The facts
In the case of Angel Group Ltd and others [2015] EWHC 3624, Administrators from KPMG were appointed to Angel Group Limited and to seven of its subsidiaries. The Bank of Scotland was the only secured creditor, and was owed a residual balance of £20 million.
The companies owned a residential and commercial property portfolio and part of the companies’ business was to provide residential accommodation to asylum seekers pursuant to a contract with the UK Border Agency.
The Administrators asserted that the companies had claims against the companies' original owner and controlling party, Ms Davey, for unlawfully extracting money by fraudulently backdating transactions which paid substantial amounts to her. Conversely Ms Davey claimed that Bank of Scotland and KPMG conspired to artificially distress the companies to push them into a formal insolvency. Ms Davey complained that (amongst other things):
- the Administrators failed to acknowledge a conflict of interest that arose from the Administrators' pre-appointment work conducted on behalf of the bank
- the Administrators failed to investigate claims that the companies might have had against various third parties including the UK Border Agency
- placing the companies into the bank’s business support unit “drained millions of pounds away from the cash flow" thereby artificially distressing the companies.
All parties agreed that the companies should move into liquidation with four liquidators appointed – two chosen by Ms Davey to conduct the claims she asserted against the bank and certain third parties; and two chosen by the bank to complete the disposal of the companies’ assets and to pursue any claims against Ms Davey. The Court was asked to determine the best mechanism to deal with the various issues.
The issues
- How to wind up the companies so that the individuals nominated by Ms Davey and the bank were able to act as Liquidators.
It was agreed that there were no grounds for a creditors’ voluntary liquidation under paragraph 83 of Schedule B1 of the Insolvency Act 1986 (the "Act") so the companies needed to be wound up by the Court. However, the Court only had the power to appoint the Official Receiver as Liquidator in such circumstances (Re Exchange Travel [1992] BCC 954).
It was also agreed that appointing the Official Receiver would be inappropriate - being unfamiliar with the facts and disputes in play the Official Receiver would be unlikely to come up with a better solution than the one negotiated by the parties.
The solution reached was for the two existing Administrators to appoint the four nominees as Administrators, with their role limited to appointing themselves as Liquidators.
- Did the Court have the power to sanction the Memorandum of Understanding?
A Memorandum of Understanding had been proposed to deal with (amongst other things): (i) the alleged conflicts of interest by separating the roles of and the litigation expenses incurred by the two sets of Liquidators; (ii) access to documents required in the various claims; and (iii) the Liquidators’ remuneration.
The Court concluded that it had the power (pursuant to section 168(3) of the Act) to take the “pragmatic course” and direct the Liquidators to enter into the Memorandum of Understanding.
- When should the Administrators obtain their discharge?
The Court also considered how to deal with the discharge of the various Administrators. The Court accepted that paragraphs 98 and 75 of Schedule B1 of the Act create a framework whereby Administrators will generally obtain their discharge once they vacate office (paragraph 98) and that after such discharge a claim in relation to the conduct of Administrators must be made pursuant to paragraph 75. Notwithstanding this framework, the current Administrators agreed that it was usual for discharge under paragraph 98 to be delayed whilst investigations are conducted by the liquidator into the handling of the administration.
The current Administrators proposed a delay of 6 months, Ms Davey proposed 3 years and the incoming Liquidators chosen by Ms Davey asked for an indefinite delay to investigate the handing of the Administrations due to the complex matrix of claims and the “voluminous documentation”.
The Court noted that no case had been identified where there was a delay of more than three months and that neither “the complexity of the claims or the seriousness of the allegations…[justified]…a significant departure from the court’s usual practice”. However, the Court did decide to allow a delay of 6 months in accordance with the current Administrators’ suggestion. The Court determined that this was a sufficient length of time for the incoming Liquidators to investigate any claims but that it was short enough to prevent disproportionately lengthy and costly investigations being undertaken by the Liquidators which would “threaten to make serious inroads into any sums available to creditors".
What does this mean for practitioners?
This case demonstrates the pragmatic steps a Court will take to resolve issues arising when conflicts of interest are alleged.
The Judge emphasised that this was a case where discipline was required to be exercised over the conduct of the nominated Liquidators and that the Court was unwilling to postpone the Administrators' discharge indefinitely.
Liquidators should therefore make sure that any potential claims are investigated promptly and efficiently, with careful consideration of the foundation for such claims and the likely costs incurred.