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Administrators’ Appointment Terminated: Reasons – Motive, Duty, Potential Conflict

A fascinating judgment sprouted in the matter of Koon v Ltd v Bowes & Ors [2019] EWHC 3455 (Ch), where Mr Justice Halliwell decided that the Administrators’ appointment should cease.

This was a case in which a company de facto Director appointed Administrators, whose Proposals were rejected by the major creditor. There appeared to be concerns as to the merit of a debenture granted in favour of the de facto Director – whether or not consideration had been provided, whether the consideration was past consideration and whether or not the future consideration related to monies advanced to enable the company to discharge its own liabilities as opposed to those arguably applicable to the de facto Director.

It was notable that Mr Koon the major creditor had offered to discharge the debenture holder’s debt in relation to consideration provided to the company after the date the debenture had been entered into. However, this was rejected by the debenture holder.

The Court seemed concerned about the position and that it appeared to the Court that the granting of a debenture in the manner done was to seek influence over the company’s property, conceivably at the expense of the major creditor using the Administration process.

Notable extracts from the judgment:

I am satisfied that, when making the application, Mr Koon honestly believed that, in appointing the administrators, Mr Parker was actuated by an improper motive. Moreover, there were and are reasonable grounds for that belief. In my judgment, the most likely explanation for Mr Parker’s conduct is that he entered into the Debenture as a device to enable him to appoint his own nominees as administrators and thus improve his prospects of influencing the insolvency process. This would include the management and disposal of the Property and the handling of any complaints about the conduct of the directors. Ultimately, Messrs Bowes and Rosler were appointed as administrators as part of the same strategy.

I am thus satisfied that, under Paragraph 81(1), I have a discretion to make an order providing for the administrators’ appointment to cease to have effect. I shall make such an order for the following reasons.

My first reason is, indeed, based on Mr Parker’s motives in appointing the Administrators. Mr Parker caused the Company to enter into the Debenture and appointed the Administrators in the knowledge that (1) the Company was insolvent without the support of Mr Koon and (2) Mr Koon was entitled to a majority, in value of the creditors’ voting rights. Mr Parker can be taken to have this knowledge following the advice given to him by VZX. He can also be taken to have acted in order to obtain a collateral advantage over Mr Koon and put himself in a better positon than otherwise so as to influence the insolvency procedure and the course of the administration. It is conceivable that, in doing so, Mr Parker believed he could procure a more advantageous outcome for the creditors as a whole. However, ultimately, this is a matter for commercial judgment. It is not self-evident that administration will achieve a better result for the creditors than liquidation if the Property is simply to be disposed of at a proper price taking into consideration all professional advice in connection with issues of marketing and the sale price. However, Mr Parker’s motive was to obtain a collateral advantage in connection with this process to which he would not otherwise have been entitled. In the sense originally envisaged, this advantage was achieved.

Secondly, Mr Parker caused the Company to enter into the Debenture by acting as a de facto director and committing breaches of his fiduciary duties to the Company. Following Mr Parker’s resignation in on 1st April 2017, there was no resolution on the part of the directors or the members to re-appoint him as a director and, at no stage, was Companies House notified of any such appointment. However, Ms Bunbury accepted, on his behalf, that in causing the Company to enter into the Debenture, he must be taken to have assumed the duties of a director if, indeed, he was not already acting as a de facto director. In breach of his fiduciary duties, Mr Parker then caused the Company to assume liability for the entirety of VZX’s fees notwithstanding that a significant part of their services must be taken to have been provided to Mr Parker in his capacity as a creditor. The indebtedness secured by the Debenture is essentially made up of VZX’s professional fees for their professional advice and services in connection with the debenture itself.

Thirdly, the Debenture is susceptible of challenge at the suit of the office holder for the time being and, in view of the fact, that they have themselves been appointed under the Debenture, the Administrators are thus potentially exposed to a potential conflict of interest and dutySections 238 and 239 of the Insolvency Act 1986 furnish them with grounds to challenge the Debenture and the underlying indebtedness in respect of VZX’s fees on the grounds that, by assuming responsibility for their fees or preferring Mr Parker to the other creditors, the Company entered into a transaction at an under-value or by statutory preference. If the Administrators were to issue proceedings, the Court would have jurisdiction to make an order restoring the position to what it would have been if the Company had not entered into the relevant transactions or entered into the Debenture.

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