Removal of Administrator to allow Pre-Pack Review
Pre-packaged sales following the appointment of administrators have had their fair share of press comment recently. The primary concern is that while unsecured creditors have no say in such a sale, they are generally the worst affected, especially in a management buy-out pre-pack. In contrast, the company’s lenders are usually involved or at least aware of negotiations where a pre-pack is proposed, and so are generally “on-side” with a sale.
Not so with a recent Chancery Division case, where the lenders successfully applied to the Court to remove administrators from office and appoint a replacement administrator to allow review of a pre-pack. The case, Clydesdale Financial Services Limited v Smailes, involved the administration of a law firm, Alexander Samuel LLP.
The LLP’s management had sought advice from an insolvency practitioner, Mr Robert Smailes, who suggested a pre-packaged sale to preserve the value of the firm’s work in progress. The LLP’s business constituted low value high volume personal injury claims. A buyer was found and negotiations were concluded for the sale of the business. Rather than the usual signing of the contract post-appointment, the sale was concluded just prior to the administrators’ appointment., with completion to be implemented immediately after appointment. The IP was nevertheless closely involved in negotiating the deal.
The firm’s lenders, Clydesdale Financial Services Limited and two others, objected both to the terms of the sale contract, and the valuation of WIP on which the sale was based. It was too late to stop the sale itself, as it had substantially completed on appointment, The lenders accordingly applied, under paragraph 74 or 88 of Schedule B1 to the Insolvency Act 1986, to remove the administrator from office, and to seek the appointment of a replacement administrator. In addition, the lenders sought damages.
Paragraph 74 allows the Court to grant a variety of orders where a creditor shows that the administrator proposes to act or has acted so as to unfairly harm the interest of the creditor(s). Paragraph 88 provides simply that “the court may by order remove an administrator from office”. No grounds are specified and the Court’s discretion for consideration of conduct is wide.
The lenders’ allegations included various charges of collusion, misconduct and failure to consult with creditors, aimed at the administrator, the LLP and the purchaser. Their primary allegation was of a sale at undervalue; the lenders were concerned that the information provided to the valuer as to case success rates was inaccurate and that the basis of valuation should have been on actual recoveries rather then WIP value. The Court also noted the employment by the purchaser of a key employee of the LLP, who may or may not have had an incentive in encouraging the sale.
The Court agreed with the lenders that the circumstances surrounding the sale and in particular the valuation should be subject to independent review by an appropriate person. The Court also decided that due to the administrator’s close involvement in the negotiation of the sale, he should not conduct the review.
While the administrators proposed convening a creditors’ meeting with a view to moving the company into creditors’ voluntary liquidation with the appointment of new liquidators, the Court disagreed. Instead, the Court was persuaded that there should be no delay in a review of the sale and as the majority of the firm’s creditors supported the lenders’ application for removal, the administrator was removed and a new administrator – Mr Stephen Hunt – was appointed.
In respect of the claim for damages, the administrator argued that the lender’s claim for damages was incompetent, as the acts complained of took place before his appointment as administrator, and that this element of the claim should be struck out. The Court was not prepared to do so given the complications involved in assessing the IP’s conduct both with and without his administrator’s hat on. That aspect of the claim will be decided on a later date.
This decision demonstrates that in negotiating and concluding pre-packs, full compliance with SIP 16 is crucial. This case - together with the recent decision in Kayley Vending in which the Court provided guidance on how it would assess a proposed pre-pack in the context of an administration order - demonstrates that the Courts are willing to step in and allow review of pre-packs where appropriate.
For further information please contact: Gordon Hollerin