In a very litigious and long-running saga concerning some land near Bicester, a recent judgment involved parties applying to remove the Administrators.
In summary:
- The removal application had not merely to show harm but must prove unfair harm to the specified group of creditors.
- On the facts, the complainants had not shown that the Administrators actions were unreasonable and so the claim failed.
- This case is on all fours with the trend of cases showing that insolvency officeholders are something of a hard target provided they act on professional advice, and keep contemporaneous notes of their decisions, both of which are often key to defending any subsequent criticisms.
A brief history
A very "broad brush" summary of the history of the development the subject of the administration is set out below.
A group of companies acquired land in 2010 near Bicester for development. In 2015, the companies entered into heads of terms with a developer, Brooke Homes ("BH"), with an exclusivity period, designed to allow the parties to agree something more formal allowing BH to develop the land.
In 2018, Desiman lent to the companies and were granted security over the land. BH commenced proceedings against the companies seeking, inter alia, damages for breach of contract.
In 2021, Desiman provided further loans and in late 2021, BH succeeded in its claim leaving the companies liable to pay £13.4m to BH for breach of contract. At that stage in 2021, the potential value of the land meant there should still have been a significant return to shareholders even after payment of the BH claim and the Desiman loans.
Following failed attempts to sell the land, in January 2022, Desiman demanded repayment of its loans which the companies could not repay. Administrators were then appointed following a court application by Desiman.
During 2022, the Administrators sought to sell the land. There were 3 interested bidders – all property development companies. The Administrators sought the advice of Savills as to which one was likely to give the biggest overall return.
In early September 2022, following advice from Savills, they came close to a sale to Cala for £48m with various rights and options to share in the potential gains for what would be Phases 2 and 3 of the development. But before contracts could be agreed, the economic uncertainty following the Elizabeth Truss budget caused Cala to reduce its offer to £40m, and Desiman demanded a greater share of any profits to be made from phases 2 and 3 in exchange for their continued support and funding.
The Administrators eventually agreed to sell Cala in January 2023 for the lower £40m price. The combined effect of the lower price and Desiman's greater entitlement almost wiped out any value the shareholders might have seen from a successful sale.
In late 2023, the shareholders in the Companies applied to remove the Administrators. Essentially, they alleged that the Administrators were not acting in the interests of creditors as a whole and were favouring the secured creditor, Desiman, at the undue expense of the unsecured creditors and the shareholders.
Judgment
The judge concluded that the Administrator should not be removed. The judge rejected all the main criticisms, finding that the Administrator had generally acted reasonably in difficult circumstances and had not unfairly prejudiced shareholders' rights but had done their best with the difficult hand they had been dealt.
On each occasion when Desiman upped their demands, the Administrators made a careful record of their decisions as to why they should accept or reject the demands and concluded (having taken legal and valuation advice) that they should, perhaps reluctantly, accept the new demands. The court reviewed at length some of the notes of decisions made.
Desiman, as the secured creditor, had significant commercial leverage because of their security rights over the land, giving the Administrator no realistic option but to agree to their increased demands.
The judge emphasised how high the threshold for removal of an officeholder is.
"The court will … be mindful, when being asked to examine their conduct, that they are licensed IPs, and officers of the court, who are delegated the responsibility, under statute, to make often difficult decisions as regards the strategy and approach to take. This will involve commercial judgment making and an exercise of discretion. The courts are generally reluctant to intrude into what are essentially commercial decisions for the IP to make and will ordinarily give them a degree of latitude …" [Para 44]
He concluded [at para 48], "showing harm on its own is not enough: what must be proven is unfair harm" [Our emphasis added].
Comment – the importance of taking advice
The courts are generally reluctant to replace insolvency professionals, as officers of the court. Mere harm or indeed some degree of alleged negligence causing loss appears not to be enough for the court to have them replaced.
The court also recognises repeatedly that insolvency officeholders are often in difficult, time pressured situations where complex commercial judgement is necessary. What is often key is that the officeholder remembers to properly document their reasons contemporaneously.
The decision follows the trend of cases such as Swiss Cottage Properties Limited (in liquidation) [2022] in which DACB successfully defended officeholders against a claim in negligence (our commentary is available here). In that case the judge held “an administrator is entitled to rely on appropriate professional advice in carrying out his duties, and will not be liable in negligence if the advice relied on appears to be competent…” 1.
But as the One Blackfriars Limited judgment (found here) held, it is still up to the insolvency officeholder to establish that reliance on that professional advice was reasonable in the circumstances.2
This judgment, while concerning an application for the replacement of an officeholder rather than a claim for damages, is indicative of the importance of insolvency professionals taking proper advice when considering decisions as to whether to enter into major commercial transactions. Provided they have done so, they remain a hard target for any subsequent criticism.
[1] (Fitzroy Street Capital Inc & others v Lee Manning & others [2021] EWHC 684 (Ch)), Paragraph 174
[2] [2021] EWHC 684 (Ch), Paragraph 223
