Administrators, conflicts of interest and prior professional relationships

The UK courts in a series of judgments last year have provided useful guidance on the level of previous professional engagement which would rule an administrator out of accepting a role in the insolvency of a company.

In New Zealand, conflicts of interest will generally be addressed at the outset of any administration as part of the section 280 process. But the pragmatic approach adopted in the UK will assist in this decision-making.

Zinc Hotels v Beveridge1 Context The administrators decided to proceed with asset sales which the company had embarked upon before it was put into administration.

But before being appointed, they had been engaged by the secured lender to conduct a contingency planning exercise with the company, including preparing to accept a potential appointment as administrators of companies in the group.

The shareholders applied to the Court to have them removed due to a conflict of interest.

Decision The Court accepted that in most insolvencies, the proposed administrators will have been engaged prior to the commencement of the insolvency proceedings by a secured creditor.

The Court saw no evidence that the administrators were conflicted. The administrators did not advise the secured lender to put the company into administration.

Davy v Money2 The sole director of a company in liquidation brought a claim against the joint administrators appointed by a secured creditor alleging that they had failed to exercise independent judgement and had instead paid excessive regard to the interests and wishes of the appointing creditor.

Decision The Court held there was no absolute bar upon the appointment of administrators who had a prior business relationship with the secured creditors and had been nominated by them. The question was whether they could be relied upon to act impartially and in accordance with their duties.

That required an assessment of all the circumstances, and of the appointed administrator's competency and ability to discharge fiduciary duties to the company.

On the complicated and lengthy facts of the case, the Court found that the administrators acted independently and in accordance with the statutory objectives of the administration.

VE Vegas v Shinners3 Context The board and management of Company A formed a new company (Company B). Company A then engaged an accounting firm that advised it to conduct a pre-pack sale to Company B and also advised on insolvency options.

When Company A went into...