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Trust assets in insolvency: when can office-holders recover their costs?

The High Court has refused to grant administrators an indemnity for costs incurred in dealing with trust assets, in Gillan v HEC Enterprises Ltd (in administration) and others [2016] EWHC 3179.

The court was also critical of the administrators for refusing to consent to the continuation of pre-administration legal proceedings where these could have dealt with the issues surrounding the trust assets.

This is a stark reminder to insolvency practitioners to seek directions from the court early and often when dealing with trust assets, to avoid incurring costs that cannot be recovered.  It also provides a useful analysis of the circumstances in which the court will exercise its discretion to grant an indemnity.

Background

Members of rock band Deep Purple (the Claimants) brought proceedings in 2015 against a number of defendants, asserting their beneficial ownership of certain recordings, copyrights and song compositions.  The directors of two of the defendant companies (the Companies) appointed administrators early in 2016.

Once administrators were appointed, the Claimants could not continue the litigation against the Companies without the consent of the administrators or the court.  The administrators refused consent.  Instead, they sought their own legal advice regarding the trust.  They managed and administered royalty payments, dealt with licensing requests relating to the disputed property, and attempted to broker a settlement agreement between the parties.   

The Claimants applied to court for permission to continue the proceedings.  The administrators then applied for a declaration that they be entitled to be indemnified out of the trust assets in respect of their remuneration, costs and expenses relating to the administration and management of those trust assets.  The costs claimed totaled almost £423,000. 

Trust property in insolvency

Trust property does not form part of an insolvent estate.  The court may, in some circumstances, allow insolvency office-holders to recover their fees and expenses in dealing with trust property.  This discretion is known as the Berkeley Applegate principle, after the leading case of Re Berkeley Applegate (Investment Consultants) Ltd (no 2) [1988] 4 BCC 279.  The principle has been considered and applied in a number of cases since 1988.    

The decision

The parties reached agreement about the beneficial ownership of the assets without the court needing to lift the administration moratorium.  The court was, however, highly critical of the administrators' decision not to consent to the continuation of proceedings in the first place.  Allowing the litigation to continue would have dealt with the disputes regarding the trust assets.  Instead, the administrators unofficially appointed themselves, as mediators of the dispute without the consent of the parties but were unable to reach any settlement.

The administrators' application for a declaration that they be entitled to be indemnified out of the trust assets in respect of their remuneration, costs and expenses in relation to the administration and management of those trust assets was refused.  The court held that such an order would be too general to be of any real use, although it recognised that the request was based upon the original wording in the Berkeley Applegate case. 

Instead, the court commented on the specific elements of work done by the administrators.  It was held that the administrators would not be able to recover from trust property any costs incurred in relation to:

  • The pre-administration litigation (which should be dealt with under the court's jurisdiction as to costs in the litigation);
  • Work which benefited the companies' unsecured creditors and did not benefit the trust beneficiaries; and
  • Work done to enable the administrators to advance the case that assets were not trust assets or to determine whether or not they were trust assets.

The court held that certain costs may be recoverable from trust assets.  The administrators were invited to reconsider their claim in light of the judgment and, if they believed that they had a proper claim, to identify it in enough detail to allow it to be subject to detailed assessment.

The implications for insolvency practitioners

This case is a reminder for all insolvency office-holders that the Berkeley Applegate principle is a discretionary remedy.  If office-holders find themselves dealing with trust property they should be cautious and seek directions from the court. 

Insolvency practitioners should consider the following before incurring costs in connection with trust property:

  • The Insolvency Act 1986 only provides for payment of office-holder remuneration out the assets of the company, and not out of assets held by the company on trust;
  • An office-holder appointed over a company which holds trust assets does not become a trustee themselves;
  • The discretion to pay costs incurred in the administration of a trust will only be exercised where the work:
    • Was needed to be carried out by the beneficiaries or a court appointed receiver in any event; and
    • Was of substantial benefit to the trust property and the beneficiaries under the trust; and
  • Even where a Berkeley Applegate order is made the sums claimed must be identified in enough detail to allow detailed assessment if necessary.

If you are an insolvency office-holder dealing with trust property and would like further advice in this respect please contact a member of the Restructuring and Insolvency team.

Contributor: Tessa Glover

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at April 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions

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