The power of administrators to auction off a company's interest in a legal claim

A recent case in the High Court has examined the power of administrators (and indeed any insolvency office holders) to auction off a company’s interest in a legal claim.[1]

Background

M was a company formed to promote a new type of mobile phone cable.  M was placed into administration in April 2016 and the business and assets sold by pre-pack to MML, a newco incorporated by S, a creditor and original shareholder of M.

The applicants, also shareholders and creditors of M, included G who originally invented the cable. G alleged that S (and others) had entered into an unlawful conspiracy to put M into administration and dispose of its assets at an under-value.  If brought, this would be a derivative claim on behalf of the company and, therefore, an asset of M.

G attempted to agree an assignment of the claim to him for £5,000 plus costs. The administrators, initially receptive, decided they didn’t want to risk the sale being at an under-value and would instead put the claim to auction. G applied to the Court to prevent the auction on the grounds that:

1. The administrators had already agreed to sell the claim to him; and
2. If the agreement didn’t bite, the auction sale should be prevented on the basis it would cause him unfair harm [2]

Decision

The first part of the judgement is an interesting run-through of the principles of formation of a contract, with the Court concluding there was no offer capable of acceptance and therefore no agreement (and a further example of why pre-contract correspondence should always be headed “subject to contract”).

More relevant to this blog, is the Court’s subsequent examination of whether the proposed sale of the claim by auction would cause unfair harm to G.

Firstly, if G were treated less favourably than other creditors as a result, then this may be unfair harm. However, the Court emphasised this will only ever be the case if the actions cannot be justified by reference to the creditors as a whole.

Otherwise, if creditors were not treated differently, then the Court would only intervene in the actions of administrators if the decision did not withstand logical analysis.

In this case, the nature of the claim was key. The claim was very difficult to value, it was difficult to bring, the prospects of success were not clear and, whilst G had proposed to hold proceeds on trust for the creditors of M, it would take a long time before monies (if any) found their way to the creditors. For the Court, there was too much uncertainty in this route.

Conversely, the Court saw that an auction provided an opportunity for market value to be openly tested. It also realised that value immediately, for the benefit of all creditors of M.

The Court further considered whether it was in the public interest to allow the auction, given S was a man of means and would no doubt attempt to purchase the claim and stifle it.

The Court determined public interest in ensuring that substantial claims are not stifled was a marginal factor at best (unless there was evidence of extreme abuse). S was likely to pay the highest price for the claim, to stop it being brought. G also had access to significant funds and would likely bid against S and drive the price up (analogous, in the Court’s view, to a settlement negotiation). Ultimately, the higher price would be in the interest of the creditors.

The application was therefore dismissed.

Comments

The case is another useful demonstration that the threshold for interference by the Court in the actions of administrators is high, and generally limited to where administrators are taking a course of action either wrong in law or manifestly unfair to a particular creditor or creditors.

As for auctioning claims, where a claim has a clear face value then office holders have a duty to realise that value as best they can. Otherwise, the Court seems satisfied that an auction is an appropriate method of determining value and of realising that value quickly to the highest bidder, whoever that may be.

[1] Re Meem SL Limited (in Administration) [2017] EWHC 2688(CH)

[2] Under paragraph 74(1)(b) of Schedule B1 to the Insolvency Act 1986.