High Court approves 'light touch' administration and clarifies administrators' duties

Julie Davey, the sole director and shareholder of Angel House Developments Ltd (AHDL), alleged extensive breaches of administrators' duties. The High Court found in favour of the administrators and dismissed Davey's counter-claim that the charge-holder Dunbar Assets plc was liable for alleged breaches by the administrators.

Davey alleged that the administrators of AHDL breached their duties as administrators by:

• conducting a "light touch" administration in which they failed to exercise independent judgment;
• instead paying excessive regard to the interests and wishes of Dunbar;
• failing to take steps to involve Davey in the administration; and
• selling the property of AHDL at an undervalue in reliance on unsuitable agents and an improper marketing campaign.

Davey also alleged, amongst other allegations, that Dunbar directed or interfered in the conduct of the administration so as to make the administrators its agents and that Dunbar was therefore liable for their alleged breach of duty.

General guidance for administrators when realising company assets

The High Court said that the administrators had not breached their duties in this case. However, in addressing all of Davey's allegations it highlighted a number of guiding principles that apply to administrators when realising company assets:

• administrators are required to have regard to the interests of all the company's creditors, and they can only limit their ambition to seek to realise assets to repay the charge-holder if they think that it is not reasonably practicable to achieve anything else;
• it is not necessary for administrators to appoint property agents who are independent of the charge-holder;
• administrators may agree to an 'incentive fee' payable to the agent if the price achieved on the sale of the property exceeds the amount of the secured debt;
• administrators are not required to conduct a 'beauty parade' of agents and select 'one of the big boys' to sell real estate company assets because, as a matter of principle, the 'big boys' do not have a monopoly on competence or the relevant knowledge for realising real property assets;
• administrators will not necessarily breach their duties by selling real property following a 'soft marketing' campaign where only particular specialised and complex potential purchasers are targeted and contacted. However, administrators should ensure that both local and overseas potential purchasers are targeted.

Approval of 'light touch' administrations

The administration of AHDL was a 'light touch' administration because the administrators were not heavily involved in the day-to-day running of the business, instead relying from the outset of the administration on employed property agents to manage the operational aspects of the continuation of the business.

The High Court concluded the light touch administration of AHDL was appropriate in the circumstances. However, it confirmed that it is necessary for light touch administrators to thoroughly consider the objectives of company administration  (i.e. rescuing the company as a going concern or achieving a better result for the company's creditors as a whole than would be likely in a liquidation scenario) and to only act for the benefit of the charge-holder if they think that these objectives cannot be reasonably be achieved.

Therefore, administrators, especially in a light touch administration, should be explicit in their statement of proposals about why a proposed course of action will be unlikely to rescue the company as a going concern or achieve a better result for the company's creditors as a whole than would be likely in a liquidation scenario.

Charge-holder liability for breach of duty by an administrator

Although not applicable on the facts of this case, the High Court suggested that a charge-holder can make an administrator its agent and thus make itself liable, together with the administrator, for any sale at an undervalue or other breach by an administrator when acting as the charge-holder's agent. This position is established law as applicable to mortgagees and receivers but this is an entirely new suggestion as applicable between an administrator and charge-holder.

The High Court suggested that if the charge-holder gave directions which the administrator unquestioningly followed or if the charge-holder misled the administrators or exerted sufficient pressure on them so as to defeat their free will, then the court may hold the charge-holder liable if the property was sold negligently for an undervalued price. Conversely, it is unlikely that an agency relationship would be established merely because the charge-holder gave its consent to a sale of charged property that had been organised by an administrator or simply because an administrator had consulted the charge-holder and taken account of its wishes.

This analysis by the High Court should be considered by charge-holders as it indicates that courts may be prepared to hold charge-holders liable for the actions of a company administrator, which courts have not done in the past. However, charge-holders should be comforted by the suggestion of the High Court that the charge-holder would need to be heavily involved in the decisions of the administrators and would effectively need to be controlling the administrators for a court to find a charge-holder liable for any breach of duty by the administrators.

Tom Withyman and Sebastian Jensen are restructuring experts at Pinsent Masons, the law firm behind Out-Law.com