Misfeasance – administrators beware

The Court may examine the conduct of a person who has been the administrator of a company on an application by the liquidator of the company, pursuant to Schedule B1, Paragraph 75(1) and (2) of the Insolvency Act 1986 (“IA”). However, an application may only be made in respect of an administrator who has been discharged, with the permission of the Court, Paragraph 75(6).

The report of RBS Group’s treatment of SME customers referred to the Global Restructuring Group (the “GRG Report”) together with the Financial Conduct Authority’s Interest Rate Hedging Product Review (the “FCA Review”) have shown widespread use of the administration process by banks from 2008 to 2013. Typically, the administrators will have been appointed from a small number of large insolvency practices that are ‘bank panel’ firms. Where the creditors of the companies pushed into insolvency are dissatisfied with the conduct of the banks’ appointees, they can seek to restore the company into liquidation. They can then appoint an independent liquidator who can review the conduct of the former administrators. Applications of this sort are becoming more frequent, particularly if it appears that the bank’s appointees have done little more than look after the bank’s interests, rather than the interests of any other creditors, or the members.

One Blackfriars Limited

A good example is seen in the recent judgment of Mr William Trower QC, sitting as a Deputy Judge of the High Court, in One Blackfriars Limited [2018] EWHC 901 (Ch).

This was an application brought by the liquidators of the company for permission to bring proceedings against the former administrators for negligence. The administrators (from BDO LLP) were appointed by RBS in October 2010. The administrators sold the company’s asset – 1-16 Blackfriars Road, London SE1 (the “Site”) – for ￡77.4 million in October 2011. This was not enough to pay the other secured creditors, one of whom restored the company and put it into liquidation. The liquidators allege that the administrators sold the Site at an undervalue and by so doing were negligent. The claim against BDO is said to be worth ￡58 million.

The former administrators were the Respondents to the application and in accordance with Insolvency Rule 12.9(3) a copy of the application notice was served on the Respondents. As a consequence, the application was listed for a day and hard fought by leading counsel on both sides. Permission to issue the negligence claim was granted.

In the past such applications have sometimes been made ex parte, without notice, the logic being that it is for the Applicant to persuade the Court to grant permission before a claim is issued. When the claim is served, the Respondent can then be expected to answer the claim. Of course the target can be expected to oppose the application for permission because he does not wish to be sued – but where the Insolvency Rules require 14 days’ notice of the hearing of the application, and the former administrators are named as Respondents on the application, notice should be given; to do otherwise risks an adjournment for this purpose.

Notice of the hearing of the application will also reduce the burden on the applicant to give full and frank disclosure of every fact germane to an application brought without such notice.

In One Blackfriars the Court reviewed the existing authorities where permission had been sought from the Court to bring a claim against former office-holders, post release. In particular, against a former liquidator pursuant to section 212(4) IA and against a former trustee in bankruptcy pursuant to section 304 IA. Permission is required because the former office-holders have been discharged or released and no longer have the assets of the estate in their possession from which to indemnify themselves against claims. In this sense the permission stage is a ‘filter’ to weed out unmeritorious claims.

However, how strong did the prospective claim have to be? Little more than a bona fide claim:

‘It is incumbent upon the liquidators to show a reasonably meritorious cause of action which is reasonably likely to result in a benefit to the estate.’ (Mr William Trower QC, at paragraph 30.)

Contrary to what was said by Counsel for the former administrators, this is not a high hurdle.

Somewhat surprisingly, in this application both sides had adduced expert evidence in support of their respective positions. The former administrators had argued that it was incumbent on those seeking to challenge the conduct of a professional person for allegedly selling a property at an undervalue to have obtained expert evidence before a claim is made. This argument prompted the liquidators to serve a draft expert report. However, the Court held that there was no such obligation on the liquidators. There was sufficient evidence to support an arguable claim that there had indeed been a material loss sustained by the company.

Arthur Holgate and Son Limited (“Holgate”)

The Times and the Sunday Times (21 May 2018 and 01 July 2018 respectively) report that another similar application has been brought against Deloitte. Holgate is in liquidation. The Joint Liquidators’ Progress Report dated 26 October 2017 as filed at Companies House contains their summary of receipts and payments which confirms receipt of approximately ￡10 million, said by The Times to have been paid in an out of court settlement by Barclays. The Joint Liquidators have taken further legal advice about other potential claims and one of these is said to be against the former administrators, from Deloitte.

In order to bring such a claim, the Joint Liquidators are obliged to seek the permission of the Court, pursuant to IA Schedule B1, paragraph 75(6). The hearing of that application was listed for the 5th July 2018. However, the hearing did not appear in the cause list. One might speculate that in light of the decision in One Blackfriars Limited, the application was conceded. As a result the Court is likely to have granted permission ‘on paper’ having been satisfied that the Liquidators had demonstrated that they did have a reasonably meritorious cause of action.

Conclusion

There are likely to be more instances of liquidators being asked to review the conduct of a company’s former administrators.

Where a claim is identified, the application for permission need only evidence a reasonably meritorious cause of action that may reasonably be expected to benefit the estate. This is not a high hurdle. No expert evidence is required. The application ought to be served and as a consequence the Court will list a hearing date. This does not oblige the Respondent to file evidence and contest the application. Arguably, in view of the decision in One Blackfriars, the Respondent would want to consider very carefully the costs risk attendant upon challenging the merits of the liquidator’s claim at this stage. However, as a precaution, if the Respondent does contest the application the liquidator may want to ensure that he has adequate adverse costs insurance in place before serving the application.

Insolvency Practitioners, creditors and members of companies disenfranchised by the banks’ use of the insolvency process and requiring advice about their claims may contact me.

First published in Recovery Autumn Edition.