Lender beware: implications for security holders when agreeing officeholder remuneration for asset realisation

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Author: Huguette Craggs

The High Court recently confirmed in the case of Pagden (as Security Trustee) v Ridgley (as former Administrator of Orthios Eco Parks (Anglesey) Ltd) [2024] EWHC 3047 (Ch) that there is limited scope for secured lenders, either directly or through security trustees, to challenge insolvency practitioner fees for dealing with fixed charge assets, where those fees have been agreed at the outset.

Background

On 29 March 2022, an administrator was appointed by a security trustee, acting on behalf of various secured parties, over two companies.

The companies' assets, including a 213-acre plot of land, were subject to various forms of security interest including a legal mortgage. At the date of the administrator's appointment, the total sum secured was approximately GBP85.8 million.

Following the administrator's appointment, the security trustee (acting in his capacity as the holder of the security) reached, with the benefit of legal advice, a payment agreement for the sale of the land and payment from the sale proceeds, as follows:

To the administrator, a fee equal to 5% of the proceeds up to GBP25 million, and 15% of the proceeds in excess of GBP25 million.
To the administrator's solicitors, a fee in the sum of 1% of the proceeds up to GBP25 million and 5% of any proceeds in excess of GBP25 million.

The land sold for GBP35 million triggering a payment to the administrator of GBP2,765,000 and to the administrator's solicitors of GBP755,000.

Court applications

Subsequently, the security trustee was replaced by a successor security trustee and applications to court were made under rule 18.34 of the Insolvency (England and Wales) Rules 2016 to review the administrator's remuneration on the basis that it was excessive.

Additionally, the tenor of the applicants' evidence suggested that the payment agreement was not:

the product of a genuine negotiation
conducted in good faith
at arm's length, or
in the best interests of those on whose behalf they acted (it appeared to benefit the administrator at the expense of the secured parties).

However, these arguments were not positively submitted in the applications and without specifically stated allegations, adequate cross-examination and disclosure, the court could only proceed on the assumption that the payment agreement had been validly made.

Decision

The court dismissed the applications and held that:

It had no power under rule 18.34 to review or determine the costs and remuneration of an administrator where such remuneration (and costs of realising the security) has been expressly agreed with the holder of a fixed charge security and is payable from the proceeds of its sale.
The administrator's costs of realising the fixed charge assets, including “remuneration”, although incurred or charged in his capacity as administrator, are only payable from or chargeable on the fixed charge property by agreement with the charge holder, as a cost of realisation – the charge holder's agreement is the only source of the administrator's right to payment.
These costs of realisation are not "remuneration" or "expenses" for the purposes of rule 18.34. The rule applies only to the expenses of dealing with the free assets of the company and, in certain circumstances, assets subject to a floating charge (if the prescribed part applies).
Therefore, the administrator's “remuneration” is not fixed under Part 18, and is not therefore subject to challenge under rule 18.34.

Key takeaways for lenders

Secured creditors must be vigilant about agreements made by trustees or administrators concerning their interests.
Agreements on fees should be scrutinised rigorously before acceptance since subsequent challenges may face significant legal hurdles.
Reports of officeholders should be scrutinised to see whether they include statements regarding remuneration being charged or incurred and if they do, any application to challenge remuneration should be made in a timely manner.
Fixed charge holders can explore other legal avenues if they believe their interests are unfairly harmed, such as:

(i) Paragraph 74 application to complain about the adverse consequences of an agreement between an administrator and a fixed charge secured creditor and specifically that the administrator has acted so as “unfairly to harm [the security holder's] interests”.
(ii) Paragraph 75 application, alleging misfeasance against an administrator, or a breach of fiduciary or other duty, or that the administrator has misapplied, or retained, or become accountable for some property of the company.
(iii) An administrator is an officer of the court, and therefore subject to an obligation to act honourably and fairly. A breach of that duty could, by means of an application under paragraph 74 or 75, provide a further means of challenge.