The Court of Appeal held that administrators were personally liable in costs for litigation in circumstances where a creditor challenged whether the purpose of administration could be achieved. The case highlights a number of important points for administrators and in particular the high standards expected of them following an appointment.
Joint administrators were appointed to Ulva Limited ("Ulva") by the sole director on 14 August 2007.
However, prior to the appointment, much of Ulva's assets had been transferred out of the company for no or inadequate consideration. DRC , a major creditor of Ulva, were aware of the movement in the company's assets and requested a meeting with administrators to alert them to this. The administrators advised DRC that they would take immediate steps to secure and recover Ulva's assets with a view to effecting a sale of the business.
It appears that by 23 August 2007, the administrators were prepared to make an application for injunctive relief restraining the director from entering the company's premises, dealing with or disposing of the company's assets and taking re-delivery of its assets. However, following a meeting with the director at which he gave certain assurances no further action was taken.
The administrators then began the process of offering the company's assets for sale. Both DRC and the director expressed interest but given the uncertainty over what assets Ulva had to sell, DRC withdrew leaving the director as the only interested party.
DRC applied to the Court to have the administrators' appointment terminated on the grounds that the director had appointed them with an improper motive and further claimed that the actions of the administrators were liable to unfairly harm their interests. Ultimately DRC's applications did not need to be determined as on the morning of the hearing the administrators conceded that the purpose behind the administration could not be achieved (as the sale of the company to the director had fallen through) and sought an order for the compulsory winding up of Ulva.
DRC sought an award of costs against the administrators personally claiming that they had effectively achieved the result they had sought and had they pursued the application for the removal of the administrators it would have been successful.
The Judge at first instance considered that DRC were entitled to the costs order. This was on the grounds that the administrators had failed "to take the steps they should have taken and which they themselves threatened they would take before offering the company for sale". The Judge was of the view that the administrators did not act "expeditiously and with the robustness of purpose that one would have hoped for and which one is entitled to expect".
On appeal, the Court upheld the decision regarding costs. The Court noted that "whatever one's view was as to whether the administrators should have accepted the appointment in the first place…by 23 August 2007 they should not have entertained any thought of an attempted sale of the business". Instead the administrators ought to have focussed on the recovery of Ulva's assets. The Court noted that without "the unscrambling of the transactions" the purpose of the administration could not have been achieved and on that basis the Court felt the Judge was entitled to conclude that he would have removed the administrators from office had DRC's application been heard in full.
There are a number of points to be taken from this decision:
The Court made the award of costs against the administrators personally under Rule 7.39 of the English Insolvency Rules. This provides that where the responsible insolvency practitioner is made party to any proceedings on the application of another party to the proceedings, he shall not be personally liable for costs unless the Court otherwise directs him. In Scotland, there is no equivalent to Rule 7.39. However, the Court in Scotland has a wide discretion in relation to costs and who they are awarded against. Therefore, in our view if the action was to have been brought in Scotland the Court would still have been able to make the award against the administrators personally.
The decision reinforces the need for IPs to carefully consider and record the basis upon which they believe the statutory purposes of the administration can be achieved. It is clear that the administrators in this case were aware of the problems with the company's assets prior to their appointment and were criticised for not asking enough or the right questions at the time of appointment.
While the Court did not go as far to say that it was wrong for the administrators to accept the appointment, certainly by 23 August 2007 the administrators ought to have come to the conclusion that none of the statutory purposes could have been achieved. Instead they proceeded to try and effect a sale of the company when they had still not established what assets were owned by the company or made any steps to recover any of the assets which had been disposed of prior to appointment.
In every application to the court for an administration order, the proposed administrator is required to complete a written statement dealing with matters such as the purposes of the administration and also any prior professional relationship that the proposed administrator has had with the company.
In this case, the judge at first instance was critical of the administrators who in the Form 2.2B had said that they had no prior professional relationship with Ulva. The judge noted that advice had been given to Ulva in January and July 2007. It should be noted that the requirement to declare any prior professional relationship is not confined to material relationship but would also include any advice given or planning carried out in the period before appointment.
Finally, the case highlights the high standards which the Court expects of an administrator in office. While the honesty of the administrators was not questioned, the Court stated that it is entitled to expect those who carry on business in the highly specialised field of insolvency to show conscientious competent standards of behaviour.