A RECENT COURT OF APPEAL decision has highlighted that receivers are at risk of being unable to take their fees in circumstances where previously there was thought to be no risk to recoverability.
Receivers for a liquidation have confidently taken appointments and expended time and resources on managing receivership believing their remuneration and expenses can be recovered from the receivership property over which they have secured. That issue was challenged in the recent case of Brandon Barnes v Eastenders Cash & Carry, where at first instance the Court found that it was able to "put to one side the preconception based on a century of practice" that a receiver was entitled to draw from the receivership assets, and found in favour of the Eastenders group of companies on a novel human rights argument.
Two shareholders in the Eastenders parent company were subject to criminal surveillance and in December 2010 the Crown Prosecution Service applied in secret to a judge for orders to freeze their assets and appoint insolvency practitioner (IP) Brendon Barnes of BDO as a receiver in respect of those assets. The Crown Prosecution Service was able to persuade the lower Court that the assets of the Eastenders group could be treated as those of the two individuals. The group had a turnover of about£140m per annum, with almost £1m in cash in its bank accounts, when the receiver attended unannounced at a number of sites to take over management of the business.
On appeal the order to appoint a receiver was quashed by the Court of Appeal. The Court found that there had been insufficient grounds to suspect the two shareholder of wrong doing or to lift the corporate veil and treat Eastender's assets as those of the suspects.
However, the receiver argued it remained that the IP's remuneration and expenses were to be met out of receivership property in accordance with long established principles. Although the receiver had only been in office for two months, his fees were in excess of £700,000, and the receiver looked to the cash in Eastender's bank account for that sum.
The dispute then developed as to whether: Eastender's human rights would be breached if its assets were to be held liable for the receiver's remuneration and expenses; and the CPS was the party who ought to, and could, bear the receiver's costs directly. The core of Eastender's position was that as the Court had earlier held the receivership orders should never have been made, it would be a breach of its property rights if it, as an innocent third-party, should be liable for the receiver's costs and expenses. However, the receiver and the CPS argued the traditional position was that the receiver was entitled to take his fees from the receivership property regardless of the rights and wrongs of his original appointment.
At first instance the Court held that established law had to yield to the human rights argument and further found that it was able to read into the Proceeds of Crime Act (POCA) under which the receiver was appointed a provision requiring the CPS to meet the receiver's costs and expenses. The CPS appealed that decision; not least on the ground that the receiver had explicitly agreed not to look to the CPS for any shortfall should the assets over which he was appointed prove insufficient to meet his remuneration and expenses.
The Court of Appeal by a majority affirmed the lower Court's decision and determined that, as an exception to long established common law rules, it would be a breach of a company's human rights if it had to bear the burden of a receiver's costs and expenses.
However, the Court went on to find that the receiver was not able to recover against the CPS in the manner found by the lower court, namely reading into POCA provision to that effect. The decision effectively left the receiver without clear recourse for his fees. A potential novel argument, raised by Eastenders on the receiver's behalf, that the receiver might be able to bring a contractual claim against the CPS was left open to the IP by the Court.
Receivers invariably undertake due diligence prior to appointment to satisfy themselves that the likely assets of the receivership will be sufficient to meet their fees. Those enquiries will often extend to assets where there is a perceived risk that third party interests may exist. Prior to the decision in Eastenders that species of asset would be viewed no differently to other assets in the prospective receivership.
However following this case, receivers will need to review their exposure to arguments that third party assets cannot now be taken into consideration of their fees, on the basis that to do otherwise would amount to a breach of the owner's human rights even where receivers have innocently expended time in dealing with those assets.
No doubt in this case, with an eye on Eastender's substantial assets, the receiver anticipated a lucrative tenure. The reality has proven to be an expensive lesson that rules seemingly set in stone are not as solid as they may appear.
Geraint Jones QC and Marc Glover are barristers practicing at Tanfield Chambers.
Companies have human rights? Are they also going to be allowed to marry another company?
Posted by: Patrick Wadsted, 14 Dec 2012 | 10:41
You may also like
If budgeting is to have any value at all, it needs a radical overhaul. In today's dynamic marketplace, budgeting can no longer serve as a company's only management system; it must integrate with and support dedicated strategy management systems, process improvement systems, and the like. In this paper, Professor Peter Horvath and Dr Ralf Sauter present what's wrong with the current approach to budgeting and how to fix it.
In this white paper CCH provide checklists to help accountants and finance professionals both in practice and in business examine these issues and make plans. Also includes a case study of a large commercial organisation working through the first year of mandatory iXBRL filing.