In the recent case of Re CHF 2 Ltd [2020] EWHC 2685 (Ch), officeholders of insolvent 'unitised property ownership schemes' asked the High Court of England and Wales to order that their fees and expenses incurred in dealing with properties as part of the insolvency be paid out of the proceeds of selling leases over the properties held by investors. They ultimately abandoned their application, but the case is a useful reminder of the potential difficulty officeholders face in being paid for work carried out selling property in which other parties have an interest.
Re CHF 2 Ltd
This case involved ‘unitised property ownership schemes’ (the “Schemes”) run by the Carlauren Group (“CG”), which bought a number of hotels, which it intended to turn into luxury care homes. Parties invested money into the Scheme, in return for (i) leases over individual rooms within the properties and (ii) the promise of a fixed return in the future. The Schemes ran out of funds before CG redeveloped many of the properties, and the various group companies became insolvent.
The properties were independently valued at £24.75 million if they were sold without the investors' leases in place. If the leases remained in place, the properties were valueless. The investors refused to surrender their leases. The officeholders initially asked the Court to extend the principle set out in Re Berkeley Applegate (Investment Consultants) Ltd [1989] Ch 32 (see below) to allow payment of their fees from the sale proceeds of the lease interests, rather than solely from the proceeds of the properties owned by CG. Otherwise, the costs of dealing with the lease interests would be borne by the companies' creditors, and not the investors, who were the ones who benefited from the work.
The principle in Berkeley Applegate
In Berkeley Applegate, the High Court of England and Wales decided that the Court had a discretion to order payment of the officeholder’s fees and expenses from the sale proceeds of assets held in trust.
A Berkeley Applegate order is useful to officeholders and creditors alike. Such an order provides a means by which an officeholder’s costs of realising certain assets may be met, where the assets owned by the insolvent company are insufficient. Ordinary creditors are also relieved of the burden of meeting the costs incurred in selling assets that will generate no return for them because the sale proceeds are payable to the trust beneficiaries.
The ability of the officeholder to recover costs when selling assets held in trust is therefore to be contrasted with the position that arises when assets are owned subject to a floating charge. The House of Lords held in Re Leyland DAF Ltd that the two categories of assets, i.e. unsecured assets and assets subject to a floating charge, each only bear their own costs and there is no ability to seek to recover the costs of selling unsecured assets from assets subject to a floating charge.
Decision
The officeholders in CHF 2 ultimately abandoned their application for a Berkeley Applegate order. The third parties in this case held legal interests in the properties by virtue of their leases, rather than simply beneficial interests like the beneficiaries in Berkeley Applegate. The officeholders could not put forward a legal basis for extending the Berkeley Applegate principle and interfering with the investors’ legal interests in these circumstances, and so it became clear that they were unlikely to succeed.
Scottish insolvencies – does Berkeley Applegate apply?
It is not clear whether the Scottish courts would be willing to grant a Berkeley Applegate order. The Court of Session expressed reluctance to “develop a new doctrine” based on the decision in Berkeley Applegate in Joint Liquidators of Direct Sharedeal Ltd. It did suggest that an existing Scots law doctrine could produce a similar result but that only allows parties to be reimbursed for their reasonable expenses where they manage the affairs of others without their consent or knowledge, and without their authorisation. Whether that test could be met in a Scottish insolvency therefore remains untested.
Considerations for insolvency officeholders
Frequently officeholders will find themselves in a situation where third parties have an interest in the main (or only) asset owned by the insolvent business. In that event, the following considerations should be borne in mind:
- If dealing with a scenario like that in Re CHF 2 Ltd, the first step should be to try to agree a voluntary surrender of the leases by the third parties. The underlying property owned by the company can then be sold unencumbered, increasing the likely return. Alternatively, the third parties might want to purchase the property they hold the lease over. If this is not possible or if work will be required to realise the lease interests for the benefit of the third parties, officeholders should look to arrive at an agreement with them in respect of their remuneration for this workstream.
- The Courts in both England and Scotland generally seem keen to limit the scope of Berkeley Applegate to cases where the company holds assets in trust for the benefit of third parties. It may be difficult to persuade the Courts to extend the principle to other circumstances.
- If the insolvency is a Scottish one, a similar result might be achievable, but this is not a settled point.
- Importantly, officeholders are not entitled to remuneration for the entirety of work carried out in realising assets held in trust. Only work undertaken for the benefit of the trust beneficiaries will be included, and officeholders will not be paid out of the sale proceeds of these assets for any work undertaken that is adverse to the beneficiaries’ interests.
If you would like to find out more, or would like advice on an issue similar to this one, please contact Serena Weir (serena.weir@shepwedd.com), Alec Fair (alec.fair@shepwedd.com), or your usual Shepherd and Wedderburn contact.