Scottish Court of Session Decisions

Petitioners: Ms Ower; Shepherd & Wedderburn LLP

24 January 2011

[1] The petitioners, Gerard Anthony Friar and Blair Carnegie Nimmo, both of KPMG LLP, 191 West George Street, Glasgow, are the joint administrators of Martin Groundland & Co Ltd. ("the Company"). They were appointed administrators on 16 January 2009. They produced a Statement of Proposals on 3 March 2009 in accordance with paragraph 49 of Schedule B1 to the Insolvency Act 1986. A creditors' meeting was held on 23 March 2009 at which the Statement of Proposals was approved without modification. A creditors' committee was established. The creditors' committee extended the administration by a period of 6 months to 16 July 2010, and that period has been further extended by the court until16 July 2011.

[2] The first accounting period in the administration was from 16 January to 16 July 2009. The petitioners duly sent out a progress report in relation to that accounting period. In accordance with Rule 2.39 of the Insolvency (Scotland) Rules 1986, the administrators submitted to the creditors' committee their accounts of their intromissions with the Company's assets and their claim (a) for the outlays reasonably incurred by them (in the sum of £1,394.75 plus VAT) and (b) for their remuneration (£517,581.00 plus VAT), in both cases in respect of that accounting period. Two of the three members of the creditors' committee refused to approve the administrators' claim for expenses and remuneration - their reasons are not relevant to the present issue. On the basis that the creditors' committee had thereby, in effect, issued a determination in respect of those matters, and being dissatisfied with that determination, the administrators applied to the court, by this petition, for an order in terms of Rule 2.39A(1) of the Rules, asking the court to remit their accounts to a Reporter and to the Auditor of Court for them each (and in consultation with one another) to consider what, in their opinion, was a suitable sum to be paid in respect of their outlays and remuneration for that accounting period. On 9 April 2010, the court duly made an order remitting those matters to the Reporter and to the Auditor.

[3] The Reporter duly considered the matters remitted to him and, after consultation with the Auditor of Court, both he and the Auditor recommended that the outlays should be approved in the sum claimed but that the figure for remuneration should be reduced to the sum of £450,000.00 plus VAT. The Reporter explained that the reduction from the sum claimed for remuneration (£517,581.00 plus VAT) to the recommended sum (£450,000.00 plus VAT) was due to a deduction of a few hours in relation to "pre-appointment checks" and "strategy documents" and a 12% reduction across the board in the rates charged by the administrators for the hours worked. It is to be assumed that the Auditor applied the same approach.

[4] In light of the reports of the Report and the Auditor, the administrators have now applied by motion to have the court fix the amount to be paid to them in respect of their outlays and remuneration for that period. That is the motion with which this Opinion is concerned. I gave my decision orally at the hearing of the motion. Ms Ower, for the administrators, asked me to write on it.

[5] The Company was incorporated in 1978, although its founder, Martin Groundland, had traded for many years prior to that as a sole trader. The Company's main business was to retail jewellery and watches at discounted prices. It traded using the brand names "Symington's the Jewellers" and, more recently, "Red Contemporary Jewellery". By the late 1990s, it had expanded to about 22 stores, but following a period of losses this fell to 16 stores, 13 trading as "Symington" and three as "Red". 14 of the stores were in Scotland, one in the north of England and one in Northern Ireland. Not long before the administrators were appointed, three of the more successful stores were disposed of, leaving the administrators on their appointment to deal with13 stores with 76 employees and a head office with 19 employees. In 2006 and 2007 the Company achieved a turnover of in excess of £8 million, but this had reduced to about £4.8 million in the 10 months up to 30 November 2008. The Company suffered a loss of about £300,000 in the year to January 2008, increasing to about £850,000 in the 10 months to 30 November 2008. Administrators were appointed on 16 January 2009 after the directors failed to obtain further external funding and failed to find a purchaser for the Company.

[6] On appointment the administrators adopted the strategy of continuing to trade while pursuing a sale of the business and the assets. The stock had a book value of £1.9 million, though much of it was subject to retention of title claims). By the strategy which they adopted, which is not criticised, the administrators hoped to achieve a better price for the stock, preserve the goodwill of the business and, in the event of a successful sale of the business as a going concern, reduce the preferential claims which would then transfer to the purchaser. Six stores were sold in February 2009 and 27 employees were transferred to the purchaser under TUPE regulations. The Company owned the freehold of two properties and property valuations were instructed during this period.

[7] Ms Ower explained that the nature of the Company's business gave rise to significant complexities. Much of its business consisted of purchasing, separately, gold or silver bands and diamonds (or other precious stones), sub-contracting the work of combining the two to create diamond (or other) rings, and then selling the product. The bands and precious stones would be purchased from different suppliers and most suppliers would sell on terms which included a retention of title clause, in some cases relating to the price of the individual item and in others being of the "all sums owing" variety. Upon their appointment the administrators were presented with a large number of claims from creditors. There were some 58 claims based on retention of title claims, the investigation of which, quite apart from considering contractual issues, involved identifying which items of stock came from which supplier, and that in turn sometimes involved separating the precious stone from the gold or silver band to which it had been attached. Once this exercise had been carried out, arrangements had to be made for the aggregation of items belonging to each supplier, transporting them to head office by secure couriers and returning them to the suppliers. There were, in addition, many other matters to deal with, as would be expected, but I single out the retention of title issue for mention since it clearly formed the largest part of the work undertaken by the administrators and presented problems which are, I suspect, outside the usual run of those typically encountered in such cases. I am indebted to Ms Ower for her careful explanation of this and other aspects of the administration.

[8] Nonetheless, the administrators' claim for remuneration of £517,581 covering the first 6 months of the administration is not insignificant and requires to be scrutinised carefully, whether that be by the creditors' committee or by the court, with the help of a Reporter and the Auditor. The process of administration is intended to be for the benefit of creditors and, while administrators deserve to be properly remunerated for the work undertaken by them, it would not be right to write them a blank cheque. Nor, I am sure, would they expect one.

[9] I therefore considered with some care the administrators' time costs as set out in a schedule attached to the Report of the Reporter. That schedule showed that the two largest items were (i) a claim for £103,831.25 for 561.75 hours spent in respect of retention of title (ROT) claims and (ii) a claim for £126,991.00 for 578.20 hours spent in respect of stock and work in progress (WIP). Those seemed to me to require further explanation. Although I had the benefit of the comments of the Reporter and the Auditor, those comments did not explain why such hours were necessary. I put the case out for a hearing and, having heard Ms Ower for the administrators, referred the matter back to the Reporter for his assistance. I was particularly interested in knowing what vouching had been available to verify the hours worked in relation to the retention of title claims and the work done in respect of each claim. In an e-mail to the court, the Reporter confirmed that the schedule was computer generated by KPMG's records department from individual timesheets. He then went on to say this:

"At a detailed level the system produces as a by product a supporting spreadsheet record for each case showing for each time line - staff number, the date, the activity (which is replicated in the SIP9 summary), grade and the time input. It does not and cannot specify the particular work done in relation to the activity time line. Generally time is recorded in half hour units but not exclusively. The system can record in one-tenths of an hour. ..." (emphasis added)

The Reporter went on to say that his own firm's time recording system is broadly similar, though it includes a facility whereby a description of the work done in relation to any time line may be recorded, an is recorded for insolvency cases. In a further paragraph, the reporter added that the staff mix used by KPMG was similar to that used by his own firm on similar projects, and the number of hours spent in relation to each category of work appeared reasonable given the nature of the assignment, the number of locations, the high volume/ high value stock and the number of suppliers with retention of title claims. The charge out rates seemed reasonable. He explained that his across the board deduction of about 12% of the sum claimed by the administrators (see para.[3] above) was "more a matter of judgement in all the circumstances of the job rather than science".

[10] Two particular matters appear from the paragraph quoted from the Reporter's e-mail. I have italicised them. First, it is apparent that the system does not specify the work done in relation to the activity time line recorded. It cannot be said who was doing what and for how long in relation to any particular retention of title issue. There is no way, therefore, that the nature or efficiency of the exercise can be checked, apart from a general comment, which the Reporter feels able to make, that the number of hours spent overall appears reasonable in the circumstances. Second, time is generally, though not exclusively, recorded in half hour units. This means, as I understand it (and Ms Ower did not suggest that my understanding on this was incorrect), that if there is a telephone call lasting for, say, twenty minutes, it will be charged at half an hour. Similarly, a telephone call lasting 10 minutes or less will be charged at half an hour. It is well known that work carried out by professionals is not charged to the minute. My understanding is that solicitors in Edinburgh will often charge in six minute units. Some may charge in units of 12 minutes. I have no information as to the usual practice for accountants. Any system that charges not by the precise time used but by units of time will result in the client being charged for more time than is actually spent. The longer those units, the greater the likely difference between the time charged and the time actually used. It is not possible in the present case to know what effect the use of half hour units may have had on the hours charged. The use of such a system obviously makes practical sense. But, in sanctioning a payment to administrators of a company (and the same must apply also to liquidators), the court is concerned to protect the interests of the creditors. I would need some persuading that it would ever be right to sanction payment of the whole amount claimed as remuneration where the claim, based on hours worked, is calculated by using half hour units of time in this way, unless there was some other material showing that the recording of time in this way did not, in the particular case, unduly skew the time actually charged. .

[11] Ms Ower was not able to put further information before me which might assist in assessing the strength of the claim as submitted. Nor, on instructions, did she seek a further opportunity to obtain information or instructions which might support the claim. She candidly accepted that nothing was likely to be forthcoming. It seemed to me in the circumstances that I should adopt a broad brush approach and discount the claims for the two items in question by one-third, to represent the uncertainties which I have already mentioned and the lack of proper vouching. I therefore granted the motion only in a reduced sum.