Administrators not required to assign claim against lender to shareholder

Out-Law Legal Update | 17 Nov 2020 | 2:54 pm | 2 min. read

The sole shareholder of a company in administration has failed in a bid to have claims raised against a lender assigned to them in a ruling that highlights how difficult it is for company directors or shareholders to contest informed decisions made by administrators.

The High Court was not convinced about the merits of the claims and found other faults with the application of the shareholder, including in relation to the lack of protections for creditors in the event of an adverse costs order being made against the company or the administrators.

  • The burden was placed on the applicant to demonstrate that the claims can be properly pursued.
  • The applicant did not demonstrate unfair harm by the administrators.
  • Re L & N D Development & Design Ltd (in administration) [2020] EWHC 2803 (Ch)

Lynda Louise Dixon was the sole shareholder of property development company L & N D Development & Design Ltd (in administration). In 2016 and 2017 the company entered into various facility and finance agreements with the same lender for the purpose of constructing property developments on land it owned.

The company needed additional funding to complete the development but was not able to negotiate additional funding with the lender. Ultimately, a notice of default was served on the company and the lender, as a qualifying floating charge holder, appointed administrators in August 2018. The administrators were later also appointed as receivers of a property, owned by Dixon, in possession proceedings against her.

Dixon claimed that the lender had breached the terms of the facility by being late in advancing tranches of debt under the facility, which ultimately led to the company delaying its payments to the contractors on the development and caused the company loss and damage. She also claimed that a third facility agreement with the lender had been entered into under intimidation and economic duress.

Dixon requested that the administrators assign the claim to her and offered to pay £2,000 as consideration, but this request was refused. Subsequently, Dixon applied for a court order requiring the administrators to assign the cause of action to her, relying on the provisions under paragraph 74(1)(a) of Schedule B1 of the Insolvency Act 1986 (IA86). Paragraph 74(1)(a) of Schedule B1 IA86 provides for such applications, if the applicant can show that the administrators acted "so as unfairly to harm the interest of the applicant" in their decision not to assign the claim to them.

The court had to consider whether the administrators should assign the causes of action of the claim to Dixon. The court decided that the burden was on the shareholder to show that the administrators' refusal to assign the claims to her was unfairly harmful to her interests, and this required the shareholder to establish a real prospect of success. The court therefore also had to consider the merits of both claims.

The court ruled that the cause of action for damages for delayed advances from the lender lacked reality. Dixon had failed to argue that the lender's delay was in breach of the facility agreement and lacked the evidence to support her claim. The court also ruled that the claim for economic duress would not succeed because it was already established in the property proceedings that there was no economic duress and that Dixon could not seek to re-argue this point. Ultimately the court refused the shareholder's application.

The court also established that assigning the claims to the shareholder would not be in the interests of the company's creditors. The £2,000 offered for the assignment of the claims to the administrators was ruled inadequate and the court also found there were no protections in place in the event of an adverse costs order being made against the company or its administrators.

This decision demonstrates the challenges company directors or shareholders face when contesting a rational and properly informed decision made by administrators, and the court's reluctance to assign claims from administrators to applicants. The burden is ultimately placed on the applicant to demonstrate unfair harm by the administrators and that the cause of action can be properly pursued.

Laura Labunet is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.