High Court confirms potential liability of creditors for breaches of duty by administrators

The decision in Davey v Money & Anor [2018] EWHC 766 (Ch) serves as a useful reminder for secured creditors (such as banks) of the potentially broad-ranging scope of liabilities that they may be exposed to in the course of dealings with administrators. In addition to the usual sorts of claims for 'accessory liability' that might be raised in that context, in this case the court concluded that, in the same way as a mortgagee can be responsible for the actions of a receiver, it was possible for a secured creditor to be liable for breaches of duty by an administrator on the basis that it directed or interfered in the conduct of an administration.

In particular, it shows that secured creditors may be liable in circumstances beyond those which might give rise to liability for dishonest assistance, procuring a breach of duty or an unlawful means conspiracy. Secured creditors should therefore be mindful of seeking to control the conduct of an administration. As a practical measure, it may also be sensible to ensure that proper records of dealings are kept and that relevant communications are set out in writing.

Background

The claimant was the sole director and shareholder of Angel House Developments Ltd ("Angel"), a property development company in liquidation. The claimant was also the guarantor of Angel's indebtedness to Dunbar Assets plc ("Dunbar"), which appointed Mr James Money and Mr Jim Stewart-Koster as administrators (the "Administrators").

The claimant brought a claim under paragraph 75 of Schedule B1 to the Insolvency Act 1986, which empowers the courts to inquire into potential misfeasance by an administrator at the request of a creditor or contributory.

The claimant alleged that:

• the Administrators conducted a "light-touch" administration in which they failed to exercise independent judgment and instead had excessive regard to the interests and wishes of Dunbar;
• the Administrators failed to take steps to involve the claimant in the administration which, the claimant alleged, would have led to the rescue and survival of Angel;
• the Administrators sold Angel's main asset, a commercial property, at a significant undervalue in reliance on unsuitable agents (Alliance Property Asset Management Limited, "APAM") who had conducted a flawed marketing campaign and whom Dunbar had in effect selected;
• Dunbar directed or interfered in the conduct of the administration so as to make the Administrators its agents, and that it was therefore liable for their breaches of duty;
• Dunbar procured the breaches of duty by the Administrators; and
• Dunbar conspired with APAM to cause Angel and/or the claimant loss by unlawful means, namely by deliberately causing the Administrators to carry out a limited sale process for Angel so as to realise insufficient monies to enable the secured indebtedness to Dunbar to be repaid, leaving Angel liable for the balance and the claimant liable on the personal guarantee.

Decision

The court dismissed all of the claimant's allegations. However, on the question of whether it was possible as a matter of law for a secured creditor to direct or interfere in the conduct of the administration so as to make an administrator its agent, the court concluded that it was difficult to see any convincing policy reason why there should be any difference between the position that applies if the sale of the property were to be conducted by a receiver (where the authorities hold that it could make such a disposal) or an administrator.

That being the case, the court went on to consider what level of involvement would be required in order to justify a finding that an agency relationship had been created between an administrator and a secured creditor or otherwise to justify the imposition of liability on a secured creditor. The court adopted the formulation from the receivership authorities, that the mortgagee might be liable if it "directed or interfered" in the conduct of the receivership. It found that, to establish such a liability, it would be necessary to show something going beyond the legitimate involvement that a secured creditor could expect to have in the administration process by reason of his legal status and rights. That was because the formulation of the "directed or interfered" standard indicated that the administrator should either have been compliant with directions given by the secured creditor, or have been unable to prevent some interference with his intended conduct of the administration:

"So, for example, I do not think that an agency relationship would be established merely because the secured creditor gave its consent to a sale of charged property which had been organised by the administrator. Nor would that be the case simply because an administrator had consulted the secured creditor and taken account of its wishes, even on a regular basis. Nor would such a relationship be established merely because the secured creditor took a commercial decision in the exercise of its own rights which necessarily constrained the administrator's freedom of action. But if, in contrast, the secured creditor gave directions which the administrator unquestioningly followed, or if (to adapt the example in Morgan v Lloyds Bank plc) the secured creditor misled the administrators or exerted sufficient pressure on them so as to defeat their free will, then I see no reason why the courts should not be able to hold the secured creditor liable if the property in question was sold negligently for a price that diminished or eliminated the value of the company's equity of redemption."

The court then considered whether Dunbar had procured breaches of statutory duty by the Administrators and whether Dunbar had conspired with APAM to injure Angel or the claimant by unlawful means. The court dismissed both of these allegations on the facts. It also emphasised that a claim for accessory liability against Dunbar in respect of breaches of fiduciary duty on the part of an administrator would lie in a claim for dishonest assistance.

Comment

Although the claimant's allegations failed on the facts, the court's judgment highlights the range of liabilities which secured creditors may be exposed to if they 'overstep the mark' in the course of an administration.