Administrators disagree over fate of administration

Angelic Interiors Ltd (In Administration), Re (Rev1) [2022] EWHC 2974 (Ch)How should a court resolve competing arguments by two sets of administrators about the fate of the company’s administration?

Overview

This case considers competing arguments by the joint administrators and the conflict administrators of a company regarding the fate of the company’s administration, with the joint administrators arguing that the company should be dissolved, and the conflict administrators arguing that there should be a liquidation, and that they should be appointed sole liquidators.

Background

Ian Colin Wormleighton and Daniel Francis Butters of Teneo (the “Joint Administrators”) were appointed as first and second joint administrators of the company in July 2016, on application by Lloyds Bank plc (the “Bank“). Andrew Hosking and Carl Jackson of Quantuma (the “Conflict Administrators”) were appointed third and fourth joint administrators, on application by Julie Davey, the former director and principal shareholder, to investigate potential claims that may exist against the Bank as the principal secured creditor and other potential defendants including McBrides Accountants LLP, a firm of accountants who had provided financial advice to the company. These included claims arising from alleged mis-selling of Interest Rate Hedging Products (“IRHP“) and allegations of professional negligence.

The relationship between the Joint Administrators and the Conflict Administrators was governed by a Memorandum of Understanding, which provided that, among other things, Ms Davey would bear the costs and expenses of the Conflict Administrators, and the Conflict Administrators undertook not to have recourse to the company’s property to pay for their remuneration other than from the proceeds of the company’s potential claims against the Bank and McBrides. However, Ms Davey was made bankrupt in February 2019 and, since then, the Conflict Administrators had borne the costs and expenses of their appointment personally.

The Joint Administrators brought an application for directions concerning whether they should send a notice to the Registrar of Companies that the Company has no property which might permit a distribution to its creditors and for an order, if appropriate, that the term of their appointment and that of the Conflict Administrators should be extended to a date to be fixed.

The Joint Administrators argued that the purpose of the administration had been substantially achieved, and there was no further property to be realised that may enable a further distribution to creditors. They were of the view that the administration should end, and the Company should move to dissolution. However, by virtue of the division of responsibilities between themselves and the Conflict Administrators, the Joint Administrators had no visibility over the potential claims that the Conflict Administrators were appointed to pursue and could express no view on their merits. The Bank supported the Joint Administrators’ position.

The Conflict Administrators disagreed with this approach. They believed that there were further potential claims which constituted property of the company, and which may enable a further distribution to be made to the general body of creditors.

The Court’s Decision

The Court noted that the Conflict Administrators have yet to issue any claim. They executed an assignment of the IRHP claims to Ms Davey who then issued proceedings in 2016, and the Bank filed and served a defence in 2017. No further action had been taken to prosecute the action ever since. Because of Ms Davey’s bankruptcy in February 2019, the right to pursue those proceedings vested in her trustees in bankruptcy. A progress report to creditors in her bankruptcy from 2020 revealed that advice had been taken from counsel which cast considerable doubt on the merits of the claim, including issues of limitation and further issues concerning the validity of the assignment. The claim has not been actively pursued ever since.

In a witness statement, one of the Conflict Administrators candidly admitted that: “Whilst the possibility of claims against Lloyds Bank remains, including the possibility of effecting an assignment of those claims, the focus is presently on us hearing whether or not the professional indemnity insurance of McBrides, the company’s former auditors, will respond.” In the same witness statement, he referred to information obtained from a “whistle blower” concerning the veracity of signatures on documents and further procedural irregularities, which were relied on by the Conflict Administrators to argue that further time was needed to allow additional investigations to conclude.

With respect to the cause of the delay in relation to the investigations, the Conflict Administrators argued that there was an unwillingness on the part of the Bank to provide certain documentation. The Court did not accept this argument, and expressed surprise that the investigative powers conferred on the Conflict Administrators were not deployed by them.

The Conflict Administrators relied on an inability to fund as their reason for failing to use their investigative powers, but the Court did not find that to be persuasive. Once the bankruptcy order was made against Ms. Davey, there was a choice: either the Conflict Administrators could have resigned by giving notice in writing to the Court or, if they decided to remain in office, they would have to fund their costs and expenses personally to the extent they were unable to obtain litigation funding from the market. They elected not to resign but to continue in office at their own expense. Having adopted that course, it was simply not open to them rely on an inability to fund an application to justify a delay in making progress in the delivery up of documents and to place the blame on the Bank for that delay.

The Court then addressed the Bank’s concerns that, as a result of the Conflict Administrators’ assignment of the claim to Ms Davey and the vesting of it in her bankruptcy trustees, the Conflict Administrators’ right to pursue the claim was unclear. A dispute existed between the parties as to the terms and effect of the assignment in the context of the terms of the administration order, as well as the ability for the claims under the various agreements to be assigned without the permission of the Bank. In the light of that dispute, and the fact that it may be subject to a further application should the claims be pursued, the Court simply acknowledged that that these were matters of interpretation for another occasion should the need arise.

Ultimately, the Court found that it should allow the investigations to continue, even though it was unclear whether they would render anything productive. The recent searches were directed to a new investigation concerning the allegation of forgery some time ago in respect of signatures on significant documents. The Bank engaged with this request and produced a wet ink version of the relevant agreement. The Conflict Administrators did not accept that the signature on that agreement was genuine, and wished to continue their investigations into the potential claims. Whilst there were several compelling reasons to believe that the claims were speculative to say the least, the issues over the veracity of signature of the agreement were enough to “just get over the line for [the Court] to allow the investigations to continue”.

The question was under what regime the investigations should proceed. The Court concluded that it should not order dissolution at this stage. Whilst it noted with some concern the length of time this administration has taken, the fact remained that enquiries were continuing. Given that the administrators performing their functions had achieved the objective of the administration and that the only matters that remained were the investigations, the Court concluded that the administration should come to an end and any investigations should be allowed to continue, but in a subsequent liquidation. The Court appointed both the Joint Administrators and the Conflict Administrators as joint liquidators of the company.

Judge: Judge Frith

Counsel: Edoardo Lupi of South Square (instructed by Jones Day) for Ian Colin Wormleighton and Daniel Francis Butters in their capacity as the First and Second Joint Administrators of Angelic Interiors Limited; Andrew Mace of 9 Stone Buildings (instructed by JMW Solicitors LLP) for Andrew Lawrence Hosking and Carl Jackson in their capacity as the Third and Fourth Joint Administrators of Angelic Interiors Limited; Robert Amey of South Square (instructed by Herbert Smith Freehills LLP) for Lloyds Bank plc