England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		9 December 2010

MR. RICHARD SNOWDEN QC:

1. Ihanded down a written judgment in this matter on 3 September 2010, [2010] EWHC 2240 (Ch). That judgment concerned an application by Mr. Rubin and Mr. Lan as Administrators of Capitol Films Limited ("the Company") pursuant to paragraph 71 of Schedule B1 to the Insolvency Act 1986 ("paragraph 71"). The Administrators had entered into a conditional sale contract for the sale of all of the assets of the Company to a company called Exodus Film Company Limited ("Exodus"), and theysought the permission of the Courtto include in such sale those assets of the Company which were subject to fixed charges as if they were not subject to that security.
2. As I explained in my earlier judgment, the Administratorsinvited me at the outset of the hearing of their application on 25 August 2010 to proceed upon the basis that I could be satisfied that a pre-administration transaction between the Company and a company called PangeaMedia Holdings Limited ("Pangea" and "the Pangea Assignment"), had been effective to transfer the Company's rights and interests in a number of contracts relating to the exploitation of film rightsto Pangea.If valid, the effect of the Pangea Assignment would have been to transfer the Company's rights and interests in respect of 81 films ("the Disputed Films") to Pangea, leaving the Company with rights only in respect of 44 remaining films ("the Retained Films").The Administrators put the application to me on the basis that if the Pangea Assignment was valid, the Company's rights in relation to the Disputed Films were not included in the assets to be sold to Exodus, and hence no provision needed to be made under paragraph 71(3) for any payment from the proceeds of sale to the holders of fixed charges over the rights in respect of the Disputed Films.
3. For the reasons that I set out in my earlier judgment, I was not satisfied on the evidence that the PangeaAssignment was valid and binding upon the Company or that it was effective to pass the Company's rights and interests in respect of the Disputed Films to Pangea. The result was that it was not possible to say whetherthe conditional sale contract which the Administrators had entered into with Exoduswould not only transfer the Company's rights and interests in respect of the Retained Films to Exodus, but would also be effective to transfer the Company's rights and interests in respect of the Disputed Films to Exodus. There was also no evidence upon which I could be satisfied that the terms upon which such sale was to take place, and upon which the proceeds were to be distributed, were properly protective of the rights of the holders of fixed charges over the Company's rights in respect of the Disputed Films: see Re ARV Aviation Ltd [1989] BCLC 664.
4. Because I had been told that the matter was one of great commercial urgency due to a deadline for satisfaction of the conditions in the sale contract imposed by Exodus, I gave my decision on this matter (but not the detailed reasons) at the end of the hearing on 25 August 2010. Following that ruling, the Administrators sought, and I granted, an adjournment for a week for them to reassess the position and to engage in discussions with Exodus and the secured creditors who were affected.I also gave permission pursuant to paragraph 43 of Schedule B1 to the Insolvency Act 1986 ("paragraph 43") for one of the secured creditors, Allied Irish Banks plc ("AIB") to enforce its security over such rights as the Company might have in the film "The Edge of Love", which was one of the Disputed Films. I adjourned the argument on the costs of that application for a week in order to give the Administrators the opportunity to put in evidence to explain their conduct in relation to that application.
5. Shortly before the resumption of the hearing, I received a letter from counsel for the Administrators, informing me that they no longer intended to pursue their application under paragraph 71. The Administrators did not avail themselves of the opportunity to put in any evidence in relation to AIB's application under paragraph 43.
6. I now have to deal with the question of costs of (i) the application by the Administrators under paragraph 71, and (ii) the application by AIB under paragraph 43.
7. The three sets of secured creditors who appeared on the Administrators' application all ask for an order that the Administrators pay the secured creditors'costs of the application personally and on an indemnity basis. In addition the secured creditors ask for an order that the Administrators be prevented from recovering those costs or the Administrators' own costs of the application as expenses of the administration. AIB seeks similar ordersin respect of the costs of its application.These orders are resisted by the Administrators, who seek an order that their own costs of both applications be payable as an expense of the administration.
8. Because the costs involved are, on the estimates that I have seen, likely to run into several hundreds of thousands of pounds, and because the conduct of the Administrators and their approach to the proposed sale of the film rights have been the subject of sustained criticism by the secured creditors, I think that it is necessary for me to set out the salient events in some detail.
9. I shall adopt the same terminology in this judgment as in my earlier judgment of 3 September 2010.

Background to the Administration Order

10. In my earlier judgment I outlined the events that led to the making of the administration order and referred to some of the evidence that was put before Briggs J. in support of the application for the administration order on 2 February 2010. For convenience I shall repeat some of that narrative.
11. Prior to 2010, the Company was one of a group of companies in the UK and the USA which were engaged in the business of the production and distribution of motion pictures. At least until January 2009, the group was jointly owned by a Mr. David Bergstein, together with a wealthy business associate of his, Mr. Ronald Tutor. At all relevant times the business and day-to-day operations of the group appear to have been under the control of Mr. Bergstein, who was described in the evidence as a prominent figure in the film industry in the USA.
12. The evidence demonstrates that in addition to exercising control of the affairs of the group of which the Company forms a part, Mr. Bergstein was at the relevant times also the controller of Pangea, which appears to have taken over or assumed a greater role in the operations of the group since about 2008.
13. According to Mr. Rubin's report as proposed administrator, which was an exhibit to the evidence presented to the Court on the application for an administration order, from the beginning of 2008 the Company encountered severe cash-flow pressure and creditors began to take action to recover their debts. Mr. Rubin commented that the Company had to deal with a succession of claims, statutory demands and winding up petitions, which it managed "on a piecemeal basis by agreeing time to pay arrangements with creditors".
14. Although Mr. Rubin's report stated that the Company was adhering to these arrangements, events apparently took a further turn for the worse in 2009 with the departure of the Company's financial controller and other staff, and the worldwide recession. On 25 September 2009 a winding up petition was presented in respect of an unpaid debt which dated from July 2008 and which was not disputed by the Company. The petition was due to be heard on 19 January 2010.
15. In or about the first week of January 2010, Mr. Rubin was approached by Mr. Bergstein, who was at the time the sole director of the Company, for insolvency advice in relation to the Company. Mr. Rubin gained the impression from Mr. Bergstein that the Company owned a significant body of assets, principally the rights to distribute and exploit films, and he formed the view that these could be realised for the benefit of creditors in an administration. The advantage of an administration over a liquidation was thought to be that the making of an administration order would not trigger termination clauses in the various film contracts.
16. Having taken this insolvency advice, on 13 January 2010 Mr. Bergstein resigned as a director of the Company. He was replaced by two new directors, a Mr. John Jones and a Mr. Shimon Bitton, who were appointed on 12 and 13 January 2010 respectively. It was then Mr. Jones who, less than a week after his appointment, swore an affidavit on 18 January 2010 in support of the application for an administration order which was issued on that day. Mr. Jones' affidavit stated,

"As set out in the report of Mr. Rubin, he concludes that it is not feasible to attempt to save the Company as a going concern. I agree with his conclusions. Mr. Rubin, however, refers to film rights which the Company currently holds, and which have a material value. Mr. Rubin concludes that the potential market value of these contracts may well exceed £5 million and that this value would be lost to the Company (and therefore the creditors) should the Company go into liquidation. I concur with Mr. Rubin's conclusions. In this respect, I can say that the Company currently holds rights to between 80 to 100 feature films, with those rights generating income for the Company on an on-going basis....It is my belief that the nature of the film rights held by the Company are of such high profile that a buyer for these rights is extremely likely to be found."

(emphasis added)

17. As I observed in my earlier judgment, I find it remarkable that Mr. Jones's affidavit did not mention that he and Mr. Bitton had only very recently been appointed directors of the Company, and it did not give any indication as to whether either of them had had any prior connection with the affairs of the Company. Mr. Jones also did not identify the basis or source of his knowledge, information and belief concerning the affairs of the Company, andhe made no mention of Mr. Bergstein's control of the Company during the period over which it had declined into insolvency, or of his very recent resignation.
18. When I raised these points with Mr. McCulloch, he first told me, on instructions, that Mr. Jones had been the manager of the Company for some time prior to administration. I pointed out that this was inconsistent with the statement in the Administrators' first report to creditors of 26 March 2010 that,

"Mr. Jones was appointed a director solely to provide a UK based officer to assist with the formalities of applying for the Administration Order. Mr. Jones had not previously been involved in the management of the Company's affairs."

Mr. McCulloch then took further instructions, whereupon he informed me that Mr. Rubin thought that Mr. Jones was a manager of one of Mr. Bergstein's other companies, but that Mr. Rubin did not know from whom Mr. Jones had obtained his information about the Company.

19. I am bound to say that I do not think that the manner in which the administration order was sought was satisfactory. Whatever the supposed justification for the additional appointment of Mr. Jones, it in no way explains the deficiencies in the evidence, or why Mr. Bergstein thought it appropriate to resign as a director of the Company shortly before the application for an administration order was made.It is hard to avoid the impression that Mr. Jones must have obtained his information concerning the Company from Mr. Bergstein, and that Mr. Bergstein's resignation was designed to distance himself from the formal insolvency of the Company and to pave the way for a speedy sale of the remaining assets of the Company to another entity which he controlled.
20. That impression is supported by the fact that in spite of his resignation as a director, Mr. Bergstein had remained in contact with Mr. Rubin in the period leading up to the making of the administration order and continued that contact afterwards, seeking to acquire the assets of the Company from the Administrators. In his third affidavit in support of the Administrators' application under paragraph 71, Mr. Rubin stated,

"The indications available to the court (and to the proposed administrators) at the time of our appointment suggested that at least one entity, Veritum, was prepared to make a significant bid for the purchase of the assets of the Company following the appointment of administrators. An indicative bid letter from Veritum, dated 2 February 2010, was included in the papers made available to the court on the application for appointment of administrators. Veritum is an entity ultimately controlled by David Bergstein. I am aware that Mr. Bergstein was, until shortly prior to our appointment, a director of Capitol Films Limited."

21. Moreover, three days after the administration order was made, on 5 February 2010, Mr. Rubin sent an e-mail to Mr. Bergstein dealing with the proposed sale to Veritum and raising the issue of the Pangea Assignment. That e-mail stated,

"Dear David,

There are a number of issues which have arisen and which I would like to bring to your attention.

First. We have a number of urgent expenses which need to be met including Salter who will do the complete valuation at $50,000 – or possibly less. I cannot do a deal with him until I have some cash and we need that valuation by last week if we are to conclude any sale. Also the legalsand salary costs are important to keep the ball rolling until the end of February, by which time I am hopeful we can conclude a sale. Can you by any chance "lend" the Administration $100,000 which will be paid back to you out of first realisations?

Second. We have had a number of serious players wanting to buy the Capitol Library. Three enquiries so far; two NDAs sent out and one of them doing due diligence as we speak. We feel we must have a deposit from you – say 10%; together with proof of funds and a letter from your lawyers requesting a contract of sale. All soonest please.

Third. We are trying to tie up the loose ends of the documentation for all the films which are described in the original listings. At our meeting in January you mentioned the "Pangear" transaction (spelling?). Could you or [Ms. Stanger] or [Mr. Jones] please let me have all copy documentation that exists so that I can understand how this worked?

That's all for now. Looking forward to hearing from you.

Regards

David Rubin"

That e-mail confirms that Mr. Rubin anticipated concluding a speedy sale of the remaining assets of the Company to Mr. Bergstein within the space of a few weeks. It also suggests, however, that Mr. Rubin was unaware of the precise nature of the Pangea Assignment or its potential impact upon the assets of the Company at the time that the administration order was made.

The Conduct of the Administration Prior to the Application

22. Although Mr. Rubin did not know of the PangeaAssignment or its significance at the time that the administration order was made, he soon became aware of it. In his sixth affidavit sworn in these proceedings, Mr. Rubin stated that,

"On 9 February 2010 I had a telephone conversation with Mr. Bergstein in which I discussed with him my email of 5 February. I was blunt with Mr. Bergstein and explained to him that I could not, as joint administrator, accept the fact that he had apparently transferred films away from the Company (to Pangea), especially as the transfer took place so close to the Company proceeding into administration.Mr. Bergstein maintained that the transfers were for substantial consideration and that those transfers had been started in October and November 2009 and completed by January 2010. He said that vast sums of money had been paid by various vehicles under his control in order to pay producers, expenses, salaries and alike, and that this money was the consideration for the transfer...

I reiterated...that the conclusion of the Pangea transactions appeared to have occurred in 2010 – a matter of weeks before the Company proceeded into administration. Mr. Bergstein denied that this was the case and he reiterated that the relevant dates were much earlier...

It was clear from the conversation that Mr. Bergstein was not going to give an inch on his insistence that the titles transferred to Pangea were now the property of that entity. I told him that I would obviously have to take legal advice but that, for now, it was quite clear that we had to look at the situation in greater detail before deciding on what course of action the joint administrators would take."

It therefore appears that between 5 and 9 February, by some means that have not been identified, Mr. Rubin discovered that Mr. Bergstein purported to have transferreda substantial proportion of the assets of the Company to Pangeashortly before the Company went into administration. This caused Mr. Rubin to be sufficientlyconcerned so as to be "blunt" with Mr. Bergstein, and to appreciate the need to take legal advice and to investigate the situation.

23. Mr. Rubin then received the documentation relating to the transactions with Pangea on 10 February. I set out at some length the main features of that documentation in paragraphs 32-39 of my earlier judgment. Mr. Rubin also received an e-mail from Mr. Bergstein on 11 February 2010 which seemed to assert that the justification for the Pangea Assignment was that the Company had retained payments due to Pangea, and that Pangea had made payments on behalf of the Company. However, Mr. Bergstein gave no details of such payments.
24. In my view,the combination of Mr. Bergstein's unexplained and untimely resignation shortly prior to the application for an administration order, the unsatisfactory nature of the evidence upon which the administration order was sought, the subsequent discovery of the existence and purported effect of the Pangea Assignment, and the resultant uncertainty as to the true extent of the Company's portfolio of film rights,together raised very substantial issues as to the basis upon which the administration order had been obtained. As Mr. Rubin seems to have appreciated, they also cried out for investigation by the Administrators.
25. The need for an investigation of the PangeaAssignment was also emphasised to the Administrators by at least one of the major secured creditors of the Company at an early stage. On 19 February 2010, representatives of Aramid, which is a fund that had been involved with AIB in the financing of the film "The Edge of Love"had a telephone conference call with Mr. Rubin. That call had been prompted by concerns on the part of Aramid that a Delaware company, TFC Library LLC, which was thought to be related to Mr. Bergstein, had published a notice in The Hollywood Reporter on 4 February 2010 of its intentionto dispose of what was claimed to be a library of films provided to it as collateral for loans made, among others, to the Company.
26. In a subsequent letter dated 23 February 2010, Aramid's solicitors, Field Fisher Waterhouse, summarised the contents of that telephone call. Among other things, the letter recorded that Aramid had expressed concerns to the Administrators that improper transfers of assets had taken place between the Company and "other Bergstein controlled entities", to the detriment of creditors. Field Fisher Waterhouse also recorded that there were substantial concerns about the indicative offer which had been received from Veritum, and continued,

"You have ...expressed your reluctance to take any action directly against Mr. Bergstein or a Bergstein-controlled entity in circumstances where he may be the only party willing to make an offer for the remaining assets of Capitol. You have also indicated that if the Veritum (or any better) offer did not proceed or materialise, then you may have no choice but to further investigate the circumstances of the Pangea transaction...with a view to clawing back funds to distribute among Capitol's creditors.

Our client considers that any sale to Veritum should not proceed until the above urgent investigations are carried out by the administrator, in particular the disposal of assets to Pangea as this is fundamental to an understanding of what remaining rights Capitol has in relation to the library of 155 films. No doubt you are mindful of the recent decision in Coyne and Hardy v. DRC Distribution Ltd where the Court of Appeal criticised the administrators' actions in negotiating with the director to sell the business in circumstances where the director had caused the company to enter into a number of transactions whereby assets were transferred to another company set up by the director for little or no value. The Court held that the administrators should not have proceeded with the administration and attempted to sell the assets until these transactions were unravelled."

27. The reference to the decision in Coyne and Hardy v. DRC Distribution Ltd [2008] BCC 612 was to a decision of the Court of Appeal, the facts of which have some parallels to the instant case. The administrators had been appointed by the managing director of the company (F) in mid-August 2007 against a background of suspicion that he had, shortly before administration, carried out an asset-stripping exercise by transferring assets away to another companywhich he controlled (U1). Shortly after their appointment, the administrators had indicated to disgruntled creditors that they intended to take immediate steps to secure and recover the company's property from F and U1, and that they were in funds to do so. In the event, however, the administrators did not pursue that course. On or about 23 August 2007 they decided not to investigate the pre-administration transfer and took no proceedings to recover the company's assets. Instead, they invited offers for the business and assets from F, U1 and from one of the major creditors (DRC). In the course of that process it became apparent, however, that because of the unresolved issues surrounding the pre-administration events, it was unclear what assets the administrators were in fact able to sell. This resulted in the only offer for the assets being received from F, and when the administrators indicated that they were disposed to accept this offer, DRC sought their removal from office.
28. Shortly before the application was due to be heard, the administrators told F that they were only willing to conclude a deal with him on the basis that they retained the right to bring proceedings against him in respect of the pre-administration transactions. F maintained that his offer for the assets was only made on the basis that it would preclude all such claims and was intended to draw a line under the previous history. That marked the end of negotiations to sell the assets of the company, and the administrators concluded that the purposes of the administration could no longer be served. The administrators therefore petitioned for the making of a winding up order and the court granted that relief. The liquidator who was then appointed then took steps to recover the assets of the company from U1 and eventually sold them to DRC.
29. The making of the winding up order meant that the only issue remaining in respect of DRC's application for the removal of the administrators was the question of costs. The judge, HHJ Purle QC, found that the application for the removal of the administrators would have succeeded, and ordered the administrators and F to pay the costs personally on a joint and several basis. He found that there was strong evidence of an improper motive on the part of F in appointing administrators with a view to acquiring the assets of the company, and that the only basis upon which the purposes of the administration could have been achieved was if the administrators had taken steps to recover the assets of the company. He held that the administrators had failed to take the steps that they should obviously have taken to recover the assets of the company and had failed to meet the necessary standards of conscientious and competent behaviour to be expected of administrators.
30. The Court of Appeal upheld HHJ Purle QC's decision. The leading judgment was given by Rimer LJ (with whom Ward and Jacob LJJ agreed). Rimer LJ held that HHJ Purle QC had been entitled to make what might be described as a "hostile" order on a summary "costs only" determination and without hearing oral evidence. He then indicated that HHJ Purle QC was entirely justified in making the costs order that he did. Rimer LJ held,at paragraph 70,

"Whatever one's view as to whether the administrators should have accepted the appointment in the first place, it appears to me obvious that, in the circumstances in which they found themselves by 23 August, they should not have entertained any thought of an attempted sale of the business and assets at that stage. They should instead first have focused exclusively on the recovery from [F] and UI of the entirety of [the company's] business and assets. Only then would they be in a position to invite offers from interested parties on a level playing field and to deliver the business and assets to the winning bidder. … The judge was, in my judgment, entitled to conclude that the administrators' decision on 23 August with regard to the recovery of [the company's] assets represented a fatal wrong turn in the administration that they never attempted to correct."

31. In conclusion, at paragraph 71, Rimer LJ also agreed with HHJ Purle QC's observations that in failing to take the steps to unscramble the pre-administration transactions and to recover the property of the company before offering the business and assets for sale, the administrators,

"did not act expeditiously and with the robustness of purpose that one would have hoped for and which one is entitled to expect".

32. In the instant case, the Administrators rejected the suggestionsand warnings in Field Fisher Waterhouse's letter of 23 February 2010. On 2 March 2010 the Administrators' solicitors, Harbottle& Lewis replied saying,

"As you correctly note, there is a potential issue in relation to film rights now held by Pangea. Our clients are, of course, aware of their duties and obligations and will act accordingly. Having said that, it is not appropriate for the administrators to share information about investigations which they are undertaking in the course of their appointment...At this point in time, the administrators only have title to certain rights in relation to some 44 films. The administrators, therefore, are currently restricted to being able to offer rights in relation to these films only in terms of attempting to realise assets for creditors. To be clear, the administrators have not offered your client the opportunity to undertake due diligence on the transfer of any films or film rights to Pangea.With respect, it is not for your client to become involved in our clients' investigations in relation to Pangea. As previously stated, our clients welcome any assistance that your client might be able to provide. However the conduct of the administration will be undertaken for the benefit of creditors generally in accordance with the legislation."

(emphasis added)

The secured creditors submitted, and I accept, that this letter gave the clear impression that the Administrators were already engaged in investigating Pangea's purported acquisition of the rights to the Disputed Films, and that in the meantime, any proposed sale of assets by the Administrators would be limited to the Company's rights in respect of the 44 Retained Films.

The Administrators' Report and Proposals to Creditors

33. The impression that would have been gained by reading Harbottle& Lewis' letter of 2 March 2010 would have been confirmed by the contents of the Administrators' Report and Proposals to Creditors dated 26 March 2010. Under the heading "Company Assets", the Administrators stated,

"At the date of our appointment, we were advised that the Company had interests in sales agency agreements for 44 film titles. A number of these were subject to claims from the rights owners that the sales agency agreement had been terminated....

We have ascertained that in the latter part of 2009, a number of film interests owned by the Company in just over 100 titles were transferred to Pangea Media Holdings Limited; a UK company that we believe was and still is under common ownership or control. Pangea maintains that there was full consideration paid for this transfer because they provided substantial financial support for the Company after the transfer. Details are awaited. A number of the secured creditors of the Company have raised concerns about the validity of this transfer and the manner in which it may have infringed on their secured rights. This whole issue remains a significant matter for further investigation."

34. Under the heading "Statutory Purposes of the Administration", the Administrators' Report stated that they were conducting the administration in accordance with paragraph 3(1)(c) of Schedule B1 to the 1986 Act, namely in order to realise property in order to make a distribution to the secured creditors or preferential creditors. The Administrators further stated that although they had initially thought that there might be a possibility of achieving a return to unsecured creditors, their experience of the levels of interest in the Company's assets over the preceding weeks meant that they could safely conclude that there was no realistic possibility that a sale of assets would raise sufficient funds to repay all secured creditors in full. The Report concluded that,

"all of the assets that we believe will be available for sale are likely to be covered by fixed charges and there is unlikely to be any net property subject to the calculation of a prescribed part. We consider that Section 176A [of the Insolvency Act 1986] is therefore unlikely to apply."

35. In my judgment, the acknowledgment by the Administrators in March 2010 that there was unlikely to be a payment in full to the secured creditors (and indeed, that all of the assets to be sold would be covered by fixed charges) had significant consequences for the manner in which the Administrators ought subsequently to have approached any application under paragraph 71.Paragraph 71 gives administrators of a company an important and valuable power to apply to the court for permission to sell assets subject to fixed charges as if they were not subject to those charges. This possibility isa significant interference with the rights of the holders of fixed charges to realise their security at a time and in a manner of their own choosing. It is accordingly subject to a number of safeguards and conditions, the most obvious of which (apart from the need to seek a court order itself), are the conditions (i) that the court needs to be satisfied that the disposal of the property would be likely to promote the purpose of the administration in respect of the company (see paragraph 71(2)(b)), and (ii) that the net proceeds of the disposal of the property,together with any additional amounts needed to bring those proceeds up to market value, are paid towards discharging the secured debt (see paragraph 71(3)).
36. In a typical case, an application might be made by an administrator under paragraph 71 in order to achieve a sale of a company's business as a going concern, thereby fulfilling the purpose of achieving a better result for creditors as a whole than would be likely if the company was wound up. If, for example, a company operates from premises which are subject to a fixed charge, the administrator may wish to sell the business as a going concern and in situ, and will need to be able to convey the premises free of the fixed charge in order to do so. In such a case, an order of the court necessarily involves a balancing exercise. On the one side are the interests of the holder of the fixed charge, who has rights to seek a sale of the charged property for himself and may, for example, prefer a deferred sale with vacant possession. On the other side are the interests of the holders of floating security and the unsecured creditors, who are likely to benefit from an immediate sale of the business as a going concern. The administrator seeking an order under paragraph 71, and the court in considering whether to make it, will be required to balance the prejudice that will be felt by the secured creditor if the order is made, against the prejudice that will be felt by those interested in the promotion of the purposes specified in the administration order if it is not: see Re ARV Aviation Ltd [1989] BCLC 664 at 668h-i per Knox J.
37. In the instant case, however, where the sole purpose of the administration was to achieve a return to secured creditors, where the Administrators took the view that all of the assets to be sold were covered by fixed charges and that those secured creditors would not be repaid in full, and where the Company had no continuing business as such, the reality was that in seeking to sell the Company's rights in respect of the films, the Administrators had no, or no material, constituency to serve other than the secured creditors. In my view, the Administrators' attitude towards the secured creditors and their approach to any sale proposals leading to an application under paragraph 71 ought to have reflected that fact.

The Offers for the Company's Assets

38. As indicated above, the Administrators initially told the secured creditors that after the discovery of the Pangea Assignment, they intended to limit their attempts to find buyers for the Company's portfolio of film rights in respect of the 44 Retained Films. However, according to Mr. Rubin, in light of the responses received from the marketplace, the Administrators soon reached the conclusion that those rights were of no commercial value.
39. It was against this background that the Administrators received a formal offer for the Company's assets from an entity connected with Mr. Bergstein. No offer had materialised from Veritum, which had made an indicative offer of US$10 million at the time of the application for the administration order. Instead, on 15 March 2010 an offer was received from Film Investments Limited ("FIL"), which was another company controlled by Mr. Bergstein. That offer was for considerably less than the indicative offer from Veritum, and was not limited to the Company's rights in respect of the Retained Films. Instead, FIL sought to buy all of the Company's rights in respect of any films, together with all claims or causes of action which might vest in the Companyfor a total of US$3 million, to be apportioned between the film rights and the causes of action equally.
40. Whilst the Administrators were considering the FIL offer, on 28 April 2010, Field Fisher Waterhouse wrote to themagain, this time on behalf of AIB, again suggesting that the Pangea Assignment be investigated as a matter of urgency, and objecting to any proposed sale to FIL.The letter also indicated that to protect AIB and Aramid's interests, the Administrators' consent was sought pursuant to paragraph 43 to the appointment of a receiver over the Company's rights and interests in relation to "The Edge of Love".
41. The Administrators responded through their solicitors on 10 May 2010, indicating that they "did notin principle have an issue" in relation to the appointment of a receiver in respect of the Company's interestsin "The Edge of Love", but asking to see a copy of AIB's charge document and stating that the Administrators' consent would be subject to AIB being in a position to satisfy all formal requirements for the appointment of a receiver.
42. On 11 May 2010 Aramid itself made an offer to acquire the rights to the two films which it claimed were subject to fixed security in favour of itself and AIB (including "The Edge of Love") for US$525,000. It also offered to acquire the remaining film rights and any claims which the Company owned for US$200,000.After the Administrators entered into the conditional sale contract with Exodus in July, that offer was withdrawn and replaced with an offer which excluded the Company's rights in respect of the Disputed Films or any claims in relation to the Pangea Assignment.

The Administrators' Application under paragraph 71

43. On 20 May 2010, the Administrators issued their application pursuant to paragraph 71. Notwithstanding the importance of such a sale to the secured creditors, the Administrators did not seek to engage in any discussions with any of the secured creditors who claimed to hold fixed charges over any of the Company's film rights before issuing the application.
44. As originally framed, the application was in general terms and sought directions that the Administrators be at liberty to dispose of the assets of the Company which were subject to fixed charges pursuant either to the FIL offer or the Aramid offer. The Administrators expressed a preference for the FIL offer as the highest in value, but noted that they had yet to receive proof of available funds from FIL.
45. Mr. Rubin's evidence in support of the application dealt with the question of the Pangea Assignment in this way:

"It appears that the list of films which we had expected to be held in the Company's film library [at the date of administration] was not as extensive as was originally thought. Although the Administrators cannot comment with any certainty, suggestions have been raised by creditors of the Company that a significant section of the Company's library was transferred out of the name of the Company prior to the appointment of the Administrators and that these films are now in the control of an entity called...Pangea. I understand that Mr. Bergstein, ultimately, is in control of Pangea. There is, therefore, a potential issue as between the Company and Pangea in relation to the disposition of these assets to Pangea immediately prior to appointment. I recognise that the Company may have a claim in misfeasance, or breach of fiduciary duty or by way of asset tracing against a number of potential defendants. This potential issue impacts upon the directions which the Administrators seek from the court in respect of the current application."

(emphasis added)

46. Mr. Rubin also dealt in his evidence with the position of the secured creditors. He noted that the Company's records were hopelessly inadequate, and that he could not provide details of which of 89 registered charges over the Company's property were still valid, or for what amounts. He indicated that he had invited all registered charge-holders to provide details of their charges, and asked the court, in the absence of any response from a chargee, to treat that charge as being of no value.
47. Mr. Rubin's evidence concluded as follows:

"In practice, the purpose of the administration will now be to realize assets for the secured creditors. It is my firm belief that the sale of the undertaking of the company (to either bidder) will realise a better result for creditors than any other possible outcome. I say this because (as mentioned above) all of the indications suggest that the film rights which are still owned by the Company are of no commercial value whatsoever. On that basis, either of the bids from Aramid and FIL are likely to achieve the best result for creditors generally, and indeed, specifically for the secured creditors as well."

48. It seems to me that there were fundamental difficulties with the application under paragraph 71 from the start.The Administrators' assessment of the merits of the bids from FIL and Aramid seems to have been based on an assumption that the price offeredexceeded the value of the Company's rights in respect of the 44 Retained Films. That assumption may have been right so far as it went, but the proposals from FIL and Aramid both involved the sale by the Company of all of its rights to any films. Given that the Administrators had not accepted that the Pangea Assignment was valid, and that they appreciated that the Company might have proprietary (tracing) claims arising out of that transaction, in plain terms, they ought also to have appreciated that there was a possibility that the Pangea Assignment was invalid and that the Company was still the owner of the rights in respect of the Disputed Films.This in turn meant that there was at least a possibility that the proposed sales to FIL or Aramid would dispose of those additional rights, which were potentially much more valuable than those in respect of the Retained Films, and which were also the subject of fixed security.
49. However, apart from an acknowledgement that if a claim existed against Mr. Bergstein and Pangea arising out of the Pangea Assignment, "that claim could be for a very significant sum", the Administrators' evidence in support of their application did not give any indication as to their view of the value of any of the Company's rights in respect of the Disputed Films, either so that the Court could be satisfied that it was appropriate in the interests of the secured creditors that such assets should be sold for the price offered, or in order to give any consideration as to how the price offered ought to be distributed among those entitled to fixed charges over specific film rights. Nordid the Administrators give the Court any evidence as to the details or background of the Pangea Assignment so as to enable the Court to form a view as to whether it was a transaction which was binding upon the Company and had been effective to transfer the Company's rights and interests in respect of the Disputed Films to Pangea.
50. The Administrators' failure to provide any evidence as to the PangeaAssignmentis particularly surprising. As I have indicated, the Administrators were well aware of the significance of the Pangea Assignment. Their attention had been drawn at an early stage in the administration to the problems identified by the Court of Appeal in Coyne v. DRC Distribution;the Administrators had acknowledged from an early time, and expressly noted in their Report to creditors in March 2010, that the Pangea Assignment was an issue which required investigation; and their own evidence had expressly identified the Pangea Assignment as a "potential issue" which had an impact upon the directions which they were seeking from the Court.
51. Remarkably, however, and in spite of theinsistence in the letter of 2 March 2010 from Harbottle& Lewis to Field Fisher Waterhouse that, "it is not for your client to become involved in our clients' investigations in relation to Pangea",the Administrators had in fact conducted no such investigations.
52. In his initial evidence in support of the application, Mr. Rubin's explanation for this state of affairs was that,

"…there is insufficient money in the administration to allow me to commit even to investigating the strength of that claim. There are no assets in the administration which I could use to pursue claims on behalf of the Company. It is quite possible that the Company does have a claim, but the amount of that claim is entirely of uncertain value. It is, however, fair to say that if a claim does exist against Mr. Bergstein and Pangea, that claim could potentially be for a very significant sum. I also accept, nonetheless, that those proceedings would be defended and that those proceedings would be lengthy, complex and expensive. I cannot see any basis on which the Company, in administration, could afford to bring those proceedings. The only value to the Company, therefore, is in attempting to assign such rights for a reasonable sum."

53. In his later evidence Mr. Rubin further stated,

"Mr. Bergstein's position in relation to the so-called Pangea transaction clearly greatly affected the joint administrators' ability to realise the assets of the Company. Instead of dealing with a sizeable quantity of films as we understood was going to be the case upon our appointment as joint administrators, we found that we were in fact dealing with a much smaller quantity of films, all of which were likely to be of fairly minimal value. Likewise [sic] we were not in a position to investigate or pursue Pangea in relation to the transaction which had taken place simply because there were no funds in the administration.

Our strategy, at that point in time, was to attempt to sell the assets which were capable of realisation, and then to review what we could do, as administrators, in relation to the Pangea transaction having regard to whatever funds could be generated for the administration.

It was abundantly clear to me, from my discussions with Mr. Bergstein, that he did not and would not accept that the Pangea transaction was anything other than valid and enforceable. The joint administrators for our part, never accepted the Pangea transaction and we still do not do so. However, we have never at any time had money to challenge the transaction and therefore cannot do so without a significant commitment of funding from a third party.

To date (in the course of the current application) we have not received any firm offers of funding from any secured creditor or other third party in order to investigate or pursue a claim against Pangea. We have received general indications from certain secured creditors that they might consider funding an investigation. However, no firm proposals have been received."

54. Whilst litigation to have the Pangea Assignment set aside and to seek consequential relief was likely to require significant funding, the effect of the Administrators deciding not even to investigate the transaction or seek provisional legal advice in relation to the chances of setting it aside,meant that they gave themselves no real prospect of persuading creditors to put up such finance. Although the Administrators sought offers to fund litigation at a late stage, it was, in my view, unrealistic to ask creditors to provide a substantial commitment to litigation without some basic investigative work having been done.Mr. Rubin's explanation for the Administrators' failure to carry out such essential preparatory investigations was itself a lack of funding. However, I regret that I do not accept Mr. Rubin's evidence that the Administrators were without the necessary funding even to investigate the Pangea Assignment or seek some provisional legal advice about it.
55. As noted in the Report to Creditors, following Mr. Bergstein's e-mail to Mr. Bergstein of 5 February 2010, the Administrators had received a loan of US$100,000 from Mr. Bergstein in February 2010. Moreover, following the concerns which Aramid expressed about the PangeaAssignment, it provided a further loan of US$50,000 to the Administrators on or about 12 March 2010. Mr. Rubin's evidence accepted that the funding agreement for the loan of US$50,000 from Aramid was unconditional apart from an agreement that it be repaid first out of realisations, and that it did not restrict the use of funds to the obtaining of a valuation of the Company's film rights. Moreover, Mr. Rubin's own evidence in his seventh witness statement acknowledged that after discovery of the PangeaAssignment,

"Aramid became much more focussed on what [Aramid] (and the administrators) considered to be an improper transaction between the Company and Pangea".

(emphasis added)

56. Further, although Mr. Rubin suggested in his sixth affidavit that the US$150,000 obtained from Mr. Bergstein and Aramid had been exhausted in the costs of running the administration, (i) that does not meet the point that the US$150,000 was received before substantial costs were incurred on other matters, and (ii) that Mr. Rubin's own receipts and payments accounts show that of the US$150,000 received, some £23,960.40 still remained by 4 August 2010.
57. These points about funding were canvassed in the evidence and in argument before me, and were not answered by the Administrators. The result is that notwithstanding its manifest importance, I have no satisfactory explanation from the Administrators to explain why they did not conduct anyinvestigations into the Pangea Assignment or Mr. Bergstein's role in it.

The Response of the Secured Creditors to the Application

58. The Administrators' application was issued on 20 May 2010 and served on the various secured creditors who expressed an interest in June 2010.It met with immediate opposition.
59. On 8 June 2010 Field Fisher Waterhouse e-mailed the Administrators' solicitors indicating an intention on the part of AIB and Aramid to file evidence opposing the application. That e-mail indicated in strong terms the concerns that those parties had in relation to the conduct of the Company's business by Mr. Bergstein, the PangeaAssignment, and the Administrators' failure to investigate it. The e-mail also reiterated that it would be in the interests of creditors that the PangeaAssignment be investigated before any offer from FIL was seriously considered.
60. On the same day, Field Fisher Waterhouse also wroteto the Administrators seeking urgent clarification of whether the Administrators' preferred offer from FIL was intended to include the purchase and sale of the Company's rights in relation to "The Edge of Love", and, if it was, a statement of the Administrators' position on the market value of such rights having regard to the requirements of paragraph 71(3). Field Fisher Waterhouse repeated AIB's request for the Administrators' consent to the appointment of a receiver over the Company's rights in respect of the film.
61. The response from the Administrators' solicitors, Wallace LLP, was neither prompt nor helpful. It finally came after three weeks,in an e-mail dated 30 June 2010 which, among other things stated that,

"It is not for the Administrators to interpret for your client what the offer [from FIL] is intended to include. However, if (and only if) any rights in relation to the film "Edge of Love" are within the scope of the acquisition contemplated by the offer made, then the company in administration will clearly be transferring to any purchaser such right, title and interest as it may have in the film."

The e-mail also did not provide the consent sought by AIB to the appointment of a receiver over the Company's rights in respect of "The Edge of Love". Instead it stated that in light of the offers which were the subject of the application for directions, it was the Administrators' view that there was nothing to be gained from such appointment, and that the only consequence would be that extra costs would be incurred. The e-mail asked AIB to defer its request until after the application for directions had been heard, and added that the Administrators did not necessarily accept that an event of default had occurred, and had not been provided with any evidence of an event of default permitting the appointment of a receiver.

62. That response drew a reply from Field Fisher Waterhouse on 2 July which reiterated that AIB and Aramid opposed the sale of any of the Company's assets over which AIB held fixed security to FIL or to any other company associated with Mr. Bergstein or Mr. Tutor. In relation to the request to appoint a receiver over the Company's rights in respect of "The Edge of Love" the e-mail continued,

"In relation to our client's reasonable request for your clients' consent to appoint a receiver, you boldly assert that there has been no event of default under the AIB facility. This is quite incorrect. The Company was, inter alia, in default the moment your clients were appointed administrators. Your statement that "nothing will be gained" from the appointment of a receiver is not a good reason to refuse consent. On the other hand, the Company's creditors will not be prejudiced in any way by the appointment of a receiver over the rights to Edge of Love held by the Company and over which AIB has a fixed charge and it is quite obvious that AIB's rights as a secured creditor may be prejudiced by the offer from FIL or Mr. Tutor's company in circumstances where your clients have not served any evidence of how funds will be attributed to AIB's security in Edge of Love."

The e-mail concluded with a warning that if consent was not forthcoming immediately, AIB would issue an application under paragraph 43 and seek the costs of doing so from the Administrators.

63. In response, the Administrator's solicitors reiterated their view that,

"It is not for the Administrators to attempt to apportion the amount received from any sale amongst the secured creditors. The administrators do not, and cannot know the value of the assets relating to each film, nor do they have any information relating to the amount outstanding to each secured creditor. It is, therefore, for the secured creditors to provide information to the administrators, and to the court, in the context of the application that has been brought."

64. In my judgment, the points raised by Field Fisher Waterhouse were correct, and the responses from the Administrators' solicitors missed the point. If administrators wish to obtain consent from the court to a sale of fixed charge assets under paragraph 71, the onus lies on the administrators to persuade the court that it is appropriate to interfere with the rights of the holders of fixed security to conduct their own sale.In this case, the Administrators might have been handicapped by a lack of accurate information about the amounts owing to the various secured creditors under the various charges, but they did have the responsibility to identify which assets they were proposing to sell, and to satisfy the court that the price which they were proposing to obtain for those assets was a proper price.
65. At about the time the Administrators' application was served on the secured creditors, the offer from FIL was withdrawn and replaced by an offer from Exodus. The Exodus offer was dated 8 June 2010 and was for all of the assets of the Company for a price of US$2.35 million. It was in very similar terms to the FIL offer which it replaced, but it allocated the consideration as to US$500,000 for any rights and claims the Company might have against any third parties, and US$1.885 million for the remaining assets of the Company. Exodus was joined as a respondent to the Administrators' application and on 8 July 2010 Mr. Rubin swore a further affidavit in which he indicated that it was the Administrators' preference to accept the Exodus offer.
66. A hearing of the Administrators' application was fixed to take place before Chief Registrar Baister on 14 July 2010. Shortly before that hearing there were two developments. The first was that on 9 July 2010, Exodus' solicitors delivered an ultimatum that the Exodus offer would be withdrawn if an agreement was not reached by 2 pm on 12 July 2010.After taking advice, the Administrators decidedto enter into a conditional sale contract with Exodus.
67. I gave a brief description of the Sale Contract with Exodus in paragraphs 6-9 of my earlier judgment. The effect of the Sale Contract would have been to sell all of the Company's assets, including its rights in respect of the Retained Films and the Disputed Films, together with any and all claims which the Company might have against any person in relation to its business and assets, to Exodus for a total consideration of US$2.35 million. The Sale Contract was subject to a condition that approval should be granted by the Court pursuant to paragraph 71 by 30 August 2010 or such other date as might be agreed, and it provided for a non-refundable deposit of US$100,000. Perhaps surprisingly, given the Administrators' earlier statement in their Report to Creditors that they thought that all of the assets they would be selling would be covered by fixed charges, and in contrast to the terms of the offer from Exodus, the consideration under the Sale Contract was stated to be apportioned as to US$500,000 for assets subject to fixed charges and US$1,850,000 for the remaining assets. However, no indication was given in the Sale Contract of the identity or nature of the assets supposedly included in either category, and the evidence filed by Exodus and the Administrators did not contain any further explanation as to how this apportionment had been arrived at.
68. The second development was that AIB pursued its request to appoint a receiver over the Company's rights to the "The Edge of Love" film. On 5 July 2010 the solicitors for the Administratorsindicated that the Administrators wished to evaluate AIB's claim that the appointment of a receiver in respect of that film would not prejudice the interests of creditors, and sought information from Aramid as to the effect which the appointment of a receiver would have upon its offer for the assets of the Company. However, before an answer could be given, by an e-mail sent at about 2 pm on 7 July 2010, Mr. Rubin gave his consent to Mr. Molner of Aramid, stating,

"I confirm that the Administrators of [the Company] consent to you and/or AIB appointing a receiver under your charges over whatever rights [the Company] may have (if any) over its interests in the film "Edge of Love" and over [the Company's] interests in the shares of RGT, [the Company's] wholly-owned subsidiary."

69. Although that e-mail seemed perfectly clear, the very next day, at about 3.20 pm on 8 July 2010, Mr. Rubin sent an e-mail to Mr. Molner purporting to withdraw his consent insofar as it related to the Company's interests in respect of "The Edge of Love". He did not explain why. Field Fisher Waterhouse then wrote to the Administrators' solicitors on 9 July 2010 highlighting this volte-face and seeking confirmation that consent was given to the appointment of a receiver by AIB. However, no answer or explanation was (or ever has been) given by the Administrators or their solicitors, and in the absence of a response, AIB issuedits application under paragraph 43 on 13 July 2010.
70. On 14 July 2010, Chief Registrar Baister gave directions for the filing and exchange of evidence on both applications. The Administrators, supported by Exodus, sought a direction that the applications be heard urgently, and on 23 July 2010 Mr. Justice Arnold certified that the applications should be heard on an urgent basis as vacation business.
71. It was apparent by this stage that there were very substantial objections from the secured creditors to the Administrators' application. As set out in the skeleton arguments for both hearings in July, the secured creditors saw the actions of Exodus and the Administrators as being designed to "railroad" the secured creditors and the Court into agreeing or approving a sale which would include claims to or in respect of the Disputed Films to a company controlled by an associate of Mr. Bergstein, before there had been any investigation of the PangeaAssignment, and without the Administrators having any proper information as to the identity or value of the assets they were proposing to sell.
72. The lack of information available to the secured creditors was raised at the hearing on 14 July 2010, and on Friday 16 July 2010 the solicitors acting for the Fortress Creditors wrote to the Administrators' solicitors seeking inspection of relevant documents held by the Administrators, and also suggesting that the Administrators should exercise their powers under the Insolvency Act 1986 to obtain information and documents from Mr. Bergstein. The Fortress Creditors offered to provide finance to the Administrators for that purpose.
73. After the weekend, on 19 July 2010, the Administrators' solicitors responded, offering inspection of relevant documents, but rejecting the suggestion that they should use their statutory powers to obtain information from Mr. Bergstein. They said,

"We note your request that the administrators exercise their powers under the Insolvency Act 1986 in order to compel Mr. Bergstein to provide certain information relating to the Pangea transaction. It is the administrators' view that it is not necessary to understand, at this stage, the detail of the Pangea transactions in order to determine the current application before the court. The reasons for this are clear from the evidence filed on behalf of the administrators in the current proceedings…"

(emphasis added)

74. The solicitors for the Fortress Creditors responded that the Administrators' refusal was misconceived and would impair their ability to exercise their rights in relation to the Administrators' application. The letter continued,

"Contrary to the position adopted in your letter, an understanding of the "detail of the Pangea transactions" is fundamental to determining the identity and value of the assets which would be transferred to Exodus under the conditional sale agreement, the value of any potential claims against Pangea which would be caught by such transfer and therefore whether such sale would be in the interests of creditors or, alternatively, represent a windfall to Exodus at the expense of Capitol's creditors. By seeking information which should reveal which (if any) film rights were effectively transferred to Pangea, the nature and value of those rights and the consideration for such transfer, we have made a limited and reasonable request for information which would assist in ascertaining such matters.

Your suggestion that the nature and value of the assets of Capitol, including the value of any claims against Pangea, is irrelevant to the question whether the court should approve the proposed sale of assets to Exodus or Aramid as being in the best interests of the creditors, is inconsistent with the evidence filed on behalf of the Administrators…

It is clear that access to the information sought is necessary in order to determine the identity and value of the current assets of Capitol, including the potential claims against Mr. Bergstein and Pangea. Without this information, Fortress is unable to evaluate whether either the Aramid offer or the Exodus offer to purchase those assets is in the interests of the Fortress Creditors."

75. Following the order for expedition, extensive evidence was filed by the secured creditors, seeking to establish their own rights and interests against the Company and its assets, and also to provide some evidence of their own as to the potential value of the Company's rights in respect of the Retained Films and the Disputed Films. In particular, the Fortress Creditors sought to rely upon a valuation that they had obtained in January 2009,which attributed a value based upon projected future net receipts for the Company's whole film library (which included the Disputed Films and the Retained Films) of over US$40 million. AIB also filed evidence suggesting that the Company's rights in respect of the Disputed Film "The Edge of Love" might alone be worth between US$483,000 and US$982,000.
76. For its part, Exodus filed evidence commenting upon the valuation evidence, suggesting that the values attributed to the film rights by the secured creditors were substantially overstated, and making the further point that notices had been served on the Company since the making of the administration order which purported to terminate the Company's rights in respect of about half of the Retained Films. The evidence concluded that AIB's valuation of the rights in respect of "The Edge of Love" was substantially overstated, and that even on the basis of the valuation relied upon by the Fortress Creditors, the value of the rights in respect of the Retained Films where no termination notices had been served was only about US$1.156 million.It is, however, notable that apart from "The Edge of Love", the evidence filed by Exodus did not seek specifically to address the value of the rights in respect of the Disputed Films (or any claims relating to them) or to indicate how Exodus had arrived at the offer of US$2.35 million. Nor did the evidence indicate the basis for the apportionment in the Sale Contract of the consideration as to the assets covered by fixed charges and those that were not.
77. The secured creditors also filed extensive evidence dealing with proceedings taking place in the United States in which an Interim Trustee had been appointed by the US Bankruptcy Court to the US companies in the group operated by Mr. Bergstein. The evidence also disclosed that the US Bankruptcy Court had ordered that Mr. Bergstein and Mr. Tutor produce documents and be examined on oath as to the assets and affairs of the group.

The Hearing of the Applications

78. In paragraphs 10-16 of my earlier judgment I explained the basis upon whichI was invited to approach the application by the Administrators at the start of the hearing on 25 August 2010. Counsel for the Administrators submitted that the application was made on the basis that the Pangea Assignment had been valid and had operated to pass the Company's rights to the Disputed Films to Pangea. He submitted that the claims of the secured creditors purporting to hold fixed charges over the Company's rights to those films could therefore be ignored for the purposes of the application, and that the Administrators did not propose that any part of the US$500,000 consideration apportioned under the Sale Contract to fixed charge assets (or indeed any of the US$2.35 million total consideration) should be paid to the secured creditors claiming to hold fixed charges over the rights to the Disputed Films.
79. This approach did not find favour with the secured creditors.Consistent with the approach that they had taken in correspondence, the secured creditors all reiterated that the Administrators' stance was at odds with the position which the Administrators had taken in their own evidence and in correspondence (i) to the effect that they had not accepted the validity of the Pangea Assignment and thought that it was improper, and (ii) that it was unnecessary to understand the detail of the PangeaAssignment in order to determine the application. The secured creditors contended that the PangeaAssignment was invalid, and that the lack of any investigation by the Administrators into the transaction (still less any evidence relating to it) meant that it was impossible to reach the conclusion that the PangeaAssignment had validly operated to pass the Company's rights in respect of the Disputed Films to Pangea. AIB, Aramid and the Guilds were implacably opposed to the proposed sale to Exodus and to the Administrators' application. The Fortress Creditors stated that they did not object to a disposal to Exodus as such, but reiterated that they were unclear as to what was being sold. They were prepared not to object if the sale was limited to the rights to the Retained Films and on the basis that they received the entirety of the proceeds, but if that were not so, they were concerned that the court should, in some unspecified way, ensure that their interests were fully protected.
80. As is apparent from my earlier judgment, I accepted the submissions of the secured creditors and was unable to reach the conclusion urged upon me by the Administrators as to the effect of the PangeaAssignment. I also determined that in the absence of any (still less any good) reason being given by the Administrators to require AIB to refrain from exercising its rights as a secured creditor over the Company's rights in respect of "The Edge of Love", AIB should have permission, if it wished, to appoint a receiver over those rights under its security.

The costs of the Administrators' Application under Paragraph 71

The costs of the secured creditors

81. The first issue is whether the Administrators should be ordered to pay the costs of AIB and Aramid, the Guilds and the Fortress Creditors in relation to the application under paragraph 71.
82. The Administrators' application sought approval for a sale of the assets of the Company which included, or potentially included, assets over which those creditors claimed fixed security. It was plainly appropriate for the secured creditors to appear on the application to protect their interests. Moreover they successfully resisted the orders sought by the Administrators. On any basis, it would be right to describe the secured creditors as the successful parties to the application and the Administrators as the unsuccessful parties. The general principle is therefore that the secured creditors should be awarded their costs against the Administrators.
83. Mr. McCulloch, who appeared for the Administrators, nevertheless resisted an order for costs on the footing that the bringing of the application by the Administrators was a commercial decision taken to realise the assets of the Company in the administration. He contended that an analogy should be drawn with the approach of a court to a challenge to a decision by an office-holder to sell assets, where the court is very slow to interfere and defers to the commercial judgment of the office-holders providing that they are behaving rationally: see e.g. Re EdennoteLtd [1996] 2 BCLC 389 and Unidareplc v. Cohen [2006] BCC 463. Mr. McCulloch submitted that a court ought not to make a costs order against office-holders who did not succeed on an application under paragraph 71 provided that they had behaved rationally.On the facts, Mr. McCulloch submitted that the Administrators' application was a rational commercial response to a difficult problem caused by a combination of Mr. Bergstein's forceful assertion of the validity of the Pangea Assignment, a lack of funding in the administration, and an urgent timetable that was imposed by Exodus to prevent diminution in the value of the assets to be sold.
84. I do not think that theline of cases exemplified by Re Edennote are an appropriate analogy on the question of costs in this case. I accept that the court will generally defer to the commercial judgment of the office-holders where what is in issue is a challenge to the office-holders' assessment of the merits of one particular bid for a company's assets over another, or whether, for example, it might be possible to obtain an increased bid for those assets given more time. However, as I have indicated above, applications under paragraph 71 raise additional and different issues. They require the court to determine whether it is appropriate to prevent the holder of a fixed charge from enforcing his security rights and to permit the administrator to undertake a sale which promotes the purposes of the administration more generally. Such an application requires the court to balancethe competing rights and interests of the holders of fixed charges with the rights and interests of the other creditors: see Re ARV Aviation Ltd [1989] BCLC 664. On that type of issue, the court does not simply apply the Edennoteapproach and defer to the administrators' business judgment provided that it is rational: the court will decide for itself how to resolve the competing interests of creditors: see e.g. Re Buckingham International plc (No.2) [1998] BCC 943 at 960-961 (CA).
85. Moreover, ifan administrator seeks permission under paragraph 71, he will usually be seeking to advance the interests of the unsecured creditors and the holder of anyfloating charge and to override the rights of the holder of a fixed charge. If the administrator is making an application to court, it will be because the holder of the fixed charge does not consent to what is proposed. In those circumstances, there is a genuine lis between the holder of the fixed charge and the administrator who acts in the interests of the other creditors. If the holder of the fixed charge succeeds in opposing the application, I see no reason why he should be required to bear his own costs simply because the administrator has behaved rationally in advancing the interests of the other creditors.
86. In the instant case, however, I do not in any event believe that the Administrators' conduct in making and pursuing the application as they did was either rational or reasonable.
87. I have already indicated that from the Administrators' Report to Creditors in March, it was apparent that the administration and the sale of the Company's film rights was being conducted to make a payment to the secured creditors. The administration was, in essence, a substitute for each of the holders of fixed security conducting their own sales of the charged assets. In these circumstances, for reasons that I have explained,the Administrators ought to have engaged with the secured creditors constructively. Instead, as I have indicated above, the application under paragraph 71 was launched without consulting them, the concerns that they expressed in correspondence and in evidence about the Pangea Assignment and which assets were being sold were brushed aside, the Sale Contract with Exodus was signed without their prior knowledge, and the Administrators pressed the application to an expedited hearing in the teeth of sustained opposition from the very secured creditors whose interests it was supposed to serve.
88. I also do not think that the manner in which the Administrators sought to deal with the difficulties introduced by the PangeaAssignment was appropriate. The Administrators told creditors in March that they were limiting their efforts to selling the rights to the 44 Retained Films, and that they intended to investigate the issues relating to the PangeaAssignment and the Disputed Films later. However, they did not follow that course. Instead, they made their application under paragraph 71 in relation to offers and then the Sale Contract whichwould have included any rights which the Company retained in, or claims relating to, the Disputed Films.
89. This approach by the Administrators necessarily raised questions as to the effect of the PangeaAssignment, namely whether the sale for which the Administrators were seeking consent under paragraph 71 extended to rights and interests in the contracts relating to the Disputed Films and, if so, what value those assets had, and how the interests of the fixed chargeholdersin relation to them would be protected. The potential impact of the PangeaAssignment upon the directions which the Administrators were seeking from the Court was acknowledged in the evidence in support of the application from the outset.However, there is no evidence that the Administrators ever sought to solve this problem by, for example, going back to FIL or Exodus to investigate their willingness to exclude any rights or claims in relation to the Disputed Films from the assets to be sold.
90. Nor did the Administrators carry out any investigations into the PangeaAssignment and they placed no evidence in relation to it before the Court. Even when, in the early stages of the application, the Administrators were expressly requested by the Fortress Creditors to use their statutory powers to investigate the transaction,they sought to explain their unwillingness to do so on the basis that it was not necessary to do so for the purposes of their application. That assertion was, as the secured creditors pointed out at the time, inconsistent with the Administrators' own evidence.
91. The Administrators had also conducted no investigations into the possible value of the Company's rights in relation to the Disputed Films, or even as to the value of the claims that the Company might have had arising out of the purported disposal of those rights pursuant to the PangeaAssignment.
92. In my view, the result of the all-encompassing scope of the offers and the Sale Contract,coupled with the lack of any investigation by the Administrators into the PangeaAssignment or into the value of the Company's rights in relation to the Disputed Films, was that the Administrators never had any realistic prospect of obtaining the relief that they sought on the application. The Administrators were driven to ask the Courtto determine that the Pangea Assignment was binding on the Company and effective to dispose of the Company's rights and interests in the Disputed Films.But their own evidence was that they had never accepted the PangeaAssignment and thought that it was "improper", and they had no evidence as to the circumstances in which it had been entered into, or to support Mr. Bergstein's claims that good and valuable consideration had been provided for it.
93. In response to the specific points raised by Mr. McCulloch, I have already indicated that, in my judgment, the Administrators' failure to investigate the PangeaAssignmentcannot be explained by a lack of funds and has not been satisfactorily explained. I also do not think that the mere fact that Mr. Bergstein had asserted that the agreement was binding can justify the failure to investigate the PangeaAssignment. As pointed out in Coyne v. DRC Distribution Ltd, administrators are expected to act with a "robustness of purpose": this ought at very least to have led to them seeking to question Mr. Bergstein closely about what had occurred.And the fact that Exodus sought to impose an urgent deadline for execution of a sale contract on the basis that the Company's rights in respect of the remaining Retained Films were in commercial jeopardy from termination notices does not explain why the Administrators did not seek to limit any sale contract to those films. Nor, in fact, was there any evidence to suggest that any significant number oftermination notices were being served or threatened in July 2010 as opposed to much earlier in the administration.
94. In short, I have no doubt that the Administrators were wrong to commence and pursue the application under paragraph 71 in the manner that they did. There is accordingly no reason not to apply the general principle on costs. I will therefore order the Administrators to pay the costs of the secured creditors who appeared on the application under paragraph 71.

The basis of assessment

95. The authorities noted in the commentary at paragraph 44.4.3 of the Civil Procedure White Book show that the jurisdiction to order costs to be assessed on the indemnity basis rather than the standard basis is only to be exercised in cases which are removed from the normal run of litigation. Parties who behave reasonably in litigation should not be required to pay costs on the indemnity basis simply because they lose. There has to be a significant level of unreasonableness or otherwise inappropriate behaviour before an order on an indemnity basis is appropriate.
96. In this case, as I have indicated above, I consider that the Administrators' approach to the application was irrational and misconceived. The Administrators sought consent for completion of the Sale Contract which would have included any rights which the Company might have in respect of the Disputed Films or arising out of the Pangea Assignment,but without conducting the necessary investigations to obtaina clear understanding of the transaction, or of the identity of the assets they might be selling or any of their value.Moreover, as I have indicated, rather than engaging constructively, the Administrators adopted an uncooperative and at times hostile attitude to the secured creditors in whose interests they were supposed to be acting. They also ignored a number of detailed and specific warnings from the secured creditors, both in correspondence and in evidence, about the approach that they were taking, but pressed on regardless.
97. In my judgment, this conduct of the application by the Administrators was out of the norm and was unreasonable to a sufficiently high level to justify an award of costs on the indemnity basis.
98. For completeness, I should record that in addition to submitting that the Administrators' conduct was irrational and unreasonable to a high degree, the secured creditors also made various allegations to the effect thatthe Administrators had disregarded the concerns of the secured creditors, whose interests they were supposed to be serving in the administration, and thatthey had instead associated themselves too closely with Mr. Bergstein, Mr. Tutor and their various companies. In this regard, the secured creditors pointed, among other things, to the contacts between Mr. Rubin and Mr. Bergstein prior to and in the early stages of the administration, to the Administrators' failure to investigate the PangeaAssignment notwithstanding that they had sufficient funding to do so, to the absence of any evidence of an attempt by the Administrators to bargain or "push back" in negotiations with FIL and Exodus, to the efforts to "railroad" the paragraph 71 application through on an expedited basis, and to the rejection of the concerns and objections of the secured creditors as expressed in correspondence and in evidence.
99. If proven, allegations that the Administrators had consciously sought to serve the interests of Mr. Bergstein or Mr. Tutor rather than the Company's creditors wouldamount to serious misconduct by the Administrators.In the event I was not pressed by the secured creditors to decide such allegations and I have not thought it necessary to do so for the purposes of the applications before me. I should, however, indicate that having regard to the points made in Coyne v. DRC Distribution Ltdas to the caution which a court ought to exercise before deciding such allegations, I would have been reluctant to do so without disclosure of the Administrators' files or the opportunity being given to the Administrators to deal directly with such allegations in oral evidence.

Expenses of the administration

100. When an administrator leaves office, any expenses properly incurred by him in performing his functions in the administrationare charged on the property of which he has custody or controland are to be paid in priority to any floating charge: see paragraph 99(3) of Schedule B1 and rule 2.67(1)(a) of the Insolvency Rules 1986. The liability of an administrator for an adverse costs order made against him, and his own costs of unsuccessful litigation brought by him as administrator, are both capable of being an administration expense in an appropriate case. However, by analogy with cases on liquidation expenses, I believe that the court plainly has a discretion to deprive an administrator of such right of recoupment: see e.g. Mond v. Hammond Suddards [2000] Ch 40 (CA), affirmed in Lewis v. IRC [2001] 2 BCLC 392 (CA).
101. The circumstances in which the court might exercise its discretion to deprive an office-holder of a right of recoupment have, in the case of liquidations, been said to include cases in which the office-holder has been guilty of misconduct (see Re Wilson Lovatt& Sons Ltd[1977] 1 All ER 274 at 286f-g); where he has made a "blunder" or serious mistake (see Re Silver Valley Mines (1882) 21 Ch D 381 at 385-386); or where it would be unjust for other reasons to permit such recoupment (see MC Bacon Ltd (No.2) [1990] BCLC 607 at 615-616). In the latter case, Millett J. held that it would plainly be unjust for a liquidator to recover his costs of an unsuccessful challenge to the validity of a floating charge from the very property which was subject to that charge in priority to the holder of the charge.
102. In the instant case,whilst I have not needed to decide whether the Administrators were guilty of misconduct, I have held that the approach of the Administrators to the application under paragraph 71 was irrational and misconceived.That conduct is, in my judgment, in the same category as the "blunder" or serious error discussed in the Silver Valley Mines case, and justifies an order preventing the Administrators from recouping themselves from the assets of the Company.
103. On the particular facts of the case, I also believe that it would be unjust if the Administrators were entitled to recoup themselves ahead of the claims of the holder of any floating charge or unsecured creditors. That is because, in the absence of any proper evidence as to the value of the assets which would have been included in the proposed sale, or any explanation of the basis for the apportionment of a large part of the consideration payable under the Sale Contract to assets which were not covered by fixed security, I do not think that there is any reliable evidence that the unsecured creditors stood to benefit from the proceeds of the Sale Contract at all. Further, so far as can be ascertained, the only holder of a floating charge which might conceivably have been interested in any part of the consideration payable, namely one of the Fortress Creditors, had not been consulted and did not support the application on the basis upon which it was advanced by the Administrators. In short, I do not see why any assets that might come into the hands of the Administrators, and which are destined for the holder of the floating charge or unsecured creditors, should be diminished by the costs of an application which does not appear to have been at all likely to serve their interests.
104. Accordingly, I will make an order that the Administrators be not entitled to recoup themselves either in respect of their liability to the secured creditors or in respect of their own costs from any assets of the Company which are the subject of a floating charge or which would be available for unsecured creditors.

The costs of AIB's application under paragraph 43

105. As I have indicated, AIB was successful in its application under paragraph 43(2)(b)for permission to appoint a receiver over the Company's rights in respect of "The Edge of Love". As I have also recounted, the application was prompted when the Administrators finally gave their consent on 7 July 2010 but then withdrew it the next day without giving any reasons.
106. InRe Atlantic Computer Systems plc [1992] Ch 505, the Court of Appeal gave guidance as to the factors that might be taken into account under the legislation then in force by administrators or the court when considering whether to give consent or permission to a creditor to enforce security over the assets of a company in administration. The Court of Appeal also addressed the manner in which such decisions should be taken by administrators, saying (at page 529F-H),

"An administrator is an officer of the court. He can be expected to make his decision speedily, so far as he can do so….The administrator should also make his decision responsibly. His power to give or withhold consent was not intended to be used as a bargaining counter in a negotiation in which the administrator has regard only to the interests of the unsecured creditors. When he refuses consent, it would be helpful if, unless the reason is self-evident, he were able to state succinctly why he has refused …It should not be necessary, therefore, for the Companies Court to be swamped with applications…Should it become necessary for a lessor or owner of goods or the owner of a security to make an application to the court, the court has ample powers, by the making of orders as to costs and giving directions to the administrator…to ensure that the applicant is not prejudiced by an unreasonable decision of an administrator."

107. Given that the administration in the instant case was being conducted to achieve a return to the secured creditors by selling the Company's collection of film rights which were the subject of various securities, it is not immediately obvious why there would have been any prejudice to the achievement of those purposes if AIB sought to have the sale of the rights in respect of one particular film carried out by its own appointee as receiver, rather than as part of a collective sale by the Administrators. One advantage of a collective sale by the Administrators might have been the saving of the costs of a series of separate sales, and it is at least conceptually possible that an increase in the costs which would have been added to AIB's secured debt might have prejudiced the holders of any floating charges or unsecured creditors. However, that approach must assume, among other things, that the price to be attributed to the sale of "The Edge of Love" by the Administrators was a full price, instead of zero, which is what the Administrators proposed to distribute to AIB.
108. But whatever might have been the merits or otherwise of the arguments between the parties on such points, to my mind they were overtaken by the actions of the Administrators in granting consent to AIB and then withdrawing it without giving any explanation for doing so. Against the background of the time which had elapsed since AIB's request was first made and the further delay during June whilst the Administrators chose to advance the sale to FIL and then to Exodus against the opposition of AIB, it seems to me that the Administrators should at very least have clarified their position and given an explanation for their actions. I regard the Administrators' failure to do so as inexcusable and a breach of the guidelines set out by the Court of Appeal in Re Atlantic Computer Systems plc.
109. Moreover, even now, the Administrators have not explained their actions or sought to justify their conduct. As I indicated, I specifically gave the Administrators an opportunity to file evidence on the point in the week between my decision on 25 August 2010 and the hearing on costs on 3 September 2010. They chose not to take up the opportunity to provide an explanation or justification, and in the circumstances I think I am entitled to assume that they had no appropriate explanation or justification to give.
110. For these reasons I think that AIB was quite justified in bringing its application under paragraph 43, it was successful in its application, and I consider that this is a clear case in which I should exercise the powers in relation to costs which were identified by the Court of Appeal in Re Atlantic Computer Systemsplcto ensure that AIB is not prejudiced by the unreasonable behaviour of the Administrators.
111. Accordingly, I shall order the Administrators to pay AIB its costs of the application under paragraph 43. Having regard to the authorities on costs to which I have referred above and in light of the conduct of the Administrators, which, as I have said, I regard as wholly unreasonable, I shall also order such costs to be assessed on the indemnity basis if not agreed. Further, and in the absence of any obvious basis for a suggestionthat the Administrators' actions might have been designed to advance the interests of the holder of a floating charge or the unsecured creditors, for similar reasons to those which I gave in relation to the costs on the paragraph 71 application, I do not think that it would be just for the Administrators to recoup themselves ahead of the claims of those other creditors. I shall accordingly direct that the Administrators be not entitled to recoup any amounts paid to AIB or in respect of their own costs from the assets of the Company in priority to any claims of the holders of floating charges or the claims of any unsecured creditors.