[2025] EWHC 2674 (Ch)

Mr Harty placed particular reliance on another contextual matter: the law relating to fiduciary obligations. His argument proceeded as follows:

It was not disputed that an administrator of an insolvent company is in a fiduciary position vis-à-vis the shareholders and creditors of the insolvent company and this is acknowledged in numerous authorities: e.g., Re Gertzenstein Limited [1937] Ch 115, Davey v Money [2018] EWHC 766 (Ch), [341]; Brewer v Iqbal [2019] BCC 746 and Pagden v Fry [2025] EWHC 2316 (Ch), [35].

As to the duties which flow from that agreed premise, Mr Harty placed particular reliance on the decision in Re Gertzenstein Limited [1937] Ch 115, text book commentary referring to it, and the recent decision of Pagden v Fry [2025] EWHC 2316 (Ch).

In Re Gerzenstein, a company entered into voluntary liquidation and two liquidators were appointed, one (Mr Baron), a solicitor. The assets over which they were appointed included claims to set aside earlier transactions as a fraudulent preference (with the effect of success in such claims being to reduce the claims on the pool of assets under the stewardship of the liquidators and available for distribution to the general pool of creditors and to increase the size of that pool). Mr Baron acted as the company’s solicitor in the fraudulent preference proceedings, and charged profit costs for doing so. Those costs were disallowed in taxation, by reference to what was then the Companies (Winding Up) Rules, 1929, r. 158, which provided:

“Except as provided by the Act or the Rules, a liquidator shall not under any circumstances whatever, make any arrangement for, or accept from any solicitor, auctioneer, or any other person connected with the company of which he is liquidator, or who is employed in or in connection with the winding-up of the company, any gift, remuneration, or pecuniary or other consideration or benefit whatever beyond the remuneration to which under the Act and the Rules he is entitled as liquidator, nor shall he make any arrangement for giving up, or give up any part of such remuneration to any such solicitor, auctioneer, or other person.”

The hearing before Bennett J was a challenge to that decision, and he rejected that challenge on the basis that there was a fiduciary relationship between the liquidators and shareholders which “prevents the liquidators making a profit out of their trust”. He rejected the argument that exceptions to that broad principle might be applicable in this case, because “the language of the rule … prohibit[s] any arrangement by which a liquidator may receive extra remuneration to that allowed by the Act and Rules.”

It will be noted that Re Gerzenstein was concerned with profit made by an administrator in relation to assets forming part of “the company pot”, and involved, in effect, a trustee of the trust created by the insolvency regime profiting from their administration of trust assets.

The first textbook I was referred to was Lightman & Moss on the Law of Administrators and Receivers of Companies (6^th), [12-035]-[12-036]. The authors observe that it is “beyond doubt that the administrator can be regarded in equity as occupying the position of a fiduciary in relation to the company.” It is said to follow from this that “in exercising his powers as agent, the administrator must act with ‘single-minded loyalty so as to promote the interests of creditors collectively … over his own interests” (emphasis added – i.e. when acting as agent of the company). Footnote 128 then expands upon that statement:

“This gives way where the administrator chooses to perform his functions with the objective of realising property in order to make a distribution to one or more secured or preferential creditors (the third objective). In these circumstances, the secured or preferential creditors (as appropriate) in effect become the principal, subject to the duty to avoid unnecessary harm to the interests of the company’s creditors as a whole”.

The words “in effect become the principal” contemplate that in the scenario discussed, the administrators are “in effect” acting as agent for the secured creditors.

The footnote refers to paragraph 3 of Schedule B1 to the 1986 Act. This provides:

“(1)

The administrator of a company must perform his functions with the objective of—

(a)

rescuing the company as going concern or

(b)

achieving a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being in administration), or

(c)

realising property in order to make a distribution to one or more secured or preferential creditors.

(2)

Subject to sub-paragraph (4), the administrator of a company must perform his functions in the interests of the company's creditors as a whole.

(3)

The administrator must perform his functions with the objective specified in sub-paragraph (1)(a) unless he thinks either—

(a)

that it is not reasonably practicable to achieve that objective, or

(b)

that the objective specified in sub-paragraph (1)(b) would achieve a better result for the company's creditors as a whole.

(4)

The administrator may perform his functions with the objective specified in sub-paragraph (1)(c) only if—

(a)

he thinks that it is not reasonably practicable to achieve either of the objectives specified in sub-paragraph (1)(a) and (b), and

(b)

he does not unnecessarily harm the interests of the creditors of the company as a whole.”

It will be necessary to consider that nuanced statement of the administrator’s duties below.

Lightman & Moss continue at [12-036] that “we can expect fiduciary obligations insofar as they are applied to administrators to be flexed and moulded to the administrator’s role”, before stating that it follows from the administrator’s status as fiduciary that “he must not take an unauthorised profit from his position”. The footnote to that statement explains:

“This extends to the administrator’s remuneration, which may only be drawn insofar as authorised in principle under the 2016 Rules: see Re Gertzenstein”.

The text does not discuss the position where the administrator is realising security subject to a fixed charge, and the circumstances in which the administrator can agree to perform this role.

The second textbook is McPherson & Keay: The Law of Company Liquidation (5^th), [8-050]-[8.52]). This refers to the “fundamental principle of equity that persons who occupy a fiduciary position shall not permit their personal interests to conflict with the interests of those whom it is their duty to protect”. It is stated that “liquidators are not permitted, either directly or indirectly to profit from their office otherwise than to the extent expressly authorised by law” (for which Re Gerzenstein is cited as authority) and that “they are only entitled to their authorised remuneration”.

Finally, Pagden v Fry [2025] EWHC 2316 (Ch). The issue for decision in that case was whether liquidators dealing with a members’ voluntary liquidation could limit their liability. One argument relied upon in support of the argument that they could not turned on the statutory trust which arose when a company went into liquidation (which would be a trust in respect of the company’s fund). In that context, at [35], Thompsell J stated “clearly, as the trustee of a statutory trust, a liquidator is a fiduciary and owes corresponding fiduciary duties, such as a duty not to profit otherwise than through the remuneration allowed in statute – see Re Gerzenstein Limited …” The decision was not concerned with the position of the administrator when realising a fixed security.

While I broadly accept the foundations of Mr Harty’s argument, I do not accept they take him as far as he suggests. In particular, I am not persuaded that the fiduciary duties owed by an administrator to the general creditors inevitably prevents the administrator from acting to realise fixed security without the consent of the creditors as a whole or a court order. That might be highly inconvenient, in circumstances, for example, where there are better prospects of realising assets “for the benefit of the company as a whole” if land and buildings subject to a fixed charge and uncharged work-in-progress or stock-in-trade are marketed together.

The reference in Lightman & Moss to the “fiduciary obligations insofar as they are applied to administrators” being “flexed and moulded to the administrator’s role” seem wholly apposite. Inherent in paragraph 3 of Schedule B1 is that the duties owed by an administrator always extends beyond the general creditors (Paragraph 3.1(b)). When the objective at paragraph 3.1(c) is engaged, the priority accorded to the interests of secured and unsecured creditors is not the same. I accept that an administrator will have less freedom than an administrative receiver in realising security, reflecting statutory reforms intended to achieve that outcome, and those reforms have reduced the extent to which the charge-holder is master of their own fate, e.g. by empowering an administrator to require a receiver appointed by the charge holder under a charge to vacate office (paragraph 41(2) of Schedule B1). However, an administrator still has a level of freedom in dealing with fixed assets so far as the interests of the general creditors are concerned, which Mr Boardman, for example, did not enjoy when considering the interests of the Phipps family.

Goode on Principles of Corporate Insolvency Law (5^th) [11-28] explain the position as follows:

“[An administrator] has less freedom than that possessed by the administrative receiver, because the latter, whilst under a duty to use reasonable endeavours to obtain the best price, was free to determine the timing of any realisations and could thus proceed to an early sale even if delay would have resulted in enhancement of the value of the security and would not have prejudiced his debenture-holder. Now he has to avoid unnecessary harm to the general body of creditors. “Harm” is considered to be the equivalent of “prejudice”. He is still entitled to subordinate the interests of the general body of creditors to those of secured and preferential creditors, since para. 3(2) of Sc.B1 makes it clear that his duty to the general creditors is subject to the pursuit of the third objective. But he must avoid causing harm which is not necessary for the protection of the creditors for whom his realisations are intended. This imposes on him the duty to consider all aspects of the administration, including the timing of realisations. It is also a signal that the existence of security substantially in excess of the debt owed to the secured creditor or creditors does not entitle him to be lax in managing the business and realising the assets.”

That background, in my assessment, diminishes the forensic force of Mr Harty’s argument that Rule 18.34 must extend to an administrator’s remuneration to be paid from the proceeds of realising assets subject to a fixed charge for the costs of doing so. I would also note that the duty of avoiding “unnecessary harm” to the general body of creditors is essentially aimed at (i) prejudice to the equity of redemption and (ii) prejudice where that part of the secured debt which cannot be met from the proceeds of the security dilutes the claims of unsecured creditors to the company’s fund. However there are many cases (and this is one of them) in which even the most optimistic estimate of the net proceeds of realising the security will not come close to meeting the amount of the secured debt (such that there is no meaningful equity of redemption to speak of), and where there is no realistic prospect of dilution because the amount of “free funds” and the prescribed part is miniscule, even before taking account of the administrator’s claim for expenses and the expense of distribution. It would, in my view, be surprising if the effect of Part 18 was to subject an administrator’s remuneration for realising fixed charge assets in those circumstances to some form of control and challenge by the general body of creditors in all cases, including where there is no equity of redemption to be prejudiced, and no real prospect of “dilution” of any distribution to general creditors.

My conclusion that Mr Harty is wrong to submit that any agreement by an administrator with a fixed charge holder to realise security presumptively involves a breach of the fiduciary duties owed by an administrator to the general creditors derives some support from other matters.

First, the terms of Rule 18.38 which is more conveniently addressed when considering Part 18 below.

Second, Mr Weaver KC referred to two decisions of ICC judges which he suggested were inconsistent in their outcome with that position. It is fair to say that neither directly addresses the issue or seems to have received argument on it, and, therefore the assistance to be derived from them is limited. However, they feature a provision of more general interest, and for that reason, I will address them in a little more detail. Both decisions involved applications under paragraph 71 of Schedule B1 to the 1986 Act which permits the court to empower an administrator to dispose of property which is subject to a fixed charge as if no security was in place. It is agreed in this case that the agreement of April 2022 as referred to at [6] above effectively placed Mr Ridgley in the same position as if a court order of this kind had been made.

In the first, Townsend v Biscoe [2010] WL 3166608, an agreement had been reached between charge-holder and administrator and recorded in a consent order (I would note that, but for that last act, the position would have been the same as in this case, and Mr Harty would have said administrator was not able to enter into such an agreement without the consent of (presumably all) the creditors – another feature which I regard as an unlikely outcome of his submissions). A dispute arose as the priority of payments of the proceeds of sale which was the subject of correspondence. The administrators wrote to the charge-holder setting out the proposed priority and the amount to be paid at each stage, saying that if this was not accepted, they would seek directions from the court. This was held to give rise to an estoppel which precluded the charge-holder from complaining that the relevant priority scheme had not been followed. Clearly this did not involve a dispute between an administrator and the general creditors, but the extent to which the terms applicable to the realisation of the security appear to have been regarded as a matter regulated by private law as between charge-holder and administrator is noteworthy. That is not to say that there would be no routes of legal redress to those harmed by those terms or the terms on which any sale might be conducted, including as to remuneration.

The second is Duffy and Bell v NKJ Pension Trustees Limited [2020] EWHC 1835 (Ch), another paragraph 71 case. In that case (as in this) the security to be realised would only meet part of the secured debt. The court made the paragraph 71 order, in which the court contemplated that what would constitute “the net proceeds of disposal of the property” for paragraph 71(3)(a) purposes could be a matter for agreement between the parties, which merits a similar comment.

Both cases are also of interest in highlighting paragraph 71. On Mr Harty’s case, this provides court sanction for an administrator to undertake a role which might otherwise give rise to a breach of fiduciary duty, absent creditor consent. However, neither paragraph 71, Rule 3.49 of the 2016 Rules nor the case law suggest that this is its purpose. Rule 3.49, for example, does not require notice of an application to be served on creditors (still less all of them). So far as I am able to ascertain from a brief review, the authorities on paragraph 71 applications do not address as a relevant factor the effect of granting the order on the administrator’s fiduciary duties owed to the general creditors.

By contrast the paragraph 71 jurisdiction, and the cases discussing its exercise, note that the “normal right” of the charge-holder is to control the realisation of the assets held subject to the charge. For example Deputy ICC Judge Agnello KC in the recent decision of Kennedy v Fonds Rusnano Capital SA [2025] EWHC 112 (Ch), [73] noted that “the effect of orders made pursuant to paragraph 71 is that the holder of the relevant security will lose the ability to realise the security itself as and when it would normally be entitled to do so.” Clearly a court order vesting the power of sale with an administrator rather than leaving the charge-holder to appoint a receiver, or agreement in lieu of such an order, will reduce the paramountcy of the security-holder’s interests (as the passage from Goode makes clear). But a clear statutory basis would ordinarily be expected for a curtailment of those normal rights. A similar sentiment is expressed by Knox J in Re ARV Aviation Ltd (1988) 4 BCC 708 when addressing a predecessor provision, s.15 of the 1986 Act. Atp.712, when addressing an argument as to the scope of s.15(5), he rejected a possible interpretation because “it would be capricious to attribute to Parliament which, a priori would not be anxious to dilute the rights and security of a secured creditor”.