IP Briefing – ATE Farms Ltd v AW Estates Ltd (In Administration) & Ors
This recent case has caused significant consternation among office-holders, as it touches upon the relatively standard practice of insolvency practitioners seeking to maximise their protection in any deal. Although the decision is perhaps of less general application than had been feared, it does contain some important lessons for office-holders.
The factual background to the case is quite complex, but to briefly recount the key facts: the defender companies owned and operated a paper mill in Aberdeenshire. As part of their operations at this site, waste products were dumped at a second location (referred to as “Little Clinterty”) which the defenders did not own. They were placed into administration. As part of attempts to realise the company’s assets, the pursuer company entered negotiations with the administrators with a view to purchasing the mill site. The parties entered into a Deposit and Exclusivity Agreement (the “DEA”); this included a term obliging the administrators to “act towards the Purchaser in good faith and to diligently and expeditiously progress the negotiation and conclusion of the [sale agreement]”. During negotiations, the administrators insisted upon the purchasers granting a full indemnity in relation to the Environmental Protection Act 1997, including in respect of the site at Little Clinterty (which was not part of the sale). This indemnity was not in the agreed heads of terms, but the administrators’ stance was that it was “non-negotiable”. Ultimately, negotiations broke down and the pursuers sought to have their deposit repaid and declarator that the administrators were in breach of the DEA by insisting upon this indemnity.
The issue in question before Lord Sandison was whether the administrators, by insisting upon this indemnity, were in breach of their obligation in the DEA to act in good faith and to “diligently and expeditiously progress the negotiation and conclusion” of the sale agreement. His Lordship found that the relevant clause contained two separate obligations – a general obligation to act in good faith, and a specific one to diligently and expeditiously progress the negotiation and conclusion of the agreement. While insisting upon the indemnity did not breach the general obligation to act in good faith – it was plain that the administrators were as keen to make the deal work as the purchasers were – Lord Sandison found that it was a breach of their obligation to diligently and expeditiously progress the negotiation. By insisting on a position which was not covered in the heads of terms, even though the position would be a fairly standard one to most insolvency practitioners, the administrators had failed to diligently and expeditiously progress the negotiation. There was also some discussion of the nature of a repudiatory breach of contract, but this is of less direct impact on appointment-takers.
In principle, this indemnity will be a familiar term to most appointment-takers; it mirrors, for example, the refusal to grant warrandice in most property transactions involving insolvent sellers. These are included for sound reasons – not least because to do otherwise would often (as in this case) require the administration to remain open for far longer in case a claim arose. The prospect that such a clause could have been considered to be acting in bad faith would have been very concerning to most IPs, given that a variant on this clause is standard in most cases where an asset is sold from an insolvent entity. Thankfully, that has not happened here. However, it does serve as a salutary lesson that IPs should be very careful to ensure that any indemnities or other protections on which they seek to rely are properly expressed in the heads of terms, particularly if there is to be a deposit agreement, and not to assume that all parties will be familiar with (or will automatically accept) these clauses.
BBM Solicitors specialise in advising IP’s in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal (firstname.lastname@example.org).This briefing note is current as at 25 October 2023 and is our understanding of the position described at that date. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).