Summary and implications
Two recent cases involving company administrations have seen the court take very different approaches to an administrator’s demands. The court has shown that it will look at the overall purpose of the administration before deciding whether to allow administrators to use their powers. Clients should consider:
- whether the administrators have acted in the best interests of the company’s creditors. Clients may wish to challenge the administrators’ actions in court if they believe those actions are unfair or irregular; and
- if the administrators’ actions have caused prejudice, whether the administrators can explain the reasons for their actions in clear terms and show how this prejudice advances the purpose of the administration; and
- whether the prejudice is suffered by one person in isolation or by a larger group of creditors. The court seeks to balance the interests of the creditors as a whole, against the interests of one party.
Documents requested by the administrators were not crucial to the outcome of the administration
In the first case1 the administrators requested copies of various building contracts, designs, plans and other documents from a building contractor.
The building contractor had not been paid for its work and it refused to hand over the documents, claiming copyright over the designs.
The request for documents was very broadly worded. It did not set out which specific documents were needed by the administrators, nor what information the administrators already held.
The court was not persuaded by the copyright and non-payment arguments, but it did take into account how useful the information would be to the administrators. The court held that the indiscriminate nature of the request showed that the documents sought were not crucial to the outcome of the administration. On that basis, the court refused the application which was seen as unfair because of the wide reaching nature of the request.
The court approved a “pre-pack” sale, which was in the best interests of the creditors
In the second case2 the directors of a cigarette vending machine company applied to court for an administration order after securing the sale of the company’s business to two of its competitors in a pre-packaged (or “pre-pack”) sale.
The administrators sold the business to the competitors as soon as they were appointed. The sale took place before the creditors’ meeting, which is usually the time when the creditors discuss the future of the company and approve the way forward.
In accordance with the Statement of Insolvency Practice 16 (“SIP 16”) the court was provided with details of the deal and the valuations of the company’s assets on two bases: if the deal was done immediately and if the administrators waited until after the creditors’ meeting.
The table below sets out a summary of the information which insolvency practitioners are required to provide, where a “pre-pack” sale takes place.
The administrators were able to persuade the court that there would be a greater return to the creditors of the company if the deal was done immediately and the court allowed the pre-pack sale to proceed.
The administrators were allowed to recover their fees and expenses
Because of the nature of the pre-pack sale, the administrators worked on the transaction before they were officially appointed and they would not ordinarily have been able to recover their fees and expenses.
However, the court ordered that, in this instance, the interests of the creditors were best served if the pre-pack sale went ahead and it allowed the administrators to recover their fees and expenses from the assets realised as an expense of the administration, in preference to the creditors. The rationale for this was the benefit that the creditors received from the sale proceeding by way of a pre-pack sale.
In each case, the court looked at the interests of the parties involved and whether the purpose of the administration would be best served in making the orders requested.
Not all administrations proceed by way of a court application and clients should consider whether their interests have been unfairly prejudiced by the actions of the administrators or whether the creditors as a whole have benefitted because of the course of action taken.
Click here to view 'SIP 16 – a summary of the information which can be requested by creditors'