Ve Vegas v Shinners [2018] EWHC 186 (Ch): officeholder conflicts of interest and removal of administrators

Judgment on BAILII at: http://www.bailii.org/ew/cases/EWHC/Ch/2018/186.html

Ve Interactive Limited (“the Company”) was a company involved in providing e-commerce services. It entered into administration and the Respondents, members of Smith & Williamson LLP (“S&W”), were appointed as administrators. The Company’s business and assets were sold by way of a “pre-pack” sale to a company controlled by the Company’s directors for the sum of £1,750,000.

The Applicants were creditors of the Company. They applied for the Respondents to be removed so that new administrators could consider whether the Company’s former directors or the Respondents were guilty of misfeasance in relation to the pre-pack sale, which was alleged to be at an undervalue.

Midway through the hearing, the Respondents indicated that they would resign on the grounds of conflict of interest.

Although the Respondents indicated that they would resign, Registrar Jones gave a reasoned decision. He held as follows.

When such an application is made (for removal on the grounds of conflict of interest), the court needs to decide whether there is a “serious issue for investigation”: at [18]. Removal may be ordered if an independent review cannot be carried out because of conflict: Clydesdale Financial Services Ltd v Smailes [2009] BCC 810 at [30]

In this case, there were two competing explanations as to what happened (though the truth could be somewhere in between). First, that the Company’s dire financial position and deficient books and records meant that the directors and the Respondents did the best they could in the circumstances and/or in any event achieved the best possible price under the pre-pack sale. Second, and alternatively, that the Company’s directors took advantage of their position as directors to exclude others from a realistically competitive pre-pack process thus enabling the company they controlled to agree a pre-pack purchase on terms at an undervalue: at [20].

The second possible explanation (which was not baseless) made it clear there was a serious issue for investigation: at [22].

It is worth quoting in full the following passages from the judgment as officeholders should bear these words in mind.

[24]. It should have been apparent to the Respondents that those inquiries would or might need to consider whether S&” ought to have: provided different advice; ensured a better marketing and sale process; intervened to prevent or mitigate the actions of the directors.

[25] In my judgment the Respondents ought to have concluded, effectively from the date of their appointment or soon thereafter, that they as members of S&W were conflicted and could not carry out those investigations. S&W were inextricably bound up in the process by reason of their contractual retainer and, therefore, so were the Respondents. This is not technical legal analysis. It is obvious.

[26] That does not necessarily mean they should have resigned from their appointments. It may be (but for the resignations) there were alternative solutions. For example, the appointment of an additional administrator or replacement by only two new administrators who would be specifically and only responsible for the investigations.

[27] However, whatever the practical steps which should have been taken, it is clear the Respondents did not (properly) appreciate that conflict of interest until their notice of intention to resign. That is clear from: the events leading up to the hearing of the Application including their continued failure to draw (adequate) attention to the conflict and to deal with it; their continuous opposition to the Application until day 5; their attacks upon the Applicants in the evidence; the evidence of Mr Shinners and Mr Hardman in particular under cross-examination; and the terms of the intention to resign notice itself.

….

[29] The correct position is that the conflict and its consequences ought to have been readily apparent to them at all material times following their appointments. They ought not to have opposed the Application except to the extent that they raised with the Court alternative solutions which might result in them (or some of them) remaining in office whilst investigations were carried out by independent parties. They ought to have raised the problem of conflict with the creditors’ committee in a positive manner and sought directions from the Court insofar as matters could not be resolved or it was otherwise appropriate to do so.

[30] It is to be emphasised that administrators, undisputed creditors and shareholders (to the extent they hold an interest) should be working together to achieve the purpose of the administration. It was in the interests of the Company to identify whether claims exist which might replenish its estate including claims against the Respondents. That was the interest of the Respondents, as administrators. This could not be said to be a case for which there is no possible merit in the claims or other justification for not pursuing investigations which the Respondents could not themselves carry out because of conflict. The Respondents do not suggest a deficiency of funds or that it is not in the interests of creditors that investigations should not be pursued. Their resignations impliedly accept there is no commercial or other reason for not pursuing investigations.

[31] The Respondents’ failure to approach this matter correctly persuaded me that I should remove them as administrators and not wait until their resignation took effect to appoint replacement administrators. The Respondents were ready to hand over the

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