The High Court, exercising its supervisory jurisdiction over the conduct of insolvency proceedings, recently clarified the circumstances under which an administrator may be removed from office.
Facts:
The case involves the administration of a company named Windward Prospects Ltd. The dispute is between the administrators, Finbarr O'Connell and Colin Hardman, and the company's main creditors, BTI 2014 LLC and BAT Industries plc (BAT), who together hold at least 93% of the total creditor claims.
The underlying issue for the company dates back to a series of dividends it paid to its former holding company, Sequana SA. One of these dividend payments was found by the Court to be in breach of the Insolvency Act 1986. This led to a funding agreement that assigned the company’s claims against its former directors to BTI, with BAT funding the litigation. In return, the company was obligated to make repayments to BTI, also owing BAT a separate indemnity.
A major point of contention was a conflict of interest arising. The administrators' firm, Smith & Williamson (S&W), had previously advised the former directors of the company on the very transactions against which the administrators were now pursuing legal claims.
Decision:
The High Court ordered the removal of the current administrators, Finbarr O’Connell and Colin Hardman, and their replacement by the new administrators nominated by the applicants, BTI 2014 LLC and BAT Industries plc.
The Court found that the administrators, Finbarr O'Connell and Colin Hardman, had an irresolvable conflict of interest. This arose from O'Connell's prior professional advice to the company's directors on the very transactions that the administrators were now tasked with investigating and bringing legal claims against. The Judge concluded that this conflict was so deep-seated that it could not be managed by simply appointing a second, "Conflict Administrator," because such an appointment would leave the existing administrators with "almost nothing left to do".
The Judge found that the administrators' recent behaviour showed they had lost objectivity. This was particularly evident in a series of "extraordinary emails" sent by O'Connell, which the Judge noted contained "vituperative attacks" on the applicants and their legal counsel. The Court concluded that this conduct justified the applicants' loss of confidence, which he deemed to be "reasonable" and not merely an attempt to undermine the administration.
The administrators argued that the applicants, in seeking to remove them, were acting against the interests of the general body of creditors. The Judge rejected this argument, finding that the applicants, who represented 93% of the creditors, were not in a position which was "fundamentally adverse" to the others. He systematically dismissed each of the administrators' seven points of dispute, concluding they were either without substance or did not create a legitimate conflict. The Judge found no obstacle to appointing the new administrators nominated by the applicants.
Implications:
This judgement reinforces the principle that an administrator is a fiduciary whose primary duty is to act in the best interests of the creditors as a whole. The Court's willingness to remove an administrator based on a loss of confidence from the majority of creditors, even without a finding of past wrongdoing, sets a strong precedent. This implies that administrators cannot simply disregard the wishes of a large creditor group, particularly when those wishes are supported by legitimate concerns about the administration's conduct.
The ruling clarifies that not all conflicts of interest can be solved by simply appointing a "Conflict Administrator". If a conflict is so fundamental that it compromises an administrator's ability to perform their core functions, such as overseeing the most valuable asset (in this case, litigation against directors), then removal is the only appropriate solution. The judgement sends a clear message that insolvency practitioners must proactively and transparently address conflicts from the outset, as any reactive, attempt to manage the conflict “post-dispute” will be viewed unfavourably.