England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS
COM PANIES COURT

In The Matter Of VE INTERACTIVE LIMITED (In Administration)
And In The Matter of THE INSOLVENCY ACT 1986
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		Royal Courts of Justice Rolls Building, Fe tte r La ne , Londo n
		Date: 08/02/2018

MR REGISTRAR JONES:

Introduction

1. The Applicants are creditors of Ve Interactive Limited (In Administration) ("the Company") and other than the 4th Applicant continue to apply for the removal of the Respondents as the administrators. The Respondents are members of Smith & Williamson LLP ("S&W"). The Applicants wish them replaced by Mr Butters and Mr Harding, members of Deloitte LLP. The 4th Applicant has served a purported notice of discontinuance dated 30 November 2017. The 4th Applicant can discontinue with the consent in writing of each Applicant or permission of the Court (see CPR Part 38 Rule 38.2(2)(c)).
2. The Application is made on the basis that new administrators are required to investigate potential claims against the Company's directors and/or S&W relating to a pre-pack sale of the Company's business and assets (as specified) to Rowchester Limited on 26 April 2017 for £1,750,000. It is argued that investigations are required to assess whether there were breaches of duty by the directors and/or S&W which prevented other options being pursued and/or caused the sale to be at an undervalue. It is submitted by Mr Isaacs Q.C. for the Applicants that the Respondents are unable to investigate and should be removed from office in particular because of their conflict of interest.
3. The Application was opposed by the Respondents with the support of some of the other creditors until conclusion of the cross-examination of Mr Hardman, who had followed Mr Shinners into the witness box, on the 5th day of the hearing. Whilst it was at one stage suggested that the Respondents were adopting a neutral approach in the context of there being differing degrees of neutrality (even assuming that it is possible), it was at all times plain that the Respondents were arguing that the Application was misconceived and in any event should not be granted. This is opposition not neutrality (see Lehman Commercial Conduit & Anor. V Gatedale Limited (In CVL) [2012] EWHC 848 at [30-31], Vos J., as he then was).
4. At that conclusion I was informed by Ms Shekerdemian Q.C. (having had time within an adjournment to obtain instructions) that the Respondents would not call their other witnesses. I was also informed that "In the light of the way that the evidence has progressed over the course of the last week", the Respondents or some of them would be resigning on the ground of conflict of interest prescribed in Rule 3.62(1)(c)(i) of the Insolvency (England and Wales) Rules 2016 ("the Rules") pursuant to paragraph 87 of Schedule B1 to the Insolvency Act 1986 ("Schedule B1"), sub-paragraphs (1) and (2)(a).
5. After a variety of submissions, the Respondents provided their letter of intention to resign dated 22 January 2018 which reads:

"We … resign our positions as joint administrators … with effect from 30 January 2018 on the grounds set out in IR r.36(1)(c)(i) namely that the further discharge of the duties of the administrators is now prevented or made impractical by a conflict of interest (actual or potential) relating to the issues which are to be investigated with regard to the sale of the business and assets of the Company to Rowchester Limited and with regard to the conduct of immediate post management, the joint administrators recognising in light of the proceedings before the Court from 16 to 22 January 2018 that there may be a perception that the court or creditors would not have confidence in the continued discharge of their functions relating to those investigations".

6. On the 6th day Ms Shekerdemian Q.C. informed the Court that the Respondents also accepted that: (i) they should pay the litigation costs on an indemnity basis; (ii) they will not yet apply for a date for their discharge from liability under paragraph 98 of Schedule B1, sub-paragraphs (1) and (2)(d); (iii) their legal costs will not be borne by the Company; and (iv) they had agreed to meet with Mr Butters and Mr Harding to achieve hand-over the next day.

Issues

7. Those facts gave rise to the following applications/issues between the parties:-

(i) Whether the Court should grant an oral application made on behalf of the Respondents to abridge time for service of the notice of intention to resign upon the creditors' committee?

If so:

(ii) Whether the Court should no longer decide whether to remove the Respondents as administrators?

If appropriate instead:

(iii) Whether the Court should exercise its discretion to remove the Respondents as administrators pending their resignation on 31 January 2018?

(iv) If deciding to remove, whether a reasoned judgment should be delivered?

23 January 2018 Orders

8. This judgment sets out the reasons for the following of the Orders made on 23 January 2018: (1) Refusal of the application to abridge time; (2) Removal of the Respondents as administrators from that day; (3) Immediate appointment of replacement administrators; and (4) Permission to the Company to apply in this Application for directions to exclude work of the Respondents as a cost and expense of the administration to the extent it has become unnecessary or wasted because of their removal and/or to claim from the Respondents costs and expenses for work incurred as a result of their removal (without double counting).

Abridgement of Time

9. Rules 3.62 and 3.63 permit resignation by an administrator on the ground that "the further discharge of the duties of administrator is prevented or impaired by (c)(i) a conflict of interest" and require the administrator to give at least five business days' notice of intention to resign to (on the facts of this case) the creditors' committee. It was submitted by Mr Isaacs Q.C. that such abridgement will not assist the Respondents because the intention expressed within their notice is to resign with effect from 30 January 2018. I agree.
10. The Court has power to abridge all time periods under the Rules unless a Rule provides otherwise. In this case abridgement would give effect to any intention to resign before expiry of the five business days required for service of the notice of intention. It would allow, for example, notice to be given on 23 January 2018 of an intention to resign the same day.
11. However, there is no notice of intention to resign on 23 January 2018. The letter of resignation, which has been given to the creditors' committee, states that resignation will take effect from 30 January 2018. It does not state that it will take effect on 23 January 2018 whether time to give notice is abridged or otherwise.
12. Therefore, abridgement of time in this case would only abridge the time for giving notice of the express intention to resign with effect from 30 January 2018. That is not this application, it is unnecessary and the application was refused.
13. I would have refused the application in any event. The grounds submitted for abridging time (assuming there was a notice of intention to resign on 23 January 2017) are: (i) it will make it unnecessary to decide the issue of removal – not only will there no longer be an issue between the parties needing a decision but further Court time and costs will be avoided; and/or (ii) a reasoned judgment dealing with the application to remove will be unnecessary and such a judgment should not be delivered when the issue has become otiose.
14. I accept that in principle abridgement can be granted to achieve an objective and that those grounds can be legitimate objectives. A more obvious example would be if resignation was tendered at the beginning of the 6 day hearing, even if no good reason existed for the delay which caused the need for abridgement. I do not accept Mr Isaacs Q.C.'s submissions to the contrary. However, a decision to abridge must depend upon all the circumstances and I do not consider it right to exercise the Court's discretionary powers in this case.
15. In reaching that "in any event" decision I took particular account of (individually and cumulatively): (i) the stage at which the application was made; (ii) the grounds justifying removal; (iii) the appropriateness of giving reasons for removal; (iv) the (potential) relevance to consequential relief and future issues; and (v) the interests of creditors and the public.
16. Dealing with those matters in turn:

i) The evidence was complete when the application was made. The Applicants opposed and continued to pursue the relief of removal. Submissions had to be heard and a decision reached. Reasons would have had to be given to deal with the matters identified within paragraph 15 above, whatever the outcome.

This was not a case requiring further work to reach a decision on removal. Abridgement was sought at a stage when it was obvious to the Respondents and not disputed that an Order for removal (at least of Mr Shinners and Mr Hardman) would otherwise be made. In practice the submission of saving time and cost only concerned the additional work delivering this judgment. However, that could be and has been achieved without adversely affec ting the Court's resources or the interests of other court users. The overriding objective is not offended.

ii) The grounds justifying removal will be addressed below (from paragraph 17). It is sufficient here to record that I am satisfied those grounds lead to the conclusion that it is right that the decision to remove was made.

iii) It is trite that reasons must be given for the Orders made. I have considered the decisions relied upon by Ms Shekerdemian including Ainsbury v Millington [1987] 1 WLR 379, HL. This judgment is not a pronouncement on an abstract question of law.

iv) It is also necessary for consequential relief and future issues within the insolvency that findings and reasons exist. There is every possibility that such matters would raise further expensive litigation should I have failed to give reasons.

This applies to the fourth of the Orders identified in paragraph 8 above and to a future application for discharge from liability. It is a ground to be taken into account which stands on its own but it is also relevant in this case because the letter of intention to resign does not express the Court's findings. As will be explained below when dealing with the decision to remove, the letter refers to conclusions drawn from the litigation, whereas (as will be apparent) my judgment is that conclusions arising from conflict of interest should have been drawn from or about the date of appointment.

v) It is also important that all interested in the insolvency understand what has happened and why. The Application concerns all. As mentioned, the letter of resignation does not achieve that aim. A decision which abridged time and left the matter to rest upon resignation would not reflect the true position. Namely, that grounds for removal are established and that is the appropriate remedy. The decision to refuse abridgment and to remove the Respondents achieves transparency. It is a decision in the interests of creditors and shareholders. Transparency is also in the public interest to ensure confidence in the statutory, insolvency regime.

The Decision to Remove

17. The decisions whether to remove and, if so, whether to provide a reasoned judgment are inextricably entwined. Indeed, it is difficult to see that a decision to remove should be made without reasons being given and the matters applicable to reasons considered above when addressing the application to abridge apply. Therefore, I will deal further with those issues together.
18. The Application by raising a conflict of interest required me to decide whether there is a "serious issue for investigation" not whether the claims identified for investigation have merit. That is because removal may be ordered if an independent review cannot be carried out because of conflict (see Clydesdale Financial Services Ltd v Smailes [2009] BCC 810 at [30], David Richards J, as he then was and see also Sisu Capital Fund Ltd v Tucker [2006] BCC 463 at [89], Warren J.).
19. Reading the contemporaneous exhibits, (at least) two possible scenarios readily present themselves from the following truncated, summary of the facts:

(i) From 3 March 2017 pursuant to a settlement deed with the Company and the former controlling director, Mr Brown, the Treyew Consortium injected £3 million of capital and took practical control of the Company through a new management team. The consortium included Mr Barrowman and Mr Pearson, who became directors of the Company.

ii) As at and following 3 March the Company was in serious financial difficulty. The new directors and management team decided that £40 million of capital needed to be raised to place the Company in a strong financial position. They decided that a minimum of £20 million was required urgently to pay creditors and provide short term working capital.

iii) Between 3 March and 13 April the new directors and management team sought to raise the £20 million. They also sought to convert debt into equity. They negotiated with, amongst others, the Clerkenwell Consortium, a group of existing shareholders .

iv) On 4 April 2017 Mr Barrowman and Mr Pearson formed Rowchester Limited, which they subsequently used for the pre-pack purchase.

v) On 10 April S&W met the directors and management team to advise upon insolvency options. Pre-pack was the favoured conclusion. Their retainer to advise upon and achieve that outcome was delayed until 13 April whilst the Company tried to raise the £20 million. The Respondents acted for S&W throughout.

vi) From the date the directors decided to proceed with a pre-pack purchase, a conflict of interest plainly arose, as it will always arise when directors and/or the management team are seeking to purchase a company's business and/or assets.

vii) The sale was far from straightforward. The financial position of the Company in the absence of the £20 million investment meant urgency was required. S&W needed to be provided with the financial information potential purchasers would require. There were also issues over what would or could be sold, in particular (but not only) concerning Ve Interactive LLC. This US company provided some 30% of the Company's turnover and had been identified as a subsidiary in the Company's accounts. This was considered incorrect by the new directors and management. Purchasers would need to know if it was excluded from the sale and, if so consider the financial consequences.

viii) The first time a potential purchaser other than Rowchester Limited was identified to S&W by the Company was during the evening of Thursday 20 April 2017.

ix) For whatever reason, there was also delay in the Company's directors and management providing financial and other relevant and requested information to S&W. The information ultimately provided did not provide S&W with what they had requested. It was deficient for purchasers if judged by the normal requirements for a sale of a business and/or assets.

x) Rowchester Limited had a head start and significant information unavailable to the market including information later provided by S&W relevant to negotiating the purchase price. For example, on 20 April, S&W informed that company alone that "up front consideration in the region of £2m" would be needed for a sale.

xi) Any potential purchaser other than Rowchester Limited would have to make an offer before 26 April 2017 based upon the deficient information and without a memorandum of sale describing what was being sold and dealing with the Ve Interactive LLC issue. None of this appears to have been disclosed by S&W to the Court making the administration order.

20. The two possible scenarios, at either end of the spectrum of possibilities referred to are:

i) Those facts occurred within a significantly short time-scale because of the Company's dire financial position, deficient books and records and issues of dispute (in particular with Ve Interactive LLC) which meant that the directors/management and/or S&W did the best they could in the circumstances and/or in any event achieved the only realistic sale, for good value at the best possible price.

ii) Those behind Rowchester Limited took advantage of their position as directors of the Company and used that position and resulting knowledge to achieve an advantage for themselves and intentionally or unintentionally in practice effectively exclude others from a realistically competitive pre-pack process. This enabled Rowchester Limited to agree a pre-pack purchase on terms at an undervalue.

21. It is to be stressed (without apologies for repetition) that there is potential for many other scenarios and that the matters above do not purport to address each fact and document before this Court. Nor do they seek to give any suggestion of a decision on the merits. This Court does not have to decide whether any claims exist but whether the Respondents should be removed from office because of the need to investigate and the existence of a conflict of interest. It is also to be remembered that only the parties to the Application have been heard and only in the context of the Application.
22. However in that context, the second possible scenario makes clear there is serious issue for investigation. It is also plain from the matters above that it should have been apparent to the Respondents from the date of their appointment (or soon thereafter) that there are at least two issues to investigate:

i) Whether the pre-pack was entered into in circumstances of the directors acting in breach of duty having put their own interests first with the result that a pre- pack was pursued at the expense of other options and outcomes or the market value or (if different) the best price for the sale of the Company's business and assets was not achieved.

ii) Whether S&W whilst acting in accordance with their contractual retainer breached their duties of reasonable skill and care with the result that loss was caused to the Company as a result of or upon the sale of its business and assets (see generally Re Charnley Davies Ltd (No 2) [1990] BCLC 760).

23. It should have been equally apparent that matters requiring investigation might include: whether the business was marketed with due diligence; whether the directors were able to and did take advantage of financial and sale information which they kept to themselves; whether the process and lack of information effectively excluded the possibility of competing bids and, therefore, a genuine market upon a level playing field; and S&W's role in the process.
24. It should have been apparent to the Respondents that those inquiries would or might need to consider whether S&W 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.
28. That letter only accepts that:

"the further discharge of the duties of the administrators is now prevented or made impractical by a conflict of interest (actual or potential) relating to the issues which are to be investigated … the joint administrators recognising in light of the proceedings before the Court from 16 to 22 January 2018 that there may be a perception that the court or creditors would not have confidence in the continued discharge of their functions relating to those investigations". (my underlining)

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 reins and I required them to do so.
32. That decision was and remains sustained by my assessment of the evidence of Mr Shinners and Mr Hardman under cross-examination. I unhesitatingly reach the conclusion from that evidence that the Respondents have lost perspective of their role. Throughout, their evidence demonstrated that they are primarily and essentially concerned with the defence of any claim against S&W and not with the competing, conflicting interests of the Company. The answers and responses of Mr Shinners and Mr Hardman demonstrated that they had and have no adequate appreciation of their conflict.
33. I will not embarrass them further by providing specific examples unless asked to do so before handing down judgment for the purposes of any intended appeal. That is because I understand this assessment is not in dispute following meticulous cross- examination by Mr Isaacs Q.C.. I understand it to be the cause of the "perception" the Respondents identify within their letter of resignation. However, I should make clear that in my judgment based upon the history of this matter as a whole, it is not that there "may be a perception that … creditors would not have confidence in the continued discharge of their functions relating to those investigations", it is that there is no cause for confidence.
34. That means either all or two had to be removed and replaced by an independent party(ies) with the specific role of and sole responsibility for investigation and pursuit of claims. Options were not investigated because all the Respondents chose to give notice of their intentions to resign. I expressed my concern that this meant the Court could not consider whether replacement of all this is the best course for the purpose of the administration. The Court has not been able to consider, for example, whether one or other should remain in office to deal in particular with ongoing contentious matters. I will have to assume there will be no problem caused by mass resignation but plainly the new administrators may ask for directions if required.
35. In reaching my decision I have taken into account the guidance to be found in case law for the exercise of the unfettered discretionary power to remove an administrator pursuant to paragraph 88 of Schedule B1. The law is not in dispute but I should record that I have taken account of (amongst other matters) the fact that removal will have an impact upon professional standing and reputation (see Re Edennote Ltd, Tottenham Hotspur plc v Ryman [1996] BCLC 389 (CA), at 725). In this case that will be a result of what has occurred.
36. I also record that in reaching my decision I have appreciated that, as a matter of policy, it should not be easy to remove an office holder simply because conduct has fallen short of the ideal. However, this has gone further than that. In addition, this is not a case where removal will or should encourage unjustified applications or cause office holders to have to look over their shoulders (see AMP Music Box Enterprises Limited v Hoffman [2002] BCC 996).
37. I have borne in mind that the court should consider but may not be persuaded by the views and wishes of the majority of creditors in their capacity as creditors (Sisu Capital Fund Ltd v Tucker [2006] BCC 463; Re Zegna III Holdings Inc [2010] BPIR 277 at [24]; and Maud v Aabar Block SARL [2016] BPIR 1486 at [97-98]). There is an issue over who are the majority group of creditors, those supporting or opposing the Application. I need not deal with that. The decision in this case is an obvious one for the reasons given and no creditor has provided reasons to the contrary.
38. Mr Isaacs Q.C. has raised other issues to press for the granting of relief, some particularly serious. I do not need to consider them to reach my decision and do not consider it appropriate to do so in all the circumstances. Included as part of his submissions is a document entitled "Issues to be Investigated". Normally that would have been a helpful "aide memoire" but I have not referred to it. I accept Ms Shekerdemian Q.C.'s submission that it would be wrong to do so when she has not had an opportunity to respond because he did not need to refer to it during his oral submissions in the circumstance of the notice of intention to resign letter.

Reasons

39. It follows that I do not consider it right to decide not to give judgment because reasons are not required. Reasons are required for this judgment.

Other Relief

40. It is plainly right to appoint Mr Butters and Mr Harding as administrators. They are licensed insolvency practitioners, have no conflict of interest to my knowledge and consent to their appointment. An appointment had to be made straight away and the Respondents had arranged a hand-over.
41. It is also right in principle that the Respondents should not be able to recover costs and expenses, including their remuneration, insofar as they now prove to be unnecessary or wasted. Similarly, they should be responsible for costs and expenses to be incurred as a result of their resignation which would not otherwise have been incurred. I make no finding on this and the issue may not be straightforward. It may also be a matter to determine upon an application for assessment. However, I have given permission for any issues to be determined upon an application for directions by the new administrators to assist the conduct of the administration. I do not exclude any alternative approach.
42. Finally, I mention that during the course of the hearing I floated the question whether the purpose of administration has been sufficiently achieved and, if so, whether the Company should be wound up. I referred to paragraph 79(3) of Schedule B1 but make clear that I have not reached a decision or even a view upon this. I consider it a matter for the new administrators to address, insofar as they consider there is reason to do so.

Order Accordingly