Claims against insolvency practitioners – should we expect more?

The Insolvency Service statistics for Q1 of 2018 have confirmed that the number of company insolvencies have increased to the highest quarterly level since 2014. Does this increase in insolvencies together with the recent decision of Davey v Money mean that insurers should be wary of a raft of claims against IPs in the near future?

Insolvencies on the rise

The Insolvency Service has reported an increase in the highest quarterly level of underlying number of insolvencies. This has however been driven by a rise in creditors’ voluntary liquidations and compulsory liquidations. This has resulted in the total of new company insolvencies reaching levels that we have not seen since 2012.

History tells us that a rise in insolvencies usually translates into an uptick in claims against IPs a few years later – which is exactly what we saw during the last recession. If that is the case, the judgment in Davey v Money provides considerable helpful guidance as to the circumstances in which an administrator will be found to have acted in breach of their duty to creditors. It should provide comfort to insurers of the profession often given the nickname “the vampires of the recession”.

Davey v Money

In summary, Mrs Davey was very critical of a decision taken by the administrators to sell the property which resulted in Dunbar Bank’s charge being redeemed, but no funds being returned to her as the majority creditor. The Bank had appointed the administrators in the first instance.

Mrs Davey brought a claim against two administrators of a company who she claimed had acted in breach of duty by failing to obtain a proper price for the sale of the company’s main asset, a substantial property, by failing to explore and pursue a funded rescue of the company, in their approach to the appointment and supervision of an agent, and by failing to exercise their own independent judgement in the conduct of the administration.

In accordance with paragraph 3 of Schedule B1 of the Insolvency Act 1986, the administrator of a company must perform his functions with the objective of:

1. rescuing the company as a going concern, or
2. achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration), or
3. realising property in order to make a distribution to one or more preferential creditors.

The administrator must perform his functions with the objective of (a) unless it is not reasonably practicable to achieve that objective or that the objective of (b) would achieve a better result for the company’s creditors as a whole.

The administrator can only perform his functions in accordance with (c) if it is not reasonably practicable to achieve (a) or (b) and he does not unnecessarily harm the interests of the creditors as a whole.

Mrs Davey argued that from the outset the administrators performed their functions with the objective of (c) and were engaged by Dunbar Bank to conduct what they had themselves termed as a “light touch administration”.

The evidence of the administrators was that what they termed as “light touch” meant that they would not get involved in the day to day running of the business. Their evidence confirmed that their strategy always referred to paying off the Bank’s debt but that any payments received above the debt would be paid to Mrs Davey.

Snowden J provided helpful guidance for those handling claims against administrators by emphasising that the administrators’ conduct was only open to challenge if it was made in bad faith or was clearly perverse in the sense that no reasonable administrator could have thought that it was not reasonably practicable to rescue the company as a going concern. He rejected any arguments that the only way that a company could assess whether it could be rescued as a going concern is for the administrators to consult with the directors and shareholders. He said this was putting matters far too high.

Importantly, the court accepted that the Statement of Proposals, which set out which objective the administrators were performing their functions to achieve, was defective. In particular, it was missing “an explicit explanation of why the Administrators thought that their proposed course of action would be unlikely to result in the rescue of the Company as a going concern or a better realisation for creditors than in a liquidation”. However, the court dismissed the idea that a failure to be transparent or open about the objectives and reasoning in the Statement would subsequently invalidate all later decisions in the administration.

That said, it is clear from the decision that the court is prepared to take greater interest in the way in which the administrator goes about effecting the chosen objective. That bar is lower and the court will take an objective view in accordance with the standard and skill of a reasonably competent administrator.

In this case, it was reasonable for the administrator to delegate the sale of property to a competent agent and rely on that agent’s advice.

Comment

In our view, claims against IPs are likely to follow any continued increase in insolvencies in the same way they did during the recession. However, much like everything today, this is dependent on the vagaries of our economy and the deep uncertainty around our future in Europe.  That said, it is important to remember that claims against IPs are typically much more difficult to pursue than those against other professionals and this is reinforced by the judgment in Davey.