Blue Monkey Gaming v Hudson & Others

Insolvency professionals will welcome the High Court's decision in Blue Monkey Gaming Limited v Hudson & Others [2014] which is clear authority that the onus is upon retention of title claimants, not administrators, to locate and identify retention of title goods. The court made clear that to require the administrator to identify retention of title goods would be "totally unrealistic and practically unworkable."

The case arose out of the administration of the Agora Group, which was (when it entered into administration in 2009) one of the largest operators in the UK adult gaming industry with over one hundred arcades around the country. MDM Leisure Limited ("MDM") (which subsequently assigned its claim to the Claimant, Blue Monkey Gaming Limited ("BMG"), when it entered liquidation) supplied fruit machines to the Agora Group for use in its arcades. When the Agora Group went into administration, MDM asserted retention of title claims over the machines supplied prior to the Administration for which it claimed it had not yet been paid.  

BMG subsequently pursued a claim in conversion personally against the joint administrators of the Agora Group alleging that they had wrongfully detained MDM's machines and used them for the purposes of the Administration. At trial, BMG sought substantial damages for conversion on the basis of a hypothetical profit sharing agreement in respect of unpaid machines supplied by MDM (the true value, number and identity of which was subject to significant dispute).

Who was responsible for identifying MDM's machines?

MDM did not take any steps to identify or locate its machines on Agora premises. BMG alleged instead that the Administrators had been under a duty to do so. HHJ McCahill QC disagreed, taking a more commercially realistic view of the administration regime. 

He found that the Administrators were not under a duty to compile an inventory of the assets held at each of the arcades, nor "on their own to set about identifying machines owned by individual third parties, including MDM.

He cited Mr Justice Blackburne in Four Private Investment Funds v Lomas [2009] BCC 632 : "The administrator'[s] task would become quite unmanageable … if he is to be at the beck and call of each and every creditor or each and every asset claimant wishing to be informed about his claim or asset and who expects the administrator to turn aside from the general conduct of the administration and devote time and resources to responding to his enquiries." In a clear statement that will be welcomed by administrators faced with numerous competing demands on their time, HHJ McCahill QC held that: "In my judgment, it was the duty of the person claiming ownership of goods to identify its own goods, not for the Administrators to do so. To hold otherwise would be not only totally unrealistic and practically unworkable but would also impose an obligation on Administrators which I do not consider the law demands."

In his view, the Administrators' only obligation in these circumstances was "to permit and supervise access to an alleged owner to enable it to identify its own goods and then to adjudicate on any claim arising on the basis of all the evidence supplied."  He was satisfied on the facts of this case that the Administrators had done so.   The judge dismissed various arguments which BMG sought to run about the wording of the ROT questionnaire and its accompanying correspondence. He pointed out that the ROT questionnaire was the important document as it asked MDM to supply the information which would be most material to identification and location of the unpaid machines. The information which MDM supplied was however  inaccurate and incomplete, and suggested MDM still had further information to provide, for example, a statement that an inventory was "not possible as yet." This debate highlights the importance of careful drafting of communications with creditors to avoid any confusion as to the parties' respective responsibilities.

The correct measure of damages

The judge held that the Administrators had not procured the conversion of MDM’s machines and so were not liable in conversion for any of MDM’s machines across the period of the Administration.  As such, it was not strictly necessary for him to deal with quantum but he chose to address the question of the correct measure of damages in such a case in any event. BMG sought to claim "user damages" of £7.71m on the basis of a hypothetical 50% profit share agreement into which it asserted that the Administrators would have been compelled to enter with MDM, had MDM sought to remove its machines during the Administration.   The judge disagreed that this was the correct measure of damages, holding instead that any loss which MDM might have suffered as a result of any wrongful detention of the unpaid machines would have been limited to their diminution in value over the period of the wrongful detention. In this case, this would have amounted to a maximum of £112,500 had conversion been established over the entire 12 month period of the Administration for the full amount of machines that MDM claimed to be unpaid. 

Comment

This is a helpful judgment for the insolvency profession. Administrators arrive as strangers to a company in difficulty, and often in disarray, duty bound to comply with their statutory objectives under the Insolvency Act 1986, while facing significant and competing demands on their time from numerous parties, such as creditors, landlords and employees.

This judgment takes account of this commercial reality by placing the responsibility for the location and identification of goods firmly with the party in whose commercial interests it is to recover them.

That said, it is key to ensure that office holders' communications with creditors make clear that it is up to those creditors, not the administrators, to take steps to identify their goods.  

Andrew Howell and Sophie Cubbon acted for the Defendants.