Administrators do not owe a duty of care to buyers of insolvent companies

Out-Law Legal Update | 01 Feb 2021 | 11:42 am | 2 min. read

A court analysing the takeover of a Formula 1 racing team in financial difficulty found that the administrators did not owe a duty of care to a failed bidder and that the administrators of the company undertook a fair and proper sales process.

The court said that if such a duty of care applied it would have allowed bidders to apply leverage and threaten administrators with personal liability.

Force India (FI) was a successful Formula 1 team when competing on the track, however; it faced severe financial distress by summer 2018. In late July 2018 FI went into administration.

The administrators undertook a sales process. By August 2018, there were two potential viable buyers, Uralkali and Racing Point UK Limited (Racing Point). The administrators accepted a share sale offer from Racing Point on the understanding that that if the share sale failed then the parties would move to "Plan B" and Racing Point would purchase the business and assets of F1. The share sale turned out not to be viable and Racing Point ultimately purchased the business and certain assets of FI for £90 million.

Uralkali had put forward an offer to purchase the business and assets of F1 for £101.5 million, with a ratchet mechanism for their offer to be increased to £122 million if a higher bid was received. Whilst Uralkali's offer was higher than Racing Point's, the administrators had accepted Racing Point's offer, as Racing Point's “Plan A” would have led to the rescue of F1 as a going concern, which is an administrators' primary objective. Having lost out on the opportunity to purchase the business and assets of F1, Uralkali issued proceedings against the administrators. The crux of their claim was that the administrators had "failed to conduct a fair and proper sales process".

The question before the court was whether or not the administrators had acted negligently whilst conducting the bidding process and breached confidentiality by disclosing information to the other bidder. Mr Justice Miles dismissed all of Uralkali's claims and found that the administrators conducted the sales process fairly and properly.

The decision highlighted that principles established in the case of Hedley Byrne v Heller, in which the court analysed when individuals owe a duty care, did not mean that the administrators assumed responsibility for Uralkali in respect of any representations that they made during the sale process. There was no duty of care, as this only arises when the representor had assumed responsibility for it to the representee, which the administrators had not done.

The court recognised that it should be very slow to impose a duty of care on an administrator which would prevent them from acting in accordance with the statutory purpose of an administration; the primary objective of which is to rescue a company as a going concern. The judge acknowledged that if such a duty of care was imposed on administrators, then this would potentially encourage bidders to threaten administrators with personal liability in order to gain commercial leverage in negotiations.

The outcome recognises the time pressured circumstances administrators are required to work under which may lead to informal decision making. Mr Justice Miles showed that the weight is on the substance of the decision being made by an administrator and not on how this decision is documented. The court rejected the suggestion that specific notes had to be prepared to justify the decision to accept the final offer.

The judge did, however, acknowledge that had the administrators acted with bias and unfairly preferred a bid, which they did not, that they would have not been acting with reasonable care and would have been negligent.

This decision is further evidence of the court's reluctant approach to interfere with administrators' decision making in accordance with their duties. Going forward it will be unlikely that administrators will assume responsibilities for prospective bidders. However, Uralkali does intend to seek permission to appeal the decision.

Written by Caitlan Stevenson, a restructuring expert at Pinsent Masons