Administrators' conflicts of interest and prior professional relationships

The UK courts in a series of judgments last year have provided useful guidance on the level of previous professional engagement which would rule an administrator out of accepting a role in the insolvency of a company.

In New Zealand, conflicts of interest will generally be addressed at the outset of any administration as part of the section 280 process. But the pragmatic approach adopted in the UK will assist in this decision-making.  

Zinc Hotels v Beveridge[1]

Context

The administrators decided to proceed with asset sales which the company had embarked upon before it was put into administration.   

But before being appointed, they had been engaged by the secured lender to conduct a contingency planning exercise with the company, including preparing to accept a potential appointment as administrators of companies in the group. 

The shareholders applied to the Court to have them removed due to a conflict of interest.

Decision

The Court accepted that in most insolvencies, the proposed administrators will have been engaged prior to the commencement of the insolvency proceedings by a secured creditor.   

The Court saw no evidence that the administrators were conflicted. The administrators did not advise the secured lender to put the company into administration. 

Davy v Money[2]

The sole director of a company in liquidation brought a claim against the joint administrators appointed by a secured creditor alleging that they had failed to exercise independent judgement and had instead paid excessive regard to the interests and wishes of the appointing creditor. 

Decision

The Court held there was no absolute bar upon the appointment of administrators who had a prior business relationship with the secured creditors and had been nominated by them. The question was whether they could be relied upon to act impartially and in accordance with their duties.   

That required an assessment of all the circumstances, and of the appointed administrator’s competency and ability to discharge fiduciary duties to the company.   

On the complicated and lengthy facts of the case, the Court found that the administrators acted independently and in accordance with the statutory objectives of the administration. 

VE Vegas v Shinners[3]

Context

The board and management of Company A formed a new company (Company B). Company A then engaged an accounting firm that advised it to conduct a pre-pack sale to Company B and also advised on insolvency options.   

When Company A went into administration, the administrators were appointed from this same firm, leading Company A’s creditors to apply to have them removed on the basis that an investigation was needed into whether there were breaches of duty by the directors and/or the accountants in relation to the sale of Company A’s assets.

Decision

The Court removed the administrators, finding that they were conflicted because their firm was bound up in the process by reason of their contractual retainer.  

But it found that the conflict of interest could have been avoided had they – for example – sought the appointment of a special purposes administrator who would be responsible only for the investigations into whether there were breaches of duty in relation to the sale of the company’s assets.

Chapman Tripp comments

The UK decisions show that the Courts are likely to take a pragmatic approach that takes into account commercial reality.

Mere pre-appointment advice on a company's insolvency options will not usually create a reasonable basis to doubt the administrator's independence. But conflict of interest issues may emerge if the administrator has to investigate actions taken by the company on their advice prior to their appointment as administrators. 

Although the UK cases discussed above are limited to administrations, the principles stated by the UK courts are applicable to administrators and liquidators alike in New Zealand.

A reflection of these principles can be found in the RITANZ Code of Conduct, in particular clauses 2.1.1 and 2.4.

  • Clause 2.1.1 sets out that the test for independence focuses on the nature of the contact and the relationship between the practitioner and the insolvent company, its creditors or directors prior to the appointment.
  • Clause 2.4 requires that practitioners provide a declaration of independence to creditors as soon as possible. As part of the declaration, practitioners are required to declare whether they provided any advice to the insolvent company, or its directors before the appointment, and why they believe that such advice does not give rise to a conflict of interest. 

The Courts are likely to have regard to professional standards in assessing whether there was an actual or perceived conflict of interest, or lack of independence.[4]

Thank you to Moria Brengauz for preparing this Brief Counsel. For more information please contact the authors listed.


 

[1] Zinc Hotels (Investment) Limited v Beveridge [2018] EWHC 1936 (Ch), July 2018

[2] Davey v Money [2018] EWHC 766 (Ch), April 2018 

[3] VE Vegas Investors IV LLC v Shinners [2018] EWHC 186 (Ch), February 2018

[4] Heath and Whale on Insolvency (online looseleaf ed, LexisNexis) Liability of Office Holders at 38.26(c).

Print this article

Related topics: Restructuring & insolvency

Restructuring & insolvency

Related Services

{{vm.keywordQuery}}

{{vm.results.totalRows}}

{{vm.message}}

 

Related Sectors

{{vm.keywordQuery}}

{{vm.results.totalRows}}

{{vm.message}}

   

News & Publications