 2.106(4). The court stated that:

  1. the onus was upon the administrators to justify the work
  2. they must provide full but proportionate particulars
  3. weight was to be given to their professional integrity but they were not to be given the benefit of the doubt

Per Cabletel (Re Cabletel Installations Limited [2005] BPIR 28) the court also said the remuneration of an appointee should reflect the value of the service rendered: ‘An appointee is not simply reimbursed for the time expended and cost incurred.’

To what extent is the judgment helpful in clarifying the law in this area?

It is extremely helpful as it goes through the issues in some detail as well as the individual items of work. The most important issue is that it shows the administrators have a job to do, and it is appropriate to do it—even if the creditors don’t want them to. On the issue of the level of those costs, this is just another example of the intellectual property (IP) focussing on time costs and not value etc. IP narratives need to be better to explain what has been done, why and what was achieved.

One major problem in the case was the lack of detailed time recording/narrative for each item of work so the court had to take a broad brush approach. Broadly, it accepted the hourly rates and appears to have been quite generous in allowing remuneration even where the work undertaken was not clear from the narratives.

The court went through each item, and was critical of the litigious approach adopted by the parties suggesting that a collaborative approach was required—but principally it was lack of available contemporaneous narrative which cost the administrators dear.

What are the implications for lawyers?

IP clients need to be reminded that time and time again the courts emphasise that value is more important than time in assessing the remuneration and costs. Any claim for remuneration must show not only the time spent, but why it was spent and the value that was achieved in spending that time.

During the course of a case, it would be sensible to remind clients of the need to keep detailed narratives not just of work done but the reasoning around it so that that information is easily picked up for any later fees challenge. Advices to clients should include details of the justification for courses of action.

When advising IP clients, lawyers should perhaps consider whether it is in the best interests of the client who should have the best interests of creditors (who do not want the client in the office) at heart, to foster an adversarial approach and that lawyers are there to advise and guide, but the officeholders will ultimately be held accountable for the decisions.

After the event, if solicitors are asked to advise it would be sensible to advise the IP client to be realistic. Ensure time spent is adding value and not simply formulaic processing. Given the current focus on IPs fees, it is likely that this will only get harder.

If advising creditors, likewise a collaborative approach may be advisable, and they will need to be warned of the limits of their control, and perhaps that the modifications they impose on proposals need to be more detailed.

Are there still any grey areas lawyers will need to watch out for?

Each case to an extent will of course simply turn on its own facts, the work which needs to be done and the time which needs to be spent, but it needs to be proportionate and add value.

Are there any patterns or trends emerging in the law in this area?

One simple and consistent theme that has run in this area of law for more than a decade is that the courts, on assessing remuneration, need to know far more than the time that has been spent. They need to know why that time has been spent with particular attention being paid to the value that has been achieved for the estate.

There has been a long running hostility to IPs fees which has run through the review of the complaints procedures following on from the Office of Fair Trading report and leading up to the report by Professor Elaine Kempson (July 2013) on officeholder remuneration.

There is more to come—recent proposals suggested banning time costs altogether (although that appears to have gone by the wayside). However, fee estimates up front, and fee caps, are still in play and while it is hoped there will be an exemption for investigation work (to avoid tipping off a potential defendant) there will plainly be a lot of focus on fees in the coming year(s). The current culture of compliance does not lend itself to reducing fees and there must be a balance struck. It is not an easy thing to achieve.

Further Reading

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Formal creditors' committee meetings (subscriber access only)

Office-holder remuneration (subscriber access only)

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Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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