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Private examination of third parties in insolvency proceedings See CLM ¶8172+ Cowlishaw and another v O&D Building Contractors Limited [2009] EWHC 2445 (Ch) The court’s power of private examination is wide and can include any person the court thinks is capable of providing information regarding the company’s promotion, formation, business, dealings, affairs and property (s 236 IA 1986). This can include third parties (i.e. persons who are not officers or employees of the company), whether or not they have a contractual relationship with the company. The fact that the company does not own and would not otherwise be entitled to the information requested (except in the context of disclosure in litigation) does not prevent an order being granted, but it is a factor for the court to take into account to ensure that any order is not unfair, particularly where it will affect third parties. The joint administrators of two companies, JT Ltd and WE Ltd, applied to court for the private examination of O&DBC Ltd, which was engaged by JT Ltd as building contractor for the development of a property owned by WE Ltd. The partly built property was the only significant asset of the two companies in administration, and the administrators wished to consider whether they should attempt to complete the development themselves, or sell the property in its partly completed state. They contended that in order to obtain advice on valuation and reach this decision they needed to see various documents held by O&DBC Ltd in relation to the property, including planning approvals, build contracts, drawings and specifications, guarantees and warranties, and health and safety documentation. The High Court held that the fact that O&DBC Ltd was a third party (i.e. not an officer or employee of JT Ltd or WE Ltd) did not preclude the application for private examination. However, in exercising its discretion, the court ordered O&DBC Ltd to provide the administrators with some, but not all, of the categories of documents requested in order to ensure that the order was not unfair. This was because some of the information requested was available to the administrators from other sources (for example, copies of the planning applications and approvals could be obtained from the local authority) and some would effect O&DBC Ltd’s property and other rights in relation to the documents requested, particularly copyright. Secondly, the court wished to ensure that the administrators were not able to obtain valuable information which could be said to be taking unfair advantage of O&DBC Ltd’s work without paying for it. Purpose of an administration can result in the different treatment of creditors See CLM ¶8711, ¶9015 BLV Realty Organization Ltd and another v Batten and others [2009] EWHC 2994 (Ch) ZIIIHI (a BVI registered company) was incorporated as a special purpose vehicle to undertake the redevelopment of a property. BLV Ltd was a contractor of ZIIIHI and entered into an agreement with it to provide general management and co-ordination of the redevelopment (including the management and co-ordination of other contractors). The redevelopment was over budget and fell behind schedule and ZIIIHI defaulted under its bank's facility. The financial pressures on ZIIIHI also meant that it had been unable to pay certain invoices of BLV Ltd, which had caused BVL Ltd to threaten (as an unsecured creditor) to petition for ZIIIHI’s winding up. To prevent the presentation of the winding up petition ZIIIHI’s bank applied to court for the appointment of administrators instead, in the hope that it could recover its debt if ZIIIHI continued its business by completing the redevelopment of the property with a view to selling the redeveloped units. The administrators confirmed that the objective of the administration was the achievement of a better result for ZIIIHI’s creditors as a whole than would be likely if it immediately entered liquidation (because it was not considered feasible to rescue it as a going concern). The administrators terminated ZIIIHI’s agreement with BVL Ltd, as they considered that BVL Ltd had committed breaches under the agreement and had lost the confidence of the other contractors. BVL Ltd applied for the court’s intervention on the ground that the administrators were acting or had acted so as unfairly to harm its interests as a creditor in the alleged wrongful termination of its agreement with ZIIIHI. The High Court confirmed that administration is a form of class remedy. The obligation of the administrators is to perform their functions in the interests of "the creditors as a whole", which does not mean that the obligation must be performed in the same way for each creditor. For example, as was the case here, the administrators could switch service providers if they thought that a particular service could be provided more cheaply or to a higher standard than was currently being done by a creditor with a continuing contract necessary to the company’s ongoing trading, if this would have a beneficial result to the creditors as a whole. The interests of the creditors as a whole prevail over the particular interest of an individual creditor: and that might result in different treatment. What the administrators decided to do about it was a matter of commercial judgment. In addition, the court considered that BVL Ltd's true complaint was not that its interests as a creditor had been harmed, but that its interests as a contractor after the date of the administration had been treated less favourably than other contractors, because the other contractors had been kept on whereas BLV Ltd had not. Therefore it was unable to apply for the court’s intervention in any event. In addition, BVL Ltd unsuccessfully argued that in continuing to trade the company’s business, the administrators had changed the objective of the administration to that of realising ZIIIHI’s property to distribute the proceeds to one or more of its secured creditors (i.e. the bank) because the unsecured creditors stood to get nothing. The High Court did not accept this argument. It held that administrators can properly pursue the objective of achieving a better result for the company's creditors as a whole than if the company were immediately wound up, even if they anticipate at that time that there is unlikely to be any distribution for the company’s unsecured creditors. In this case, trading the business (rather than simply realising the assets in their present state) represented the best chance of maximising recoveries by realising the best value for what had already been done to the property, which was good for the creditors as a whole (or at least avoided unnecessary harm to the creditors as a whole). Administrators of Lehman Bros seek court’s directions on status of post-administration cash See CLM ¶9014+ Re Lehman Brothers International (Europe) (in administration), Lomas and others v RAB Market Cycles (Master) Fund Limited and another [2009] EWHC 2545 (Ch) The administrators of Lehman Brothers International (Europe) (LBIE) applied to court for directions on how they should treat certain cash attributable to client securities held by LBIE as custodian, subject to a charge in LBIE’s favour, received after LBIE entered into administration. The issue was whether the cash should be: » treated as trust money, segregated and paid to the beneficial owners of the relevant securities from which it derived; or » added to the general assets of LBIE available (subject to prior claims) for distribution to its unsecured creditors, including for that purpose the beneficial owners of the relevant securities. The sums involved were substantial, several £billion, and the administrators sought the court’s confirmation that their view that the cash should be treated as trust money and paid to the relevant beneficial owners as expenses of the administration was correct. The High Court agreed that the cash should be treated as trust money (subject always to LBIE’s charge), confirming that a mere suspension of a beneficiary’s right to demand the return of trust property, brought about by the trustee’s insolvency, does not of itself count against the continuing existence of the trust. In due course, the trust property, once identified, should be returned to qualifying beneficiaries or, in the event of a shortfall, shared out between them. Accordingly, it was unnecessary for the administrators to consider whether payments of equivalent amounts should be paid out as administration expenses; as the cash was client money, it had been segregated and should simply be paid out as such. The administrators have now announced proposals for approval by LBIE’s creditors that would allow the administrators to return the cash held by LBIE on trust to the beneficial owners of the relevant securities. |
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