Marcia Shekerdemian QC considers the decisions in Ve Vegas v Shinners and Zinc Hotels v Beveridge
‘An insolvency practitioner should not allow bias, conflict of interest or undue influence of others to override professional or business judgments.’1
Basics
- Insolvency practitioners are accustomed to dealing with conflicts.
- Conflicts are usually best left to be managed if/when necessary.
- If/when it becomes clear that any conflict is sufficiently material to need managing, a variety of different approaches may be appropriate depending on the circumstances.
- These may include the appointment of an additional partner from the same firm or the appointment of an independent partner from a different firm and/or applying to court for directions.
- If the conflict cannot be managed, the office holder must give up the appointment.
- An actual conflict will not inevitably lead to the surrender of the appointment – it depends on the particular circumstances.
- The court will not lightly remove its own officer.
- The essential question is, what is in the real, substantial and honest interests of the administration?2
- ‘It takes more than a mere hope that new office holders might spot something that the current office holders may have missed to warrant their replacement…’
The pre-pack problem
In Clydesdale Financial Services Ltd & ors v Smailes [2009] EWHC 1745, the administrators were removed under paragraph 88 of Sched B1 to the Insolvency Act 1986 without any criticisms having been made of their conduct; they were ‘too closely involved’ in the pre-pack sale, and therefore could not be expected to conduct an independent review of it when the terms and circumstances of the sale were a legitimate matter for consideration.
2018 brings us…
Ve Vegas Investors IV LLC & ors v Shinners & ors [2018] EWHC 186 (Ch)
Ve Vegas Investors was hopelessly insolvent. Its essential suppliers were threatening to cut off services in the absence of substantial payment. It needed £20m to survive but could not raise it.
Smith & Williamson (S&W) (the firm in which the respondents were directors) was retained to advise Ve on insolvency options. The respondents worked with Ve’s management for six days to achieve a pre-pack sale. They experienced delays in the provision of information by Ve’s management, which exacerbated the difficulty of securing a competitive sale.
The day after their in-court appointment as administrators, the respondents completed a pre-pack sale of Ve’s business and assets to Rowchester, which was connected to Ve’s management. Rowchester had submitted the higher of the only two bids which the respondents had been able to attract at short notice.
Certain angry creditors alleged that Ve’s management had won the pre-pack by acting in breach of their duties and by prejudicing other bidders, starving them of information. They claimed that the management and S&W itself should be investigated, necessitating the removal of the respondents as administrators. They duly applied under paragraph 88.
Before the hearing concluded, the respondents tendered their resignations, seeking an abridgement of time to enable their resignations to take effect immediately. Registrar Jones refused to abridge. He held that they should be removed immediately because of their ‘failure to approach this matter correctly’.
He found that there were ‘two possible scenarios at either end of the spectrum of possibilities’. Either the directors had done their best or they and those behind Rowchester had acted improperly, excluding the possibility of a fair bidding process to benefit themselves.
Stressing that he was not giving a decision on the merits, the registrar found that ‘the second possible scenario’ made it ‘clear there is serious issue for investigation’ and that it should have been apparent to the insolvency practitioners from the date of their appointment that there were ‘at least’ two issues to investigate:
- Was the pre-pack entered into in circumstances where the directors were in breach of duty?
- Did S&W while acting (pre-administration) under their contractual retainer, breach its duties of reasonable care and skill with consequential loss to Ve from the sale of the business?
He concluded that the insolvency practitioners as members of S&W were conflicted and could not carry out those investigations: ‘This is not technical legal analysis. It is obvious.’ He noted that that did not necessarily mean they should therefore vacate office. Alternative solutions might have included the appointment of ‘conflict administrators’, although because of the resignations, this was not an option.
On the facts, the insolvency practitioners’ immediate removal was found by the registrar to be appropriate, but with the (arguably unworkable) caveat that ‘this is not a case where removal will or should encourage unjustified applications’.
Zinc Hotels (Investment) Ltd & anor v Beveridge & ors [2018] EWHC 1936 (Ch)
The Zinc Hotels companies had been placed into administration by a floating chargeholder. Administrators from AlixPartners, who had advised the secured creditors on pre-appointment contingency planning, were appointed. Certain shareholders applied for the removal and replacement of the administrators under paragraph 88, alleging that the administrators (and their solicitors) lacked independence and were conflicted as a consequence of their relationship with the secured creditors.
An interim application for the appointment of concurrent conflict administrators was heard by Mr Justice Carr. Relying on Ve, the shareholders claimed that the existence of conflicts of interest, giving rise to a ‘serious issue for investigation’, justified the relief they sought.
There were two principal aspects to their allegation of conflict. First, the administrators were conflicted because of their engagement with the secured creditors pre-appointment. The judge disagreed. Several authorities spelt out that such prior relationship was no bar to an appointment, including the recent judgment of Mr Justice Snowden in Davey v Money & anor [2018] EWHC 766 (Ch), which dealt in detail with various aspects of an administrator’s duty. Snowden J considered that the relevant question was not whether or not there had been a prior relationship, but ‘whether the insolvency practitioners could be relied upon to act impartially and in accordance with their duties required an assessment of all the circumstances’.
The judge agreed that it would be unusual in an insolvency of any complexity for there not to have been pre-appointment engagement.
Secondly, the shareholders contended that the administrators’ decision to continue using the same solicitors as the secured creditors gave rise to a conflict, in that the solicitors’ partiality towards the secured creditors infected the administrators’ independence. Again, the judge pointed to authorities that made clear that not only was there no bar on officeholders using the same solicitors as a creditor, but also that in some circumstances it may be a good thing. Most recently, Mr Justice Arnold had stated in Shlosberg v Avonwick Holdings Ltd & ors [2017] Ch 210 that it ‘may well be convenient because of the creditor’s familiarity with the debtor’s affairs and because of the absence of any real likelihood of a conflict of interest’.
The judge considered it had been appropriate for the administrators to consider that the existing knowledge of the secured creditors’ solicitors and the absence (at least at the outset) of any conflict justified their retention. However, they had instructed new solicitors once it appeared that there was a real possibility of a surplus for shareholders.
Ve and Clydesdale were addressed. The judge pointed out that unlike Zinc, those cases both concerned pre-packs and allegations of undervalue; the conflict had arisen because the administrators (as the parties arranging the pre-pack) were said to be involved in the wrongdoing and could not investigate their own conduct.
That analysis would seem to limit the ambit of Ve to cases of pre-pack, rather than administrations generally.
Where now?
Post Zinc, in non-pre-pack cases, it will be difficult to get an administrator removed on the grounds of conflict alone. Moreover, we have welcome clarity on the propriety of pre-existing relationships between secured creditors, insolvency practitioners and lawyers.
However, in pre-packs cases, Ve cannot be avoided. The picture is a different and troubling one. There will always be a conflict in a pre-pack and an administrator cannot investigate if they themself arranged the transaction. Those features, in Registrar Jones’ view, justified the respondents’ removal.
Yet these are features of most pre-packs. Moreover, the legislative and regulatory frameworks permit pre-packs. The challenge is reconciling the seemingly irreconcilable.
Marcia Shekerdemian QC, Wilberforce Chambers.
Wilberforce Chambers’ insolvency practice group runs Breakfast Briefings throughout the year featuring topical talks on legal developments and emerging trends in the insolvency field. If you would like more information, please email seminars@wilberforce.co.uk.
A longer version of this article, co-authored by Joseph Curl (9 Stone Buildings) appeared in International Corporate Rescue Volume 16 Issue 1 (www.chasecambria.com)
1. The Insolvency Service’s ‘Insolvency Code of Ethics’ Fundamental Principal 4(b)
2. Sisu Capital Fund Ltd & ors v Tucker & ors [2005] EWHC 2170 (Ch)
