Administrators' remuneration scrutinised

Overview

In this case, joint administrators that were ultimately replaced applied to fix their remuneration for their time in office, as well as certain work done before the administration and after their replacement as administrators. The successor administrators argued that the amount sought was excessive. In its decision, the Court addressed the interesting issue of the level of deference to be given to the reporter who initially reviewed the remuneration. The Court ultimately found that it could not simply accept the joint administrators’ assertions as to the value of their work without any form of independent scrutiny.

Background

Future Renewables Eco plc and certain subsidiaries operated wind turbines across the UK, generating electricity for sale to several wholesale customers. The group did not generate sufficient revenue to cover its debt obligations and defaulted on its bondholder payments in May 2021. The company engaged Interpath to prepare an information pack to be shared with the bondholders, in contemplation of a bondholder vote to vary the bondholder's agreements with the company. The attempt to reach a compromise with the bondholders failed, and on 14 September 2021 the directors of the company and eight of its subsidiaries appointed Interpath as Joint Administrators (the “Original Administrators”).

The creditors had concerns around the appointment of administrators by the directors and, by decision of the creditors, the Original Administrators were replaced as Joint Administrators by Begbies Traynor (the “Replacement Administrators”) on 25 November 2021.

The issue before the Court was the quantum of the remuneration claimed by the Original Administrators - £302,661.60, of which £70,343,90 (almost 25%) related to the period from 26 November 2021 until 29 April 2022 (the five-month period after their replacement as administrators), together with outlays of £93,706.44, of which the largest was £70,971.48 for legal fees. The Original Administrators applied to the Court to fix their remuneration and outlays. The Replacement Administrators opposed the application, asserting that the remuneration and outlays claimed were excessive and did not fairly represent the value of the Original Administrators’ work to the company, particularly but not exclusively in relation to the sum sought for the period after the Original Administrators were removed from office.

A remit was made to a reporter as well as to the Auditor of the Court of Session. The reporter recommended a reduction to the remuneration of £40,565.20, resulting in a total fee of £262,096.40, of which £57,021.30 (just over 20%) related to the period post-appointment. He approved the outlays in full. After conferring with the reporter, the auditor issued a report to similar effect. The Original Administrators accepted the reporter’s recommendations and lodged a motion for approval of their remuneration and outlays in that reduced sum, which was opposed by the Replacement Administrators.

The Court’s Decision

The issues before the Court were the circumstances in which the Court might decline to follow the reporter's advice, as well as the Replacement Administrators’ challenges to the reporter's approach to: (i) the legal fees; (ii) pre-appointment costs; (iii) post-appointment costs; and (iv) the Original Administrators’ refusal to hand over certain files to the Replacement Administrators.

Declining to Follow the Reporter’s Advice

The Original Administrators submitted that the Court should depart from the report only where the reporter had clearly gone wrong, while the Replacement Administrators took the position that the Court could disagree with the reporter's advice only for cogent and justifiable reasons. The Court found that "clearly gone wrong" was not the best way to express the test. Rather, if the decision is one for the Court (as it is), then there is no delegated decision to depart from and ultimately the report is simply one factor (albeit an important one) which carries considerable weight to be taken into account by the court in reaching its own decision as to the appropriate level of remuneration and outlays.

The Legal Fees

The sum claimed for legal fees incurred to Addleshaw Goddard was £70,971.48. The reporter's approach was to note that legal costs in an administration are a SIP 9 (Scotland) category 1 expense, which can be paid without prior approval, and do not need approval before they are charged to the estate. The Original Administrators took the position that these costs did not require taxation unless the legal firm concerned was an associate of the administrators or the costs were not deemed to be reasonable by the administrators. The Original Administrators argued that, among other things, the Original Administrators, as officers of the Court, were the final arbiters as to whether the costs were reasonable and were entitled not to require the costs to be taxed by the Court.

The Replacement Administrators pointed out that SIP 9 is a non-statutory statement of practice issued by regulators, with no statutory effect. It cannot trump the Insolvency (Scotland) (Company Voluntary Arrangements and Administration) Rules 2018, nor does it purport to do so. It merely states that a category 1 expense can be paid without prior approval, but says nothing about whether or not such an expense is to be taken to have been reasonably incurred.

The Court found that, at the end of the day, neither the reporter nor the auditor had made any inquiry into whether the outlays were reasonably incurred. By referring exclusively to category 1 expenses, the reporter had fallen into error. Therefore, the Court remitted the issue back to the reporter for further consideration.

The question then arose as to whether the Court should leave it to the reporter to consider whether, before forming a view as to whether the legal fees have been reasonably incurred, Addleshaw Goddard's fees should be taxed. There were two issues at play: (1) whether the fees were reasonable as between the Original Administrators and Addleshaw Goddard; and (2) if they were reasonable in that sense, whether they were reasonably incurred in the administration. It is only if the fees pass both tests that they ought to be charged to the administration. Given the level of the fees, and the extent of the Replacement Administrators' dissatisfaction with the overall sum claimed, the Court concluded that the fees ought to be taxed before the reporter considers the separate question of whether they were reasonably incurred.

Pre-Appointment Costs

The Replacement Administrators argued that since the reporter was not privy to details of the Original Administrators’ pre-appointment work, he could not have properly formed a view as to whether all pre-appointment work was reasonably done and provided value. The Original Administrators responded that there was no need for the reporter to be provided with information about the pre-administration work and that, if anything, the pre-appointment work resulted in savings during the administration since it may have led to less work being done.

Again, the Court found that the Original Administrators were asking the Court to accept their say-so that there was a saving to the administration through the pre-administration work, without any form of independent scrutiny of that assertion. Accordingly, this issue was also remitted back to the reporter for further consideration.

Post-Appointment Costs

The Replacement Administrators submitted that the Original Administrators should have been handing over the reins of the administration to the Replacement Administrators on, or very soon after, 25 November 2021, and it was hard to envisage how costs of even the £57,021.30 recommended by the reporter could have added value to the administration, let alone the £70,000 or so claimed by the Original Administrators, even granting that the affairs of the company were complicated and, undeniably, some work would be required to effect the hand-over.

The Court questioned various aspects of the breakdown of time costs provided to the reporter. For example, why were 3.8 hours required for "notification of appointment", resulting in a cost of £1,218, or 9.2 hours for "checklist &reviews", resulting in a cost of £2,917.80? The Court was struck by the “somewhat anodyne” description, "Fees and WIP", for which a total of 56.80 hours was charged at a cost of £29,980. The Reporter did find that some of these costs were excessive, but did not set out how much of his suggested overall reduction related to these figures. Ultimately, the Court found that it needed to know precisely how much of the £29,980 has been "disallowed" by the reporter, in case there is a legal argument to be had in due course as to whether any of the work done to justify the fee charged can itself properly be charged to the administration. Accordingly, while the reporter had already recommended a reduction to the post-administration work, the Court found that he did not give adequate consideration to the extent to which that work provided value, nor did he explain in sufficient detail the process by which he arrived at his proposed reduction, nor which items, specifically, he considered to be excessive and to what extent. This matter also required further consideration and a greater degree of clarity.

Refusal to Hand Over Files

The Replacement Administrators argued that the Original Administrators had failed to make the fruits of their work available to the Replacement Administrators. They identified two examples: (1) a report prepared by a company called CAPA that was engaged by the Original Investigators to investigate certain matters on a no-win no-fee basis; and (2) a bank statement analysis. The Replacement Administrators argued that both of these should have been delivered to the Replacement Administrators. Over the course of the hearing, the issue was clarified to be whether the Original Administrators were entitled to charge the administration for work which was not made available to their successors in office.

In relation to the specific items cited by the Replacement Administrators, the Original Administrators said that CAPA were engaged to review the group's business rates and to seek refunds in the event that the rating for each property was overpaid. The exercise was unsuccessful and CAPA were unable to identify any possible realisations. The Court found that it could not accept the Original Administrators’ assertions without any form of oversight. Whether the work reaped a benefit for the company, it was unclear why the Replacement Administrators should not see the work that was done and the outcome of that work, if only to avoid their having to undertake the same exercise again. If they were not to see that, it was unclear why the Original Administrators should be entitled to charge for it.

With respect to the bank document review, the Original Administrators said this was an internal document owned and held by the Original Administrators, used as a benefit of the Original Administrators and not the company. As such, they argued it fell out of the ambit of information required to be provided by their replacements. The Court found that this missed the point, which was whether in these circumstances the Original Administrators ought to be able to charge for work from which their successors were unable to benefit. Both of these matters required further consideration and were remitted to the reporter.

In the result, the case was remitted back to the reporter and the auditor for specific consideration of the four issues discussed above.

Judge: Lord Braid

Counsel: Thorntons Law for the Replacement Administrators; Addleshaw Goddard for the Original Administrators