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Administrator's duties and their relationship with a secured lender

Davey v Money; Dunbar Assets Plc v Davey [2018] EWHC 766 (CH)

In this recent judgment, the court considered the extent of an administrator's duties and when an administrator could be considered an agent to a secured lender. 

The issues considered by the Court

The court explored the nature of the administrator's duties in relation to the conduct of the administration, the decision of which selling agents to appoint and the sale of the secured asset.

The Court also considered whether the fact that the administrator had sought the consent of the secured lender to the sale, and taken account of the secured lender's wishes, impacted on whether the administrator was acting as the lender's agent.

Key points

The important points to take away from the judgment are as follows:

Conduct during the administration:

The role of an administrator differs from that of a receiver:

  • An administrator is required to have regard to the interest of all the company's creditors (both secured and unsecured). This means that he cannot simply decide to realise assets for the sole benefit of a secured creditor. He can only do this if it is not reasonably practicable to achieve anything else (i.e. there are insufficient assets). Even then, he must not unnecessarily harm the interests of the creditors as a whole.
  • A receiver's primary duty is to the appointing secured creditor and he is free to determine when and how to realise an asset, without consideration to the unsecured creditors or the company.

The standard of the administrators' conduct should be judged according to whether they acted rationally and in good faith. His decision not to seek to rescue a company will only be open to challenge if (i) it was made in bad faith, or (ii) if it was so perverse that no reasonable administrator would have concluded that it was not reasonably practicable to rescue the company. 

Administrators are afforded a considerable level of commercial judgment when deciding whether or not to pursue certain objective.

Whilst an administrator may decide to consult the directors of the company, there is no fundamental rule that they do so. However, such consultation may be necessary in certain circumstances (i.e. if the administrator intends to rescue the company).

Appointment of selling agents

When selecting a selling agent, there is no absolute requirement for there to be a competitive selection process, nor a bar on appointing agents who have been recommended by a secured lender. The key question is whether the agents are competent and able to discharge their duties. Each case will need to be considered on its merits and the individual circumstances of the case.

An administrator is entitled to take account of the secured lender's views as to the identity of a selling agent, particularly where it is doubtful that the sale price will exceed the secured debt. Furthermore, it is not inherently negligent for an administrator to appoint someone other than "the established 'big boys'."

Incentive arrangements which administrators agree with appointed agents are not "inherently inappropriate" and the incentive to realise an asset for more than the amount owing to secured creditors may be in the interests of unsecured creditors.

Sale of a secured asset

In selling a property, administrators owe a duty to the company to 'take reasonable care to obtain the best price which the circumstances of the case permit'. In order to establish a breach of such a duty, the company would have to show that the administrators made an error which a reasonably skilled and careful insolvency practitioner would not have made.

This duty does not mean that there is a special rule requiring exposure of the property to the open market. In this particular case, prospective purchasers were directly contacted and considerable expert evidence was provided to demonstrate that placing the property on the open market could have dissuaded those potential bidders (who had the finance for such a commercial development), who would have been unwilling to participate in an open marketing process. It will depend on the nature of the property and the relevant market.

An administrator has less freedom than a receiver when dealing with a sale of a property.

  • A receiver has the same duty to use reasonable endeavours to obtain the best price. However, this duty takes effect at the point at which the receiver chooses to sell and a receiver can therefore choose the timing of any sale, even if a delay could have enhanced the value of the security.
  • An administrator cannot choose to sell for the benefit of the secured creditor if this harms the interest of the unsecured creditors.

An administrator cannot be liable in negligence to the company if they reasonably relied upon advice from an agent which appeared to be competent

The relationship between the administrator and the secured lender

An administrator must exercise independent judgment and cannot allow another person to dictate to him how his powers must be exercised. However, this does not prevent administrators from taking into account the wishes of relevant lenders and an administrator is at liberty to consult them, although not bound to follow their wishes.

Administrators will require the consent of the secured lender when disposing of an asset subject to a fixed charge. However, this does not automatically give rise to an agency relationship between the secured lender and the administrator. The court held that the same standard of test as for receivership should be applied, i.e. did the secured creditor interfere with or 'direct' the administration.  There needs to be something more than the secured lender consenting to the sale, or the administrator consulting with the secured lender and taking account of his wishes. The creation of an agency relationship would require the secured lender giving directions which the administrator unquestioningly followed or the secured lender misleading/exerting such pressure as to defeat the administrators' free will. In those circumstances, the secured creditor could be liable if the property was sold negligently.

Comment

This case provides useful clarity on the extent of an administrator's duties. It recognises that administrators will be exercising commercial judgement in decisions which they make and does not seek to hamper that. In order for there to be a breach of duty a company would need to demonstrate that an administrator had acted in bad faith or that the action take was so perverse that no reasonable administrator would have taken that same course.

It also provides welcome relief for secured lenders, demonstrating that a secured lender providing its consent to a sale, or an administrator taking into account a secured lender's wishes, do not give rise to an agency relationship. In order for an agency relationship to arise, there needs to be some interference or direction which was unquestioningly followed by the administrator.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.


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