It was the poet John Lydgate who first said that you can please some of the people all of the time; you can please all of the people some of the time, but you can't please all of the people all of the time.

No one can understand this sentiment more than Insolvency Practitioners who regularly find themselves working under considerable time pressures and needing to make quick decisions on the basis of incomplete or imperfect information. This inevitably can result in creditors being unhappy with the decisions taken and lead to claims being brought against the office holder.

In a judgment handed down last week, the High Court was required to examine a claim against administrators concerning the sale of two properties in 2015. The sale by the administrators resulted in the senior secured lender recovering the principal amount it had advanced but the applicants, who were both unsecured and junior secured creditors, received nothing out of the administration. The main bone of contention between the parties was whether the properties had been sold for their proper value.

Background

The companies in question owned adjoining properties in the St John's Wood area of London. The companies had failed to find purchasers for the properties. When a re-financing was abandoned, the senior secured lender took steps to appoint administrators in October 2013.

Ultimately, following a short marketing period, the administrators sold the properties for a total of £61.25m. The administrators, on the advice of property agents, had not obtained up-to-date, formal "Red Book" valuation of the properties. Rather, considering the marketing attempts made pre-appointment, a guide price for each property was used to market the properties.

The applicants' criticisms

The applicants made various criticisms of the administrators. They felt that the administration had been badly mismanaged. They claimed the administrators were only concerned about the position of the senior secured lender and as a result had failed to properly inform themselves of the true value of the properties. This in turn resulted in the administrators wrongly concluding that there would be no distribution to unsecured creditors at a stage when they could not have been confident whether the unsecured creditors would get anything or not. The applicants also contended that the administrators kept other creditors in the dark, motivated only by a desire to obtain a recovery for the senior secured lender.

With regard to the marketing strategy, the applicants considered this to be fundamentally flawed and accused the administrators of not following the advice provided by its own property agents. They argued that the marketing efforts were ineffective, which meant the price achieved was well below market value.

The judge's findings

The applicant's primary claim was that the administrators acted outwith their powers by disposing of the properties as if they were not subject to the securities granted in favour of the junior secured creditors, without first obtaining the permission of the court. In order to succeed, the applicants needed to prove that by (a) granting an option to the preferred bidder or (b) exchanging contracts for the sale of the properties, the administrators had "disposed" of the properties. The judge quickly rejected this argument. He held that the administrators contracted on the basis that they would either procure the consent of the secured creditors or make an application to the court for consent; or procure that the senior secured lender sold as mortgagee in possession. In granting the option or exchanging contracts, they had not acted outwith their statutory powers.

The applicant's alternative case turned on whether the conduct of the administrators constituted a breach of duty causing loss to the applicants. The judge set out the familiar "high hurdle" that needs to be overcome in these types of cases. An administrator is to be judged, "not by the standards of the most meticulous and conscientious member of his profession, but by those of an ordinary, skilled practitioner. In order to succeed the claimant must establish that the administrator has made an error which a reasonably skilled and careful insolvency practitioner would not have made."

The judge also noted that

  • the court will, in general, not question an administrator's commercial judgment unless it is based on a wrong application of the law or is conspicuously unfair to a particular creditor; and
  • an administrator is entitled to rely on appropriate professional advice in carrying out his duties, and will not be liable in negligence if the advice relied on appears to be competent. In that regard, it will be for an administrator to establish that such reliance was reasonable in all the circumstances.

With those principles in mind, the judge considered the process the administrators had gone through in marketing the properties. Overall, the judge was satisfied that the strategy employed by the administrators was reasonable in light of the previous marketing efforts and advice received. The judge agreed with the applicants that certain aspects of the administrators' conduct could be criticised, however he could not identify anything done by the administrators which would have caused the applicants' loss.

Take Away Points

The following points can be taken from this judgment:-

  • The judgement is another reminder that the court will not interfere with the commercial judgements of an administrator unless these are based on a wrong application of the law or "conspicuously unfair".
  • There is no "one size fits all" solution when it comes to reviewing the conduct of insolvency practitioners. In this case, obtaining a formal "Red Book" valuation was not required. In other cases, that may well be necessary and failure to do so will be actionable.
  • The importance of recording key decisions – and making sure that they are preserved. Ultimately, it was not important in this case, but the judge did remark that no notes were available of meetings attended by the administrators. It would seem that notebooks kept by administrators' junior colleagues may have been lost. To have the key decisions documented together with the reasons underlying those decisions will always be the office holder's best and first line of defence.
  • The judge agreed with the applicants that the administrators, although aware that the companies had other creditors, had not paid sufficient attention to those creditors which had then resulted in a number of errors on the part of the administrators. While not causative of any loss, the message is clear – even in cases where there might be only one creditor with any economic interest in the case, there is still a need to consider and deal carefully with other creditors even if they are not "in the money".
  • For those involved in litigating cases of this sort, the judge identified the danger of fixating on the detail which then obscures the bigger picture. The administrators' counsel warned against what he called the "narcissism of small differences" – a phrase which obviously resonated with the judge who considered that the "tendency to pick away at points of detail, natural enough in a case where professional conduct is in issue, can sometimes result in one losing sight of the wood for the trees."