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Restructuring & Insolvency analysis: What does the recent Brilliant Independent Media Specialists case tell us about whether an administrator can have their remuneration fixed for work undertaken contrary to the wishes of a creditors’ committee and outside the scope of the proposals approved by creditors.
Re Brilliant Independent Media Specialists Ltd  EWHC B11 (Ch),  All ER (D) 111 (Oct)
Mr Registrar Jones sitting in the Companies Court was faced with the issue of whether the court could fix administrators’ remuneration which had not been approved by the creditors’ committee. After modification, the proposals provided, among other things, for the company to move from administration to creditors’ voluntary liquidation within six months of the commencement of the administration, and for investigative work to be undertaken by the liquidators (who would not be the administrators). The creditors’ committee challenged the administrators’ right to recover remuneration in circumstances in which it was claimed that the administrators acted beyond the scope of the proposals and the wishes of the creditors’ committee.
The Registrar held that, notwithstanding the proposals and the wishes of the creditors’ committee, the administrators were entitled to be remunerated for some of the work undertaken by them. Having made that decision, the Registrar then had to consider the amount of remuneration to be fixed.
What were the facts of the case?
Brilliant Independent Media Specialists Ltd (BIMS), together with other members of its group, entered into administration on 1 December 2011. BIMS’ business and assets were sold for £1 in a pre-pack sale, with the purchaser undertaking liabilities in excess of £2.1m. This was intended not only to preserve the business and maintain employment, but also to improve the prospects of collecting BIMS’ books debts, which were considered to be £6.6m. Other assets available for realisation post-sale of BIMS’ business were cash, directors’ loans and licence fees. The administrators anticipated that the secured and preferential creditors would be paid in full, and a dividend paid to the unsecured creditors.
The proposals originally put forward by the administrators were not unusual. They provided for:
The creditors were unwilling to approve the administrators’ proposals. From their perspective, the trading of BIMS prior to the pre-pack sale—and the sale itself—needed to be investigated, which would necessarily include the investigation of the actions of the administrators prior to their appointment when they acted as advisers to BIMS. The proposals were approved subject to modifications, which included moving BIMS from administration to CVL within six months of the commencement of the administration (thus giving the administrators a six-month period to 31 May 2012 in which to conclude the administration before BIMS moved to CVL), and for different persons to be appointed as liquidators.
During the course of the administration, an issue arose concerning the amount owed to one of the secured creditors which led to an application for directions being commenced by the administrators. As that application would not be determined before the expiry of the agreed six-month administration term, the administrators unsuccessfully sought to revise the proposals allowing them to extend the six-month term to 28 days after the conclusion of their court application.
In due course, the administrators reached a settlement with the secured creditor. The administrators’ appointment ceased on 12 August 2012 when BIMS was placed into CVL.
Other actions taken by the administrators included:
What were the issues in relation to the administrators’ remuneration?
The creditors’ committee had already approved the administrators’ remuneration from the date of their appointment to 17 February 2012 in the sum of £180,173, together with pre-appointment costs.
The creditors’ committee did not, however, approve the administrators’ proposed remuneration for the period after 18 February 2012, which also included time costs incurred after BIMS had been placed into CVL. It was asserted by the creditors’ committee that it was never envisaged that the administrators would carry out the vast amount of work that they did, and that for example the investigations of various issues were to be, or should have been, undertaken by the liquidators.
The administrators therefore applied to court pursuant to the Insolvency Rules 1986, SI 1986/1925, r 2.106 claiming remuneration of £389,340.50.
The issues that the Registrar had to determine were:
What did the court decide?
The first issue
The Registrar held that, while the views of a creditors’ committee should be taken into account, it is for the administrator and not the committee to determine how the administration should be conducted. An administrator’s decisions will depend upon their assessment of how best to achieve the purpose of the administration.
The second issue
The Registrar held that, contrary to the submissions made on behalf of the creditors’ committee, the court has jurisdiction to fix an administrator’s remuneration even if the work to be remunerated does not comply with the statutory objective and the other parameters of the proposals, or is not required by other statutory obligations. However, the court should consider refusing to fix remuneration for such work given the general approach of the courts to not normally override or authorise the administrator to do anything that is contrary to the proposals approved by the creditors. In this case, the court took the view that leaving some matters in abeyance until after the liquidators had taken office would not only be detrimental, but would also be impractical. Further, the administrators were entitled to be remunerated for work undertaken after 31 May 2012.
The third issue
The Registrar held that remuneration could not be fixed for the period following the cessation of the administrators’ appointment. Here, the administrators had carried out work in response to various requests from the liquidators, including answering specific enquiries following the handover of files, records and assets, assisting in the recovery of the final instalment due in respect of the directors’ loan and the collection of a book debt, and providing information in respect of the settlement reached with the secured creditor. In this case, the costs incurred by the administrators were a matter between them and the liquidators.
The fourth issue
The Registrar conducted a review of the administrators’ evidence in support of their claimed remuneration, and fixed this in the sum of £233,147.25, representing a recovery of 60% of the amount claimed. The Registrar concluded this to be a fair, reasonable and proportionate sum.
What are the practical lessons for restructuring and insolvency professionals?
This case reiterates that the ultimate decision on how an administration is conducted rests with the administrator. However, the views of the general body of creditors, or the creditors’ committee if there is one, should be taken into account. Machinery exists, for example by the Insolvency Act 1986, Sch B1, para 74 (IA 1986), for creditors to challenge the conduct and decision making of an administrator where appropriate, although the court will not normally question the commercial judgments of an administrator.
An administrator should in any event conduct an administration in accordance with the proposals approved by creditors. In the case of modified proposals, an administrator should ensure that these are reviewed from time to time to ensure that the work undertaken falls within the scope of the proposals. As matters progress, it may be that substantial revisions are desirable, which will need to be approved by the creditors or, if necessary, the court pursuant to IA 1986, Sch B1, paras 54, 55. A failure to act in accordance with the proposals may cause difficulties for an administrator in having their remuneration fixed for work which falls outside the scope of the proposals.
Where an insolvency practitioner applies to the court for their remuneration to be fixed, proper regard must be given to Practice Direction: Insolvency Proceedings (2014), Part 6, which sets out the form and content of a remuneration application, and the factors that the court will take into account in determining the application.
A theme running through this case, as highlighted by the Registrar, was the failure by the administrators to provide sufficient (or in some cases, any) narrative descriptions of the work undertaken to support and justify the remuneration claimed, which caused the Registrar difficulties when fixing the remuneration. This is reflected in part by the significant amount of remuneration claimed that the Registrar did not fix.
The administrators claimed remuneration of £89,637 in respect of work spent on the remuneration application. No narrative was provided to justify those costs which the Registrar considered were plainly disproportionate, and he fixed them in the sum of £7,500. The Registrar commented that when using time recording software, narratives should be used when time is recorded. The administrators were not entitled to be remunerated in respect of any time incurred in the absence of any contemporaneous narrative and the resulting need to identify how time was spent for the purpose of the evidence in support of the remuneration application.
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First published on LexisPSL Restructuring and Insolvency
Stephen Leslie, solicitor in the Lexis®PSL Restructuring & Insolvency team
0330 161 1234