In this insightful article we identify and comment upon the leading cases involving claims against administrators appointed under the Insolvency Act 1986. In doing so, we seek to highlight some of the key legal issues arising in this complex arena.
At the time of writing, the full economic fallout from Covid-19 is yet to bite. Indeed, as a result of extensive economic intervention by both the UK Government and the Bank of England, some industries and markets are surprisingly buoyant, while others are surprisingly quiet. The insolvency profession is an example of the latter.
However, this would appear to be the calm before the inevitable storm and amongst many insolvency practitioners, there is a common expectation that workloads will increase dramatically.
As there is usually a positive correlation between the volume of work undertaken by a profession and the occurrence of professional negligence, it seems likely that Covid-19 will be a catalyst for more claims against administrators, as well as against insolvency practitioners acting in various other capacities. This is all the more likely if the floodgates open and if the insolvency profession finds itself struggling to cope with demand for its services. It is against this, regretfully gloomy, prediction that we identify our top five reported claims against administrators.
As will be seen from the cases that follow, entry on this list is not (and is not intended to be) dependent upon the level of damages recovered, or even upon the claimant attaining a successful outcome. Rather, it is dependent upon the quality of the judgment given, having regard to the level of understanding and appreciation that can be gleaned from it of the issues and complexities that inhabit this area of the law.
In this case various creditors of an insolvent insurance brokerage alleged that the administrator had acted negligently, with undue haste and without adequate consultation, with the result that he failed to obtain anything like a proper price upon the disposal of the insolvent company’s business.
Charnley Davies Ltd (‘CDL’) was one of 17 companies in the Charnley Davies group which collapsed in January 1987. CDL carried on an insurance broking business, while other companies in the group provided fund management, property investment and financial services.
On 16 January 1987 Mr Richmond was appointed administrator of CDL and of 12 other companies in the group. Very shortly after taking office, the administrator was advised by the CEO of CDL that the goodwill of the business would not last very long, especially if the brokers and their staff left the company’s employ, and that his ability to sell the business depended upon the insurance companies keeping their agency agreements with CDL alive until a sale had been effected.
On 24 January 1987, and having previously placed an advertisement in the Financial Times for the sale of CDL, the administrator wrote to all interested parties inviting unconditional offers by 27 January 1987. However, upon the expiry of that deadline, the only offers received were those supported by CDL’s own brokers and he decided to accept them.
On 28 and 29 January 1987 the administrator exchanged contracts for the immediate sale of CDL’s businesses and, in the process, obtained a total purchase price of £50,000 for the goodwill and £7,500 for the furniture and equipment.
A claim was then presented against the administrator on 30 March 1987 by 11 major insurance companies, all of whom were creditors of CDL. In due course, leave was given to amend the claim by joining CDL as second defendant and by adding a claim for an order that the administrator pay compensation to CDL for any damage it had sustained as a result of the sales he had effected.
By the time that the matter came to trial, the claim against the administrator was confined to the assertion that he had acted negligently in failing to enlist the support and assistance of the claimants, not because they were creditors, but because as leading insurance companies they had relevant knowledge and expertise and their attitude could affect the time at the administrator’s disposal and the success of the sale.
In determining the claim, Mr Justice Millett made the following observations:
Based on these observations and the evidence before the court, Mr Justice Millett found that the administrator had not acted negligently or with undue haste in selling the businesses when he did. Nor had the claimants established that the administrator had realised less than the fair value of CDL.
He further held that while it was unnecessary to decide the remaining question, viz. whether a sale of the company’s assets by an administrator at a negligent undervalue is sufficient, without more, to establish a claim to relief under section 27, he expressed the view that it was not.
Here, the Court of Appeal had to decide whether or not to uphold the decision of the High Court to strike out only part of the claims against administrators for professional negligence, commenced by creditors who alleged that they were owed a duty of care by the administrators.
The partnership of J & H Kyrris had operated thirteen restaurants under franchise from Burger King. However, by April 1997 it had encountered financial difficulties and become insolvent. On 28 April 1997, and upon a petition by the Royal Bank of Scotland, an administration order was made against it.
After taking office the administrators carried on the partnership business with a view to selling it as a going concern, which they eventually did in November 1998.
On 30 July 2001 the administrators applied for the discharge of the administration order and for their release, together with an order winding up the partnership. However, the day before that application was heard, applications were made by Mrs Kyrris and Mr Royle opposing the discharge and making equitable charge claims.
In due course both Mrs Kyrris and Mr Royle commenced claims against the administrators. Both alleged that the partnership had previously created equitable charges in their favour and that the administrators had failed to account to them individually as secured creditors. In addition, and in the alternative, both sought to allege that the administrators owed a duty of care in negligence and/or a fiduciary duty to them as creditors of the partnership, to take reasonable care to ensure that their interests and those of other creditors were protected. They further alleged that the administrators had breached these duties in various respects, including by selling the partnership’s assets at an undervalue and through mismanagement of its business affairs.
Upon the application of the administrators to strike out the claims, HH Judge Behrens ordered that the equitable charge claims be allowed to continue, but that the claims based on the duties allegedly owed to the claimants as unsecured creditors would not. The administrators appealed and the claimants cross-appealed.
In giving the leading judgment in the Court of Appeal, Lord Justice Parker observed that:
Accordingly, the court dismissed both the appeal and the cross-appeal and, in the process, confirmed that there is no actionable duty of care generally owed at common law (whether arising in tort or as a fiduciary) by an administrator to an individual creditor. Any such duty that does arise will necessitate special circumstances.
In this case the court had to decide whether or not to grant an application to strike out claims against administrators for professional negligence, made by the members of an insolvent limited liability partnership in both their personal capacity and in their capacity as creditors and members.
Mr Berntsen and Mr Richardson had decided to purchase and redevelop the Coniston Hotel at Sittingbourne in Kent and together, they formed a limited liability partnership called Coniston Hotel (Kent) LLP (‘LLP’).
Working capital for the project was provided by Mr Berntsen and Mr Richardson (‘Members’) and by various loan facilities provided by NatWest Bank (‘Bank’). However, by June 2010 the Bank had confirmed that it would not release the further funds required to complete the development without additional security.
On behalf of the LLP, the Members then appointed Ms Rayment and Mr Tait as individual insolvency practitioners practising from the offices of BDO Stoy Hayward. On the advice of Mr Tait an additional valuation of the hotel was obtained from Knight Frank, which reported that it was worth much less than the Members claimed. In response, the Bank refused to provide any further funding and on 22 June 2010, Ms Rayment and Mr Tait were appointed joint administrators of the LLP.
On 1 August 2011 the Members commenced claims against the joint administrators. In doing so, the Members sought an order that Ms Rayment and Mr Tait should cease to act as joint administrators, that the administration be ‘discharged’ and that the costs of the administration should be borne by them personally. In the event, before those proceedings were determined and upon a winding up order being made against the LLP, the joint administrators were discharged from office. However, that was subject to the claims commenced by the Members, which were allowed to continue.
In due course, and in their Points of Claim, the Members confirmed that they were seeking to recover compensation/loss/damages from the joint administrators occasioned by their breach of fiduciary duty of and/or negligence, under both paragraph 74 and paragraph 75 of Schedule B1 of the Insolvency Act 1986.
In response, the joint administrators applied for an order either striking out the claims or granting summary judgment to them.
In determining the application, Mr Justice Norris observed that:
In turn, the court held that while Mr Berntsen’s and Mr Richardson’s personal claims for loss/damages/equitable compensation for breach of fiduciary duty and/or negligence were not properly advanced, the balance of their claims as creditors or members under paragraphs 74 and 75 of Schedule B1 would not be struck out or made subject to an order for summary judgment and could continue.
In this heavy-weight claim, the court had to determine whether or not joint administrators appointed by a commercial lender had acted in breach of their common law duty of care and/or fiduciary duty and whether or not the lender was itself liable for such breaches, by reason of its interference in the conduct of the administration.
Ms Davey was the sole shareholder and the sole director of Angel House Developments Limited (‘AHDL’). She was also the guarantor of its indebtedness to Dunbar Assets plc (‘Dunbar’) to the extent of £1.6 million, plus interest and costs.
In 2007 AHDL acquired Angel House, a four-story commercial office property located in Docklands, London. The acquisition was funded by a loan facility with Dunbar, who was granted a legal charge over Angel House.
In due course AHDL submitted a planning application to redevelop Angel House into a residential tower with hotel, office and retail space. However, the planning process encountered various difficulties and delay and, in the meantime, AHDL defaulted on its borrowing covenants.
On 27 December 2012 Dunbar appointed Mr Money and Mr Stewart-Koster as joint administrators of AHDL. In turn, and at the instigation of Dunbar, the administrators appointed Alliance Property Asset Management Limited (‘APAM’) to undertake (i) the day-to-day property management of Angel House, (ii) the asset management of Angel House to maximise its rental income, (iii) the management of the ongoing planning application, (iv) the positioning of the property for sale, and (v) the management of the marketing and sales process.
Initially the administrators considered that the best result would be achieved by continuing to trade AHDL and by securing planning permission before disposing of Angel House. However, that strategy later changed in response to certain events and in favour of an immediate disposal.
Although Ms Davey expressed an interest in purchasing Angel House and redeeming Dunbar’s loan, she was unable to provide the funding assurances required by the administrators within the timeframe stipulated. As a result, Angel House was sold to Cubitt Property Holdings Limited for £17.05 million on 19 December 2013. In turn, Dunbar received £15,978,011.86 from the proceeds of the sale in part payment of its loans.
Litigation then followed. On 31 January 2014 Dunbar issued a claim against Ms Davey seeking to recover the costs of enforcing her personal guarantee. On 18 July 2014 Ms Davey issued a claim against the administrators under paragraph 75 of Schedule B1 of the Insolvency Act 1986. On 7 November 2014, and having taken an assignment of rights of action from the liquidator of AHDL, Ms Davey was given permission to amend her defence to Dunbar’s claim for the purposes of adding a counterclaim. On 9 February 2015 the court ordered that the two matters be heard together.
As regards the claim against the administrators, Ms Davey alleged that they had acted in breach of duty in:
In relation to Dunbar, Ms Davey alleged that it:
In determining the allegations before the court, and in his 173-page judgment, Mr Justice Snowdon observed that:
In the circumstances of this case, the court found that there had been no breach of duty by the joint administrators, who had acted independently and reasonably relied on the advice from APAM. Further, there had been no wrongdoing on the part of Dunbar, which was entitled to enforce the personal guarantees that Ms Davey had given to it. Accordingly, both Ms Davey’s claim and counterclaim were dismissed.
In this case the joint liquidators of Ary Digital UK Limited pursued a claim against the administrator, in which they alleged that in selling the assets of that company at an undervalue to the directors, Mr Iqbal had acted either negligently, in breach of his equitable duty of care, in breach of trust, in breach of fiduciary duty or in breach of statutory duty.
Ary Digital UK Limited (‘ADUL’) was part of a group of companies and a broadcaster of customised streaming content for the Southeast Asian community in the UK. To facilitate its broadcasts, ADUL acquired Electronic Programming Guides (‘EPGs’) on a fixed-term basis from British Sky Broadcasting Ltd (‘BSB’). These enabled it to provide a digital display menu, listing current and upcoming television programmes on its channels.
By 2011 ADUL was in financial difficulty and at this time it was introduced to Mr Iqbal, a licensed insolvency practitioner and founding partner at Cooper Young. Mr Iqbal was subsequently appointed as adviser to ADUL and, based on his advice, ADUL entered into administration with the aim of achieving a better result for the creditors as a whole than would be achieved if ADUL was wound up.
Once appointed as administrator, Mr Iqbal instructed Edward Symmons to advertise ADUL’s assets for sale, including the EPGs for which he had agreed a provisional sale price with the directors of £40,000. Although the advertisement was to run for a period of 12 days, Mr Iqbal instructed Edward Symmons after only 8 days to sell the EPGs to the directors for £40,000, in addition to various other assets.
While Mr Iqbal relied on the fact that the directors were the only parties interested in the EPGs and that he was concerned not to lose them, no evidence was advanced at trial to justify this concern. Moreover, Mr Iqbal had not obtained any prior independent evidence to confirm the value of the EPGs and had instead relied upon comments from ADUL’s accountant and directors.
Following the sale, Mr Iqbal submitted a written report to creditors in which he recommended that ADUL enter into a creditors voluntary liquidation and that he be appointed as liquidator. However, at a subsequent meeting of creditors in July 2011, those proposals were rejected and ADUL was instead wound up following the appointment of alternative joint liquidators.
As the joint liquidators of ADUL, Richard Brewer and Mark Wilson were subsequently granted permission, pursuant to paragraph 75(6) of Schedule B1 of the Insolvency Act 1986, to examine the conduct of Mr Iqbal while acting as administrator.
Amongst other matters, the joint liquidators alleged that in disposing of the EPGs Mr Iqbal had acted negligently and/or in breach of his equitable duty of care by:
The joint liquidators further alleged that Mr Iqbal had acted in breach of his fiduciary duty by acting in some capacity for the directors of ADUL in connection with the sale of the EPGs, which had been agreed prior to the administration.
In determining the claim, Chief Insolvency and Companies Court Judge Briggs observed that:
In turn, the court held that Mr Iqbal had been negligent in various respects, including as a result of his failure to recognise that the directors could not provide independent advice to him on timing, advertisement, price or any matter concerning ADHL and its assets.
The court also concluded that Mr Iqbal had breached his fiduciary duties by, amongst other matters, preferring the interests of the other companies within the group over those of ADUL itself.
Finally, it ordered that Mr Iqbal should pay equitable compensation in the sum of £743,750 to ADUL as a result of his breaches of fiduciary duty.
As these cases collectively show, the role of administrator can be a complex and challenging one, which is over-laced with a plethora of common law and statutory duties. While the courts will generally approach claims against administrators with some deference as a result of these challenges, they will not close their eyes to allegations of professional negligence and instead, will scrutinise them with vigour and independence of mind.
For claimants, considerable care will need to be taken when formulating claims against administrators. This is to ensure that not only are the allegations made legally and factually sustainable, but that they have the capability to deliver the remedy or compensation sought by those that are funding them.
As professional negligence specialists we act for clients nationwide, to resolve claims against a wide range of professionals, including claims against administrators.
If you would like to arrange an initial consultation with us, free of charge or commitment, please do not hesitate to contact us on 0800 195 4983 or by email at email@example.com.
As you can discover here, at PNC Legal there is much more than just the fact that we specialise exclusively in resolving claims for professional negligence that sets us apart from most other solicitors.
There are no posts matching your criteria.