In the recent United Kingdom case of Gillan v HEC Enterprises Ltd (in administration) and Ors [2016] EWHC 3179 (Ch), the High Court considered (1) in what circumstances administrators can recover costs and expenses incurred in dealing with trust property and (2) how the administrators’ costs in applying for a Berkeley Applegate order and other litigation were to be dealt with.

Background

HEC Enterprises Limited and Deep Purple (Overseas) Limited (“Defendants”) had contracted with the Claimants (some of the members of the band Deep Purple) to provide various services and royalties in respect of various copyright works.

A dispute had arisen between the parties which were resolved under a settlement agreement in 2005 (“Settlement”), pursuant to which a new company (Purpletuity Ltd) would be formed, to which various copyrights and other assets were to be transferred. The shares in Purpletuity Ltd were to be held for the benefit of the Claimants and others. By 2015, some provisions of the Settlement had still not been actioned and so the Claimants issued proceedings to enforce the Settlement. The Defendants entered administration in 2016.

Following their appointment, the administrators (who accepted the assets in question were trust assets (“Trust Assets”)) sought to mediate a settlement, but following the failed settlement negotiations, refused permission to lift the statutory moratorium to enable the Claimants to continue the action.

The Court was faced with 2 applications:

• the Claimants’ application to lift the statutory moratorium and to continue the proceedings;

• an application by the administrators (based on Berkeley Applegate principles) that they be indemnified out of the Trust Assets in respect of the work they had conducted on determining royalty entitlements, recovering monies, obtaining advice as to which assets fell within the settlement agreement, making distributions to those interested in those assets and dealing with the litigation.

Permission to continue the proceedings

By the time the Claimants’ application was due to be heard, the parties had agreed the position and the Court did not need to rule on it. The Court noted, however, that based on the principles set out in Atlantic Computer Systems Plc, it would have granted permission to continue the proceedings and that the administrators ought to have consented because:

• the Claimants’ claims related to assets held on trust as opposed to assets available for the general body of creditors;

• the Settlement imposed binding contractual obligations on the Defendants which continued notwithstanding the administrations;

• the Claimants were the only persons interested in the trust assets and they did not wish to instruct the administrators to resolve the dispute; and

• continuation of the action would not impede the purpose of the administrations (and the administrators’ suggestion to the contrary was unconvincing).

Berkeley Applegate

The Court considered that the real issue in this case was the extent to which the work conducted by the administrators truly fell within Berkeley Applegate principles. The Court made a number of points:

• where the Defendants were involved in existing litigation, the administrators had to decide how to deal with it, and if they incurred costs in that regard, the Court had power to determine who should bear such costs;

• the Court considered that the administrators ought not to be able to recover costs on a Berkeley Applegate basis for work where they were seeking to protect the interests of unsecured creditors as opposed to protecting the interests of the beneficiaries. The same applied to work in identifying whether the assets were Trust Assets;

• this was not a case where a company in administration held funds on trust for a large number of beneficiaries and the most convenient course was for the administrators to administer the trusts and distribute to the beneficiaries. This was an action against the Defendants for breach of contract. Instead of consenting to the continuation of the proceedings so that the litigation could take its course, the administrators took it upon themselves to try to resolve matters expecting to be entitled to charge their costs of doing so against the Trust Assets.

The Court ultimately found that the majority of the work conducted by the administrators did not fall within the Berkeley Applegate principle. The Court left it to the administrators to reconsider their position and any rights to lodge a proper costs claim in the light of the judgment.

Comment

It is easy to see in such a case why administrators could consider the steps they took as being in the best interests of creditors as a whole and therefore in line with their statutory duties. However, where trust assets are involved and there is a chance that the administrators’ actions are likely adversely to affect a beneficiary’s interests, following this case the Court is unlikely to allow administrators’ costs to be paid from the trust assets under the Berkeley Applegate principle.

This could potentially be very costly to an officeholder. Consequently,  it is crucial to establish early following appointment whether any assets to be dealt with in an insolvency process are subject to a trust and to formulate a strategy on how to deal with them before significant costs are incurred.