Administration: selling assets by auction and conduct causing unfair harm to creditors or members

The High Court has provided useful guidance regarding an administrator’s conduct in selling assets by auction causing unfair harm to the interests of creditors or members.

In accordance with paragraph 74 of schedule B1 to the Insolvency Act 1986 a creditor or member of a company in administration may make an application to court claiming that the administrator is acting or has acted in a way that has unfairly harmed the interests of the applicant.

Upon dealing with such an application, the court has a wide range of powers available to it including the power to regulate the administrator’s exercise of his functions, require the administrator to do or not do a specified thing or provide for the appointment of the administrator to cease with immediate effect.

In 2013 a company was formed to develop a phone charger. The company faced financial difficulties and was placed in administration in 2016. The administrators sold the company’s business (by way of a pre-packaged sale) to a newly formed company, set up by an investor, shareholder and director (“S”) of the company now in administration.

One of the creditors (“G”) of the company, who was also the inventor of the phone charger, alleged that the purchaser of the company’s business had conspired with other directors to place the company into administration and purchase the business, using a new company, at a significant undervalue.

In consequence, G sought to purchase the claim from the administrators and entered into correspondence with the administrators in order to seek the assignment of the claim. Rather than sell than assign the claim to G, the administrators resolved to sell the claim by way of an auction.

G made an application to court for an order that there was a binding agreement to assign the claim to him and, in the alternative, that the administrators couldn’t auction the right to bring the claim against S, because S could purchase the claim, which would cause unfair harm to G.

Firstly, the court ruled that there was no binding agreement between the administrators and G in relation to the claim being assigned to G. Notwithstanding the fact that G claimed that an exchange of emails between himself and the administrators, evidenced a binding agreement to assign the claim, the court stated that it was clear that no binding agreement was reached. Of particular note was that the court stated that the fact the administrators had indicated that they were intending on instructing solicitors to draft the assignment agreement, evidenced that no agreement had been reached.

The court subsequently had to decide whether, by auctioning the claim, G’s interests would be unfairly harmed in accordance with paragraph 74 of schedule B1 to the Insolvency Act 1986. G’s position was that by auctioning the claim, S could purchase the claim and settle it against himself.

In deciding that auctioning the claim did not unfairly harm G’s interests as a creditor and member, the court stated that where G was treated in the same way as the other creditors and members, unfair harm would only be established if it could be shown that the specific decisions of the administrators did not withstand logical analysis. In this case, the decision to auction the claim was entirely logical and that by auctioning the claim, the administrators were testing the market value of the claim. Of course, the market value of the claim could be distorted by the fact that one participant may pay well in excess of true value of the claim, in order to distinguish the claim i.e. what S would pay.

This decision will be of particular interest to administrators when considering both the merits and method of selling a claim. On the face of it, making a claim available to the defendant seems illogical, although it may in certain circumstances be the most appropriate result to the creditors.