Background
The case concerned allegations of breach of duty by two company administrators and former partners in Deloitte. They were appointed as administrators on 14 October 2013 over two companies (the “Companies”) whose business involved the development and sale of two properties, No. 40 and No. 38 Avenue Road (the “Properties”).
The majority of funding for the development of the Properties was provided by Barclays Bank Plc, as the senior secured lender (c. £66.89m, including fees and interest). Funding was also provided by junior secured creditors, BMBSCI (c. £7.1m) and BMBAR (c. £2.7m) and substantial unsecured shareholder loans of around £19.6m. .
The Properties were very large super-prime properties, each at over 21,500 sq ft. A novel feature of the Properties was that over 60% of the square footage was below ground, basement accommodation. During the course of their construction, the Properties had been valued together (at various times between 2008 and 2011) at over £100m and were put on the market with guide prices of £75m each – one “dressed” and the other less advanced and “undressed”. The pre-administration marketing period lasted around two years, and despite around 160 viewings, the Properties remained unsold. After discussions about a possible refinancing broke down, the Administrators were appointed over the Companies on 14 October 2013.
Once appointed, the Administrators agreed with the incumbent agents, Knight Frank and Savills, an initial marketing period of 28 days with guide prices at a reduced level of £35m (“dressed”) and £30m (“undressed”). It was agreed that if no sale was found within that 28 day period, a third agent, Aston Chase, would also be instructed.
A buyer was found during that initial period, and, crucially as regards judging whether the Administrators fulfilled their professional duties, the two agents confirmed that in their opinion the Properties had been adequately exposed to the market and the highest offer should be accepted. A sale was agreed for the Properties at £61.25m. The Administrators entered into an exclusivity agreement and later a sale agreement with the prospective buyer. Those agreements were entered into before charges in favour of the junior secured creditors had been released, by consent or by order of the court.
Following the sale of the Properties, after taking into account the considerable sale costs, the Administrators made a distribution to Barclays, as the senior secured lender, which suffered a substantial shortfall of around £10m. No funds were available for the junior and unsecured creditors of the Companies who sued the Administrators under insolvency legislation.
BMBSCI and the shareholder investors assigned their claim to Fitzroy Street Capital Inc (“Fitzroy”), and on 11 June 2020, BMBAR and Fitzroy applied to the court for permission under Schedule B1 Paragraph 75(6) of the Insolvency Act 1986 (the “Act”) to make an application for the court to examine the conduct of the Administrators.
Issues
The Applicants’ claim was two-fold.
- The Primary claim: That the Administrators exceeded their powers by entering into the exclusivity agreement and sale agreement, which involved a disposition of the Properties, as if the Properties were not subject to fixed charge securities, and without obtaining permission of the court pursuant to the Sch. B1 para 71 of the Act.
- Secondary claim: Other claims of breach of duty by the Administrators. The Judge summarised this as “revolv[ing]” around two themes:
a. The Administrators either ignored or paid insufficient regard to the interests of the junior secured creditors; and
b. Efforts undertaken to market the Properties were inadequate, with the result that they were sold below market value.
Decision
The Judge dismissed the Application, rejecting both of the Applicants’ claims. While he identified some deficiencies in the Administrators’ conduct (the majority of which were admitted) these were not found to be material to the outcome of the Administration. He concluded that:
- The Administrators had not acted in excess of their powers. He decided that neither the exclusivity agreement nor the sale agreements could be construed as creating an immediate equitable interest in the Properties (i.e. the Properties were not “disposed” of) given that the Administrators had no powers to dispose of the Properties free from the charges in favour of the junior secured creditors; and
- The Properties had in any event not been sold at an undervalue. He decided they realised their market values, and the Administrators had been entitled to rely on advice that the Properties had been properly exposed to the market by the instructed agents Knight Frank and Savills.
Key Takeaways
- Administrators are entitled to rely on appropriate professional advice in carrying out their duties. Crucially to the case against them, the Judge found that the Administrators were entitled to rely on the professional advice of the agents, Knight Frank and Savills, that the Properties had been adequately exposed to the market.
DACB Comment: There is now a well-established principle that Administrators are able to rely on professional advice when undertaking their duties and the existence of, and nature of such advice, will no doubt feature heavily in future claims.
- Red Book valuation not necessary in circumstances where value is determined through marketing. The Claimants relied upon a series of historic Red Book valuations placing a value on the properties above or close to £100m. However, when tested against actual market interest, these valuations had failed to prove an accurate “barometer” of market value. The Administrators were entitled to assume that there would be little use in commissioning yet another valuer’s report. The Judge agreed with the Administrators that placing the Properties on the market was the best way to determine their value.
DACB Comment: The Administrators might have taken the “safe” option and obtained yet another valuation, as argued by the Claimants, but they did not and they would have been wrong to do so. It would only have served to delay putting the properties on the market and delay achieving a sale, and to what end? They were right to test the market by marketing the Properties and to accept professional advice that an offer should be accepted. Administrators operate in the very real world of business realities, and should conduct themselves accordingly. Their commercial actions and judgements were rightly approved by the Judge.
- In professional negligence actions, don’t get lost in the detail. The Judge observed that where every aspect of the Administrators’ conduct was examined, there was a danger that an affixation on the detail would obscure the bigger picture. The key question was whether the Properties were sold by the Administrators for market value, and he found that they were. The Judge referred, with approval, to the warning of Mr Dale QC for the Administrators: “against what he called the narcissism of small differences. That attractive and evocative phrase is a reminder that the tendency to pick away at points of detail, natural enough in a case where professional conduct is in issue, can sometimes result in one losing sight of the wood for the trees”.
DACB Comment: We predict this approach will be cited with approval in future judgments in professional negligence actions.
Conclusion
Kevin Hawthorn, partner at DAC Beachcroft specialising in insolvency, restructuring and business advisory, commented, “The judgment will be welcomed by insolvency office holders and follows a number of similar cases which recognise that office holders are often required to make difficult commercial and business decisions in challenging circumstances which may include time pressures and funding constraints. Office holders are entitled to rely on suitable professional advice to assist them making those decisions and should not lose sight of the need to focus on those with a genuine economic interest in the insolvency. Absent perversity or clear unreasonableness, an office holder’s decisions will be respected and should withstand challenge by disgruntled creditors or third parties.”
Deloitte was represented by Richard Highley (Partner), Pippa Ellis (Director), Annabel Walker (Associate) and Isabel McNeil (Solicitor) at DAC Beachcroft LLP, and by Derrick Dale QC (Fountain Court Chambers) and Ben Griffiths (Erskine Chambers).
