IP Briefing: Opinions in the cases of VE Vegas Investors and ors v Henry Shinners and ors (‘Vegas’) and Tailby & Courtman v Hutchinson Telecom (‘Tailby’)
The Factual Background
Both cases concerned applications made in the English courts to replace Administrators as a result of perceived conflicts of interest.
In the case of Vegas, four members of Smith & Williamson LLP (‘S&W’) were appointed as Joint Administrators. S&W had initially been instructed to advise the company on its insolvency options and then retained to advise in relation to a pre-pack sale which was decided to be the best option. The business and its assets were sold to a Newco formed by the former management of Vegas. The pre-pack sale was complex and certain creditors of the company applied to the court for the Administrators’ removal on the grounds that they were conflicted and unable to investigate possible claims against the directors of the company and/or S&W resulting from the pre-pack sale.
In the case of Tailby, Joint Administrators were appointed to three connected companies, namely TPS, ABC and CP. TPS had transferred properties to the other two companies which ultimately raised questions as to whether the transactions could be set aside on the basis that they were transactions at undervalue (or as would be the case in Scotland, gratuitous alienations). A creditor sought removal of the Administrators on the basis that there was a conflict of interest between their duties as Administrators of TPS (the potential Claimant in the case) and ABC and CP (the potential Defendants in the case).
The court in Vegas ordered that the Administrators should be removed and replaced on the basis that there was a conflict of interest in that they could not properly investigate the potential claims (regarding, for example, whether the directors of the company had put their own interests before the interests of the company’s creditors and whether S&W had breached their duties of reasonable skill and care by causing loss to Vegas as a result of the pre-pack sale). The court noted that there was an unavoidable conflict of interest as the IPs were members of the same firm that had provided pre-insolvency advice. The court did not say, however, that the pre-pack had in some way been improper but rather that it was inappropriate for the current Administrators to carry out the requisite investigations.
By contrast, in the Tailby case it was decided that there was no conflict of interest requiring the removal of the Administrators. The court noted that it can be useful from an efficiency point of view to have a common office holder appointed to groups of insolvent companies. It was highlighted that whether a conflict arises is dependent on the particular facts and circumstances of the situation. It will depend on whether it arises pre or post appointment and whether and how it might properly be managed. It was also noted that replacing office holders can result in duplication of time and cost and could hamper exchange of information between related companies.
Advice for Insolvency Practitioners
The outcome of both of these cases highlights the importance of independence and ethics. The Vegas case shows that, particularly when dealing with pre-pack sales, the courts can intervene when there is a concern that the best price has not been achieved for creditors. It should be borne in mind, however, that as noted in the Vegas case, alternative solutions such as appointing an additional Administrator with responsibility for investigations can avoid the need for replacement of the existing Administrators. The Tailby case also offers some reassurance to IPs in that it indicates that the court will adopt a practical approach and take into account considerations such as the impact on distributions to creditors following replacement of Administrators.
BBM Solicitors specialise in advising IP’s in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal (emb [AT] bbmsolicitors [DOT] co [DOT] uk) or Sheana Campbell (firstname.lastname@example.org). This briefing note is current as at 21 June 2018 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).