The decision handed down in Pagden and another v Ridgley [2024] EWCH 3047 (Ch) is a helpful clarification on whether agreed costs and expenses incurred by an office-holder in the context of dealing with assets which are subject to a fixed charge in an administration or liquidation, are capable of subsequent challenge under rule 18.34 of the Insolvency (England & Wales) Rules 2016 (SI 2016/1024) (the Rules).

Decision

ICCJ Greenwood held that pre-agreed costs and expenses of an insolvency practitioner (IP), which the fixed charge holder had agreed could be paid out of the proceeds of realisation of the relevant fixed charge asset do not constitute “remuneration” or “expenses” for the purposes of Rule 18.34, and are therefore not capable of challenge on the basis that they were “excessive” or fixed on an “inappropriate” basis. 

This decision establishes (a) the importance of an IP agreeing with a fixed charge holder what costs and expenses they can recover out of fixed charge realisations at the outset – the expenses regime will not help, and relying on other equitable principles could potentially leave them out of pocket; and (b) once an agreement is in place, that a fixed charge holder has limited grounds to challenge agreed fees (although note our commentary below) and therefore they can be confident of recovering what they have agreed. 

For fixed charge holders, the decision is a “note to self” that in agreeing fees with an IP for dealing with the fixed charge assets at the outset, there will be limited scope to challenge these after the sale has concluded, even if retrospectively such costs appear to be disproportionately high.

Background

The Respondent, Mr Ridgley, had been appointed administrator of Orthios Eco Parks (Anglesey) Limited and its subsidiary Orthios Power (Anglesey) Limited on 29 March 2022 (together, the Companies), in each case, by Mr Colin – the original security trustee acting on behalf of various secured parties.

The secured debt of around £85.8m was secured by way of a fixed charge and mortgage over the Companies’ assets, including a 213-acre site (the Land) which was the Companies’ principal asset. Prior to the sale of the Land, Mr Colin and Mr Ridgley agreed under a costs realisation agreement (the CRA) that Mr Ridgley’s fees as the administrator for dealing with the fixed charge asset, and the costs of his agents and legal fees would be paid out of the proceeds of any realisation of the secured assets in priority to any distributions to be made under the fixed charges, as follows:

• Mr Ridgley was to receive a fee equal to 5% of the sale proceeds from the fixed charge assets (primarily the Land) of up to £25m, and 15% of any proceeds in excess of £25m, and
• Howes Percival LLP (Mr Ridgley’s solicitors) were to receive a fee equal to 1% of the sale proceeds up to £25m, and 5% of any proceeds in excess of £25m.

The Land was sold for £35m triggering a payment to Mr Ridgley of £2,765,000 and Howes Percival LLP of £755,000.

The Applicants raised a number of concerns about Mr Ridgley’s appointment. It was suggested that, among other things, the secured parties had not been consulted by Mr Colin prior to appointing Mr Ridgley as administrator, and that the CRA may not have been concluded in good faith or at arm’s length and appeared to benefit Mr Ridgley at the expense of the secured parties. Notably, those arguments had not been positively submitted in the applications before the Court and without more specifically stated allegations, adequate cross-examination and disclosure, the Court could only proceed on the assumption that the CRA has been validly made.

Scope of Rule 18.34

Before it could be considered whether or not the costs in this case could be challenged under Rule 18.34, it fell to the Court to determine whether such costs in fact constituted “remuneration” and/or “expenses” for the purposes of Part 18 of the Rules. It was held that they did not.

The Judge distinguished between (i) free assets of a company (i.e. unencumbered assets), which are the principal source of payment of expenses and debts for the insolvent company including for payment of the company’s general creditors, (ii) assets subject to a floating charge, which may to an extent be available for expenses, preferential debts and unsecured debts (if the prescribed part applies), and (iii) assets subject to a fixed charge, which are not available to pay remuneration without the fixed charge holder consent or a court order.

In short, ICCJ Greenwood concluded that Part 18 of the Rules only provided a code for determining office-holder remuneration insofar as it is an expense of the administration. The costs of dealing with the fixed charge asset sat outside of this regime and therefore the fixed charge holder had no standing to complain about the remuneration agreed under the CRA under Rule 18.34.

The case is a helpful reminder that an office-holder’s remuneration will not always constitute an “expense” which is to be borne out of the insolvent estate. For example, office-holders are entitled to have their costs and expenses associated with the administration of trust property met out of the trust property itself. Remuneration that does not fall within the expenses regime under Part 18 of the Rules may be recoverable pursuant to an agreement between the relevant creditor and the IP (as it was in this case), if the court makes an order under para 71 of Schedule B1 of the Insolvency Act 1986 (IA86) or under Berkley Applegate principles.

Commentary

Although on the facts in Pagden, the costs were not capable of challenge, one should not consider the door to such challenges to be entirely closed when it comes to challenging IP realisation costs for dealing with fixed charge assets:

• In this case, the value of the Land was far lower than the secured debt and there was no real prospect of the fixed charge asset realisation producing a surplus (and indeed that was net result of the sale). It is possible to see a scenario where a fixed charge creditor may be paid in full, leaving a surplus that would then be available to floating charge or unsecured creditors who would then have a genuine interest in, or are impacted by, the fees that have been agreed with the IP for dealing with fixed charge assets. In cases, where there is likely to be a surplus, or the position is marginal, one could still see scope challenge.
• The Applicants also had other bases for challenging the IP’s fees in this case. For example, they could have relied on paragraphs 74 or 75 of Schedule B1 of IA86 (challenge to administrator’s conduct of company and administrator misfeasance, respectively). Office-holders, being fiduciaries, are subject to fiduciary duties and also a common law duty of care.