Out-Law Legal Update 3 min. read

High Court refuses to interfere with administrators' decision to auction causes of action

LEGAL UPDATE: The High Court's refusal to restrain joint administrators from auctioning a proposed claim will be welcome news to officeholders. It reinforces the reluctance of the courts to interfere with reasonable commercial decisions of officeholders concerning the sale of assets, in the absence of unfair harm. The threshold for interference is a high one, and an administrator is generally given a wide measure of latitude when exercising their duties and powers. The courts will only intervene in circumstances where administrators are proposing to take a course of action which is based on either the wrong appreciation of the law or is conspicuously unfair to a particular creditor or creditors of the company. 

Meem SL Ltd was put into administration by its board, which was made up of a director who owned 11% of the company and two others. Joint administrators arranged a prepack sale of the business to MML Limited, a new company set up by the directors. The company was sold for £1.4 million, comprising £185,000 in cash and an agreement that MML would take over Meem's liabilities of around £1.2 million.

Shareholders owning 67.5% of the company sent a letter of claim and particulars of claim to the directors' solicitors, detailing a derivative claim to be brought on Meem's behalf claiming £11.8 million in damages. The shareholders purported that the directors had acted in breach of duty in relation to an unlawful conspiracy by them to place the company into administration and to dispose of its assets to the new company at an undervalue.

In email correspondence with one of the administrators, the majority shareholders' solicitor proposed that the claim be assigned to his clients for £5k plus VAT, or alternatively that there be an assignment for nominal consideration, with any realisations of the litigation being held on trust for the company, less any costs of litigation.

The joint administrators decided not to assign the claims but to instead dispose of them by auction in line with their duty to maximise returns for creditors. The majority shareholders argued that the email correspondence with the administrator to assign the causes of action was a binding contract which was enforceable and that any auction of the claims would cause them unfair harm. They issued an application against the joint administrators and the directors under paragraph 74 of Schedule B1 of the Insolvency Act 1986 to restrain the administrators from selling the claim at public auction and seeking an order that the claims be assigned to them.

The Court had two key issues to consider, firstly whether the joint administrators were bound to assign the claim to the applicants, and secondly, whether the administrators' disposal of the claim by auction was unfairly prejudicial to the applicants' interests.

Concerning the first point, the Court found that the email exchange was not an offer which was capable of acceptance and, therefore, did not constitute a valid contract. The court ruled that the administrator had been clear in stating that he would be instructing solicitors, and so the email exchanges were by implication subject to contract and not binding.

On the second issue, the Court found that the administrators' decision to dispose of the claims at auction did not cause the applicants any unfair harm and, therefore, the judge dismissed the application on both grounds. The judge based his decision on the following principles:

  • unfair harm would arise if the administrator treated the applicant less favourably than other creditors. In order to be unfair, the applicant has to show that the decision cannot be justified by reference to the interests of creditors as a whole or in achieving the objective of the administration. This was not made out here;
  • unfair harm is not limited to differential treatment of creditors and could include an administrator's decision to sell an asset at an undervalue, thereby causing loss to creditors;
  • in a case where there is no differential treatment of creditors, the court will not interfere with an administrator's decision to sell, unless this decision does not withstand logical analysis;
  • the judge acknowledged that causes of action may be difficult to value. However, if it appeared the claim had substantial value, no reasonable administrator would sell it for a fixed price without properly considering its value, with either expert assistance or finding a sensible alternative; and
  • an administrator will not necessarily be acting unreasonably if he sells a cause of action by auction, however, each case must be judged on its own facts. The testing of the market by holding an auction may make it reasonable to proceed without seeking a valuation if, for example, the claim is a difficult one to value.

Justifying his decision, the judge also found that the applicants' offer of an assignment would lead to considerable delay and uncertainty and it was not clear that the applicants had the financial means to pursue the litigation or that it would result in substantial recovery - in contrast, the proposed auction would achieve a fixed price without delay.

The applicants attempted to argue that as the director, as prospective defendant to the action, would also be able to bid for the claim at the auction, there was a public interest argument to ensure that substantial claims were not stifled. The judge however gave little weight to this argument stating that the second applicant had the means to outbid the director and the bidding process would be more akin to negotiations between the claimants and defendants to compromise a claim. The public interest argument was at best a marginal factor, save in extreme cases.

As well as confirming that the courts will not interfere with officeholders reasonable commercial decisions the case also highlights that a potential defendant to claim is not precluded from purchasing the claim. The fact that a claim may be acquired by the defendants for the purpose of stifling it is of little relevance and the court will not give much weight to the argument that it is in the public interest, save in extreme cases of abuse. 

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