The High Court has laid out extensive guidance for administrators when appointed by a secured creditor and open up the possibility of claims against an administrator’s appointing party if they act essentially as their agent.
The recent case of Davey v Money raised a plethora of issues for the High Court to decide, a large number of which are fact specific. However, in a very lengthy judgment, Mr Justice Snowden has provided helpful guidance of wider interest, particularly to administrators and those working in corporate recovery.
Ms Davey was the sole shareholder of Angel House Developments Limited (“AHDL”). AHDL’s sole asset was a property over which Dunbar Assets plc (“Dunbar”) held security. Ms Davey also gave a personal guarantee to Dunbar.
AHDL failed to keep up with payments to Dunbar, and therefore Dunbar appointed administrators over AHDL (“the Administrator”). Dunbar also sought to enforce Ms Davey’s personal guarantee.
Under paragraph 3(1) Schedule B1 of the Insolvency Act 1986 there are three potential objectives of an administration:
rescuing the company as a going concern;
achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration); or
realising property in order to make a distribution to one or more secured or preferential creditors.
An administrator can only opt for objective 3 if objectives 1 and 2 are not reasonably practicable and it will not unnecessarily harm the interests of the creditors as a whole. In Davey v Money, the Administrator determined that objective 3 was the appropriate objective for the administration.
Ms Davey’s Claims
Ms Davey claimed for misfeasance by the Administrator based on alleged breach of their duties to AHDL, in particular that the Administrator had:
conducted the administration with excessive regard to the wishes and position of Dunbar;
undertaken a ‘light touch’ administration and in doing so failed to exercise independent judgment;
failed to take sufficient steps to involve Ms Davey in the administration and review the possibility of a funded rescue; and
appointed unsuitable agents (at the direction of Dunbar) and that as a consequence sold the sole asset of AHDL at an undervalue.
In the event that the Administrator was found to have committed a breach of their duties, they would have been liable to pay compensation into the administration of AHDL for distribution to creditors.
Ms Davey also brought a claim against Dunbar alleging that, by their conduct and interference with the administration of AHDL, they had made the Administrator their agent and should be liable for the breaches of the Administrator.
All of Ms Davey’s claims were dismissed and a declaration was in fact made in favour of Dunbar entitling them to recovery of their costs in respect of seeking to enforce the personal guarantee given by Ms Davey.
New Law – Potential Liability of Security Holder for breach by administrator
Although the Court did not actually make a finding on this point, as the facts of the case did not require it, the Court has proposed that a security holder could be liable for breaches by an administrator (by making them their agent) if they:
“gave directions which the administrator unquestioningly followed”;
“misled the administrators”; or
“exerted sufficient pressure on them so as to defeat their free will”.
Whilst therefore possible that a security holder could be made liable, the wording of the judgment indicates that it would require an extensive level of involvement, whereby they would be essentially in control of the administrator, and it could be shown that the security holder dishonestly assisted a breach of fiduciary duty by the administrators.
Guidance – Identifying Administration’s Purpose
If realising assets to pay a secured creditor is the statutory objective of the administration then the statement of proposals must contain an explicit statement as to why the first two objectives were not reasonably practicable. However, failure to do so will not invalidate subsequent actions provided the actions taken do not unnecessarily harm the interests of the creditors as a whole.
In fact, the Court went further and stated that the chosen objective should only be open to challenge if it was made in “bad faith or was clearly perverse”. This is because the decision of which objective to follow clearly involves a “substantial amount of commercial judgment, often under significant time pressures”.
Finally, it was further said that there was no specific duty to consult with the directors/shareholders on whether or not the company in administration could be rescued as a going concern.
Guidance – ‘Light Touch’ Administration
The Court confirmed that, in certain circumstances, a ‘light touch’ administration is acceptable (i.e. one where the administrator is minimally involved in the day to day running of the insolvent company). Each case will turn on the specific facts, however in this instance the only real day to day task was property management, which could more capably be carried out by an appropriately qualified agent.
Guidance – Choice of Agent
The Court found that there is no strict requirement to hold a “beauty parade” (i.e. an exhaustive tendering and selection process) when selecting an agent to act for the administrators. The Court further found that there was no bar against the appointment of an agent that was recommended by a secured creditor.
The Court, in fact, stated that “the essential question in all cases will be whether the agents to be appointed are competent and able to discharge their fiduciary duties to the company”.
Save for the (potential) new law regarding liability of security holders for the actions of administrators, the case does not hold much in the way of groundbreaking developments. However, the guidance above should be borne in mind by administrators in similar situations.