Administrators' Commercial Decision-Making Powers vs. 'Unfair Harm' to Creditors

Hocking and others v Marsden and another [2014]

Pursuant to paragraph 74 of Schedule B1 to the Insolvency Act 1986, if the conduct of an administrator unfairly harms the interest of a creditor, the creditor may apply to court for relief. Relief can include an order requiring the administrator to take a particular action.

Background

London & Westcounty Estates Limited (Company) went into administration. The Company’s directors claimed that the Company had a cause of action against its bank on the basis of mis-sold interest swap products (Action).

The Company’s administrators decided not to bring proceedings on behalf of the Company, against the bank, in relation to the Action. The directors requested that the Action be assigned to them by the administrators. The administrators refused this request, on the basis that the consideration offered by the directors was unlikely to result in any material return to the Company’s creditors.

One of the directors of the Company (also a creditor of the Company) (Petitioner) applied to the High Court under paragraph 74 for an order to compel the administrators to assign the Action to her.

The administrators argued that the Petitioner had not shown that the administrators refusal to assign the Action had caused her ‘unfair harm’ as a creditor of the Company, and additionally that the administrators had not, in refusing to assign the Action, treated the Petitioner any different from other creditors in her class.

Decision

The High Court ordered the administrators to assign the Action to the Petitioner.

Whilst the court accepted that the Petitioner had not been treated differently from other creditors in her class, it was held that this was not a prerequisite for a finding of ‘unfair harm’.  The court found that all that was required was some kind of harm that the creditor in question (or the Company’s creditors generally) should not be expected to suffer.

The administrators’ refusal to assign the Action meant that the Petitioner, in her capacity as a creditor of the Company (and also the Company’s creditors as a whole), lost the opportunity to benefit from an asset of the Company.

Commentary

• Previous decisions of the High Court have required applicants under paragraph 74 to show that the administrator has treated them unequally or differently with other creditors in their class. In this case this was not deemed to be a prerequisite for a ‘unfair harm’ finding.
• Previous applications under paragraph 74 have failed where an administrator has demonstrated that the decision was the result of a commercial, cogent and reasoned decision, taken for the benefit of the creditors as a whole (BLV Realty Organization Limited and another v Batten and others [2009]) and consistent with achieving the stated purpose of the administration and the administrators general duty to creditors (Re Lehman Brothers International (Europe) [2008]).
• This is a rare example of the court interfering with the commercial decision-making of administrators. The administrators argued that the terms of the proposed assignment to the Petitioner were ‘derisory’. The court acknowledged that the commercial benefit to the Company’s creditors was likely to be very small (“so small as to be illusory” in fact) however the court still chose to order the administrators to assign the Action.
• This case may be distinguishable from other cases on the basis that an assignment of the Action carried no potential risk to the general body of creditors.  This could suggest that the court may be more willing to intervene in cases where the action in question would carry some benefit (however small) to creditors if there is no risk of detriment to the creditors and if the progress of the administration will not be impeded.

For more information, help or advice please contact Claire Seddon on 0191 211 7991.