The Court of Appeal (CoA) was faced with this question in the context of administrators wanting to change the basis of their remuneration rather than arguing that their remuneration was insufficient.
Background:
The administrators were appointed on the 28th of June, 2022. The administration ceased, and the administrators' appointment came to an end on the 26th of January 2023 upon the occurrence of the effective date of a restructuring plan under Part 26A of the Companies Act 2006 in respect of the company.
The administrators tried to obtain a resolution in respect of their fees, estimated at £225,817 from the creditors, along with approval for their substantive proposals under paragraph 49 of Schedule B1 to the Insolvency Act 1986. At the meeting, the creditors approved the administrators' substantive proposals, but elected to appoint a creditors' committee to consider the administrators' proposals as regards their fees. The meeting was held on the 1st of November 2022 where the fee approved was £175,000 plus VAT.
Their fees were subsequently increased to £400,315.50 due to the extended administration, despite the creditors approving a payment on account of £235,000 plus VAT. The administrators started an action, which was dismissed by the High Court, and they appealed to the CoA.
Decision:
The CoA upheld the High Court's decision that the administrators could not seek an increase in their remuneration under the Insolvency Rules (2016) 18.24 and 18.28, as their remuneration was fixed on a time-cost basis. Remuneration fixed on a time-cost basis is governed by Rule 18.30, which was not pleaded.
The Court started by explaining that the rules relating to the remuneration of insolvency office-holders are set out in Chapter 4 of Part 18 of the Insolvency Rules 2016. The starting point is that an administrator is entitled to receive remuneration for his services as an office-holder. Rule 18 provides that the basis of remuneration must be fixed, on one of three bases: (1) as a percentage of the value of the assets with which the administrators deal or which they realise; (2) by reference to the time properly given by the office-holder and his staff; or (3) as a set amount.”
The basis is to be fixed, in the first place, by the creditors' committee, but if there is no creditors' committee, or if it fails to do so, then it is for the creditors to fix the basis by a decision procedure: Rule 18.18. If, having attempted but failed to have the basis of their remuneration fixed by the creditors' committee or the creditors, the administrators can apply to the Court to do so within 18 months of their appointment according to Rule 18.23. Rule 18.24 applies where the administrator considers the "rate" or "amount" of remuneration fixed to be insufficient. While an administrator can take part of their remuneration on a time-cost basis, they need to provide the creditors with a fee estimate. Remuneration is capped at the fees estimate unless further approval is obtained.
The Court noted that “because the creditors were provided with a fees estimate of £400,315.50 before their remuneration was fixed on a time-cost basis, they already have an entitlement to be paid remuneration up to that figure, without the need for further authorisation, whether from the creditors or the Court. They are entitled to that remuneration and to the benefit of a charge on the assets of the company that were in their custody or control immediately before they left office as security for that amount.” However, the rule Ex parte James, In Re Condon (1874) prevented the administrators from taking further remuneration out of the assets of the company without their approval.
Implications:
This decision highlights the importance of clear procedural compliance for administrators. It also makes it clear that remuneration beyond the estimate must be approved by the creditors to ensure fairness.
This judgement is also a good reminder that an increase in the rate or amount of administrators’ remuneration falls within the ambit of Rule 18.28, but the change in the basis of remuneration does not. The approach taken by creditors in approving fees will, therefore, determine the procedural route for any modifications.