Goel & Anor v Grant & Anor (As Joint Administrators of Meem SL Ltd) & Anor [2017] EWHC 2688 (Ch)

[2017] EWHC 2688 (Ch)Case No CR 2016 001856
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
In the Matter of MEEM SL LIMITED (In Administration) AND In the Matter of the Insolvency Act 1986
Venue Royal Courts of Justice, Rolls Building, Fetter Lane, London, EC4A 1NLDate 30/10/2017
Before
MR DAVID HALPERN QCSITTING AS A DEPUTY HIGH COURT JUDGE
Between
(1) ANIL GOELApplicants(2) SUSHIL GUPTAApplicant(1) STEPHEN GRANT AND ANTHONY CORK (As Joint Administrators of MEEM SL LIMITED)Respondents(2) KELLY SUMNERRespondent
Mr Donald Lilly (instructed by Rosenblatt Solicitors) for Applicants Ms Bridget Williamson (instructed by Coffin Mew) for the First RespondentsMr Edward Davies QC (instructed by Fox Williams) for Second RespondentHearing Hearing dates: 10 th, 11 th and 12 th October 2017
Judgment ApprovedMr David Halpern QC:
[1]This application arises in the course of a bitter dispute between(1) Mr Anil Goel and his uncle Mr Sushil Gupta (“the Applicants”) and(2) Mr Kelly Sumner, the Second Respondent. The Applicants and Mr Sumner are shareholders and each is (or claims to be) a creditor in Meem SL Ltd (“the Company”), which is now in administration. The First Respondents are the administrators (“the Administrators”). Mr Goel has formulated a claim which he says the Company has against Mr Sumner and others for damages for conspiracy (“the Claim”). The Administrators have decided to dispose of the Claim by auction.[2]The Applicants apply on two grounds to restrain the Administrators from selling the Claim by auction: i) That there is a concluded agreement for the sale of the Claim by the Administrators to Mr Goel; and ii) If there is no concluded agreement, that the proposed sale by auction would unfairly harm the Applicants’ interests and should be restrained under paragraph 74 of Schedule B1 to the Insolvency Act 1986 (“paragraph 74”).[3]I will begin with a brief overview of the facts: i) The Company was formed in 2013 to exploit a product called the Meem memory cable, which was invented and patented by Mr Goel. The product is a mobile phone charger which backs up and saves data every time the phone battery is charged. ii) Mr Sumner provided funds, partly by way of investment in the Company and partly by way of loan to the Company, and he became its managing director. iii) The Applicants hold just over 67.5% of the share capital and Mr Sumner holds just over 11%. iv) A dispute broke out between Mr Goel and Mr Sumner in or about late 2015. I shall refer to this dispute in more detail below. v) Mr Sumner was originally the sole director of the Company. In February 2016 Mr Sumner appointed Mr Brent and Mr Knox to the board. vi) Metis Partners Ltd, who are specialist valuers, valued the intellectual property as being worth between £30,000 and £140,000. There is a dispute as to whether they were given misleading information by Mr Brent. vii) In March 2016 the board resolved to put the Company into administration and in April 2016 the Administrators were appointed. viii) The Administrators had arranged a “pre-pack” sale to Meem Memory Ltd (“MML”), a new company formed by Mr Sumner and his fellow directors. Following the appointment of the Administrators, they sold the business to MML for £1,449,463, comprising £185,000 cash and agreement by MML to take over the liabilities of the Company amounting to £1,274,643. ix) On 13th December 2016 the Applicants’ solicitors, Rosenblatt, sent a letter of claim and draft Particulars of Claim to Fox Williams, the solicitors who had formerly acted for the Company and were now acting for Mr Sumner. The proposed claim comprised a derivative claim to be brought on behalf of the Company plus a personal claim for conspiracy. The basis of the claim is that there was an unlawful-means conspiracy between Messrs Sumner, Brent and Knox to put the Company into administration and to dispose of its assets to MML at an undervalue by way of a “pre-pack”. The damages were said to be at least £11.8m. (I shall refer to the Company’s claim as “the Claim”.) x) There followed email correspondence, in the course of which, say the Applicants, the Administrators concluded an agreement to assign the Company’s Claim to them for £5,750. xi) The Administrators have resolved to dispose of the Claim by auctioning it. The Applicants’ case is that this will cause them unfair harm within the meaning of paragraph 74. The contractual claim[4]The facts relevant to the contractual claim lie within a narrow compass. If it is successful, it will dispose of the entire proceedings. It is therefore convenient to consider this claim first. I must now set out the facts in more detail.[5]On 24th January 2017 Mr Nimmo of Rosenblatt, the Applicants’ solicitor, emailed Mr Grant of Wilkins Kennedy, one of the Administrators, in response to a letter from Mr Grant expressing concern about the costs consequences for the Administrators if a derivative claim were brought by the Applicants. Mr Nimmo said:
“the simplest solution and one which avoids all cost consequences to Meem SL, would be for you to assign the rights of action to our clients rather than merely acquiesce to their permission application.”
[6]On 26th January 2017 Mr Grant replied as follows: “In order to agree to an assignment I would want 1. there to be a full legal and equitable assignment of the claim before proceedings are issued; 2. a fixed fee payable upfront being an amount to cover the cost of drafting the assignment, I would propose £750 plus VAT being the fee I have been quoted, plus an amount to ensure that I could not be accused of not getting value for a company asset 3. the assignment to include an indemnity for adverse costs”.[7]On 27th January 2017 Mr Nimmo emailed Mr Grant in response:
“Re your paragraph 2, to assist me in advising my clients, would you please let me know: 1. The value and identity of Meem SL’s current creditors, and 2. The “amount” you might be looking for in light of your valuation of the company’s assets at c£140k. As previously mentioned, we would like to get this wrapped up fairly soon.”
As previously mentioned, we would like to get this wrapped up fairly soon.”[8]Mr Grant replied enclosing a list of creditors and adding:
“In order to consider your point 2 perhaps you would be so kind as to let me know the quantum of the claim that will be issued.”
[9]Later that day (27th January 2017) Mr Nimmo emailed Mr Grant as follows:
“The claim concerns the company’s assets which you sold on behalf of the company. The quantum of the claim, in financial terms, is therefore either the proprietary value of the assets sold, which you valued at £140k, or the financial benefit which have (sic) accrued from these assets, a benefit whose value has yet to be disclosed by them. I would add, as regards your concern that in selling the rights to the claim you risk being accused of not getting value for a company asset, there is no real risk of this. The only persons who could accuse you of selling company assets at an undervalue are my clients, the majority and controlling shareholders in the company, and it is they to whom you would be assigning the claim.”
[10]On 30th January 2017 Mr Grant emailed Mr Nimmo as follows:
“May I suggest a fixed figure of £5,000 plus VAT for the assignment and a fee of £750 plus VAT for my lawyer to draft the assignment deed?”
[11]On 2nd February 2017 Mr Nimmo emailed Mr Grant as follows:
“As per my email of 30 January, my clients accept your offer to assign the claim in return for £5k + legal fees of £750 plus VAT … and an indemnity for costs. I enclose a draft deed of assignment for you to review.”
[12]On 7th February 2017 Mr Grant replied:
“Apologies for the delay in getting back to you but my lawyer advising me has been tied up …. She is now available to review the draft deed however after discussions I need to ascertain whether the price offered by your client is the best price or whether anyone else would pay more as I have a duty to maximise returns for creditors.”
[13]Mr Nimmo responded on the same day stating that Mr Grant’s offer had been accepted and was not open to renegotiation. Next day (8th February 2017) he wrote to Coffin Mew (the Administrators’ solicitors) as follows:
“We dispute that a binding legal agreement as to your clients’ offer to assign the rights of action to our clients was not agreed. Notwithstanding this, in satisfaction of your client’s obligations to act in the interests of the Company, our clients offer to take an assignment of the rights to the claim, with an indemnity to your clients for costs, in return for nominal consideration of £1 and on condition that any recovery made by your clients would be held on trust for the Company and therefore paid over the Company, less our costs of litigation.”
The parties’ submissions[14]Mr Donald Lilly, who appeared for the Applicants, submitted that the email correspondence which I have set out above contains an offer by Mr Grant on 30th January 2017 and an acceptance by Mr Nimmo on 2nd February 2017. His reasoning was as follows: i) Mr Grant’s email of 26th January set out three pre-conditions. The first was the requirement of “a full legal and equitable assignment of the claim”. It was to be inferred that the purpose of this was solely to ensure that the requirements of section 136 of the Law of Property Act 1925 would be satisfied in due course. The fact that the assignment was required “before proceedings are issued” indicated that it was not a pre-condition to a binding agreement coming into existence upon acceptance of the offer. Section 136 requires a signature, which would not (or arguably would not) be satisfied merely by an exchange of emails. ii) The second condition was agreement as to the amount payable. This was resolved by the email of 30th January. iii) The third was the inclusion of an indemnity in the assignment. This was agreed in principle. Although the wording was not agreed, that was merely a matter of drafting. iv) Accordingly all three conditions were satisfied by 30th January. The email of that date amounted to an offer (not marked “subject to contract”) which was accepted on 2nd February. v) Mr Lilly also relied on the fact that Mr Grant did not communicate further until 7th February and that he did not initially deny that there was a binding contract.[15]Ms Bridget Williamson, who appeared for the Administrators, noted that the Application sought an order in similar terms to the offer made in Rosenblatt’s letter of 8th February (see paragraph 13 above) but that the prayer for relief did not seek specific performance of the alleged agreement, unless this could be spelled out of the catch-all phrase at the end (“such other order as the court considers appropriate”). However, she did not object to the Applicants being allowed to argue that there was an agreement. She made three submissions as to why the court should find that there was no agreement.[16]Firstly, as a matter of construction, there was no offer capable of acceptance. She relied on: i) The tentative language of the emails of 26th January (“In order to agree to an assignment I would want …”) and 27th January (“the “amount” you might be looking for”). ii) The reference in the latter email to “a full legal and equitable assignment”, which clearly showed that Mr Grant intended to instruct solicitors. Where the parties are proposing to instruct solicitors, it would be usual for any negotiations between them before each party has instructed his solicitor to be impliedly subject to contract. This is particularly so where one party is an administrator who has made it clear that he wants the transaction to be dealt with properly so that he will not be open to attack from any creditor or member of the Company. iii) The requirement for the Applicants to pay £750 was a condition precedent to the making of an agreement and it was never satisfied. iv) The terms of the indemnity were never agreed.[17]Secondly, she submitted that any such contract was voidable for misrepresentation. Mr Grant asked Mr Nimmo to state “the quantum of the claim that will be issued”. Ms Williamson said that this question referred not just to the figure in the Particulars of Claim, but also to Mr Nimmo’s view of the real value of the claim. His reply was disingenuous, in that he failed to state that the Applicants valued the claim at some £10m; instead he threw Mr Grant off the scent by referring to a valuation of the assets at about £140,000. She accepted that Mr Grant had seen Mr Nimmo’s letter of claim enclosing draft Particulars of Claim, which valued the claim at some £10m, but said that this was some six weeks earlier and could not therefore be relied on by the Applicants.[18]Thirdly, she submitted that any such contract was renounced by the Applicants, firstly by sending the letter of 8th February and secondly by failing to include any mention of the agreement in their Application.[19]Mr Edward Davies QC, who appeared for Mr Sumner, adopted Ms Williamson’s submissions. He added that, if there was a binding agreement, it would be objectionable on the ground of “unfair harm” for the same reason as the Applicants advanced in respect of the proposed auction. Analysis[20]The hearing before me proceeded on the assumption that an administrator has power to sell a bare cause of action, by way of exception to the rule against champerty. Paragraph 60 of Schedule B1 gives administrators the powers specified in Schedule One, paragraph 2 of which is “power to sell or otherwise dispose of the property of the company by public auction or private contract”. This is in substantially the same terms as paragraph 2 of Schedule 4, which gives liquidators “power to sell any of the company’s property by public auction or private contract”. In Norglen Ltd v. Reed Rains Prudential Ltd [1996] 1 WLR 864 at 875 and [1999] 2 AC 1 at 11E-12E, Lord Hoffmann said that it was well-established that a trustee in bankruptcy was permitted to sell a bare cause of action and he referred with approval to the agreement between counsel that the same applied to a liquidator. Given the similarity in the wording of an administrator’s power of sale and given the desirability of an administrator being able to dispose of assets without incurring “expenditure of money which would otherwise be available for distribution among the creditors” (ibid at 12C), in my judgment counsel were right to proceed on this assumption.[21]The legal principles relating to the formation of contracts were restated by the Supreme Court in RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG [2010] 1 WLR 753. Lord Clarke said at [45]:
“The general principles are not in doubt. Whether there was a binding contract between the parties and if so, upon what terms, depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law required as essential for the formation of legally binding relations. Even if certain terms of economic or other significance have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement.”
At [47] Lord Clarke said that:
“The court should not impose binding contracts on the parties which they have not reached. All will depend on the circumstances.”
At [48] and [49] he approved Lloyd LJ’s formulation in Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601 at 619:
“(1) In order to determine whether a contract has been concluded in the course of correspondence, one must first look to the correspondence as a whole … (2) Even if the parties have reached agreement on all the terms of the proposed contract, nevertheless they may intend that the contract shall not become binding until some further condition has been fulfilled. That is the ordinary ‘subject to contract’ case. (3) Alternatively, they may intend that the contract shall not become binding until some further term or terms have been agreed … (4) Conversely, the parties may intend to be bound forthwith even though there are further terms still to be agreed or some further formality to be fulfilled … (5) If the parties fail to reach agreement on such further terms, the existing contract is not invalidated unless the failure to reach agreement on such further terms renders the contract as a whole unworkable or void for uncertainty. (6) It is sometimes said that the parties must agree on the essential terms and it is only matters of detail which can be left over. This may be misleading, since the word ‘essential’ in that context is ambiguous. If by ‘essential’ one means a term without which the contract cannot be enforced then the statement is true: the law cannot enforce an incomplete contract. If by ‘essential’ one means a term which the parties have agreed to be essential for the formation of a binding contract, then the statement is tautologous. If by ‘essential’ one means only a term which the court regards as important as opposed to a term which the court regards as less important or a matter of detail, the statement is untrue. It is for the parties to decide whether they wish to be bound and if so, by what terms, whether important or unimportant. It is the parties who are, in the memorable phrase coined by the judge [at p 611] ‘the masters of their contractual fate’. Of course the more important the term is the less likely it is that the parties will have left it for future decision. But there is no legal obstacle which stands in the way of the parties agreeing to be bound now while deferring important matters to be agreed later. It happens every day when parties enter into so-called ‘heads of agreement’.”
[22]In Whitehead Mann Ltd v. Cheverney Consulting Ltd [2006] EWCA Civ 1303 at [45], the Chancellor (Sir Andrew Morritt) said:
“Obviously each case depends on its own facts but in my view where, as here, solicitors are involved on both sides, formal written agreements are to be produced and arrangements made for their execution the normal inference will be that the parties are not bound unless and until both of them sign the agreement.”
[23]In my judgment the position should be no different where one party is represented by a solicitor who communicates directly with the other party, in at least circumstances where the other party has stated his intention to instruct his own solicitor to draw up or approve the document. Any other conclusion would encourage solicitors to take advantage of the fact that the other party has not yet instructed a solicitor.[24]I conclude that there was no offer capable of acceptance in the present case, essentially for the reasons given by Ms Williamson. My reasons are as follows: i) The relevant correspondence started with Mr Nimmo floating an idea in his email of 24th January. The idea began life in a very tentative fashion. In my judgment there was no point at which it morphed into an offer capable of acceptance. On the contrary, all that happened was that the parties explored further the terms on which they might be prepared to do a deal, were they minded to do so. ii) Although Mr Grant is a professional man, he is not a solicitor. Mr Nimmo, who is the Applicants’ solicitor, was in direct email with Mr Grant. He knew that Mr Grant intended to instruct a solicitor in relation to the proposed assignment. He also knew that Mr Grant was concerned that the transaction should be unimpeachable by the creditors and members. In my judgment the email exchange was impliedly subject to contract at the outset and there never came a time when its character changed. iii) I have reached this conclusion without regard to the emails after the purported acceptance. These cannot affect the construction of the emails said to constitute offer and acceptance.[25]The Administrators therefore succeed in relation to the first ground because there was no offer capable of acceptance. Had I reached the opposite conclusion, I would have rejected each of Ms Williamsons alternative arguments, for the following reasons: i) The payment of £750 was a condition precedent to performance, not to the making of a contract. ii) The terms which the parties regarded as essential were all sufficiently agreed. The only remaining issue was to draft the document. If the parties had intended to be bound, the contract would not have failed on this ground. iii) As regards misrepresentation, Ms Williamson is reading too much into Mr Grant’s question in which he asked Mr Nimmo to tell him “the quantum of the claim that will be issued”. Mr Nimmo could not reasonably have expected Mr Grant to tell him what the Administrators really thought the claim was worth, and Mr Grant did not ask that question. In any event, Mr Nimmo had copied the letter of claim and draft Particulars of Claim to Mr Grant some six weeks earlier; hence Mr Grant would not have been in any doubt. iv) As regards renunciation, this requires an absolute refusal to perform or a clear and unambiguous assertion that the party will not perform. Mr Nimmo’s letter of 8th February made an alternative offer but did not state that the Applicants were refusing to be bound by the previous alleged offer. Likewise, the failure to refer expressly in the Application to the submission that there was a binding agreement is not sufficiently unambiguous. It might well be that the Applicants lost confidence in this argument, but they did not abandon it.[26]However, if I had accepted that an agreement was reached, I would have accepted Mr Davies’s submission that it was objectionable on the ground of “unfair harm”, in that it would have allowed one creditor to buy the Company’s only remaining asset at a considerable undervalue, at a time when it was not known for certain whether there might be other creditors. It might well be the case that the Applicants recognised this difficulty, which would explain why they made their alternative offer on 8th February 2017. The claim under paragraph 74 The parties’ submissions[27]It might be thought counter-intuitive to allege that a proposal to sell an asset by auction is capable of causing “unfair harm”, given that an auction is often the best way of finding out the market value of an asset. Mr Lilly wisely recognised this difficulty but submitted that this was no ordinary case and that the Claim was unsuitable for disposal by way of auction, for the following reasons: i) The basis of the Company’s Claim is that the directors conspired with Fox Williams to commit deliberate breaches of fiduciary duty(a) by causing the Company to enter into an uncommercial loan with Mr Sumner, which gave him the power to orchestrate the Company’s administration, and(b) by giving misleading information to Metis, which caused them to undervalue the Company’s assets, thereby enabling MML to acquire the business at a substantial undervalue. Mr Lilly submitted that the claim clearly raises a triable issue, although he accepted, for the purpose of this application, that there was a triable defence. It was impossible for the court on this application to put a value on the Claim. ii) The benefit of any claim is always likely to be more difficult to value than a tangible asset or one for which there is a recognised market. The court should not embark on a mini-trial of the merits of the Claim. iii) A further difficulty in this case is that the prospects of success depend principally on Mr Goel’s evidence. The Claim therefore has limited value to anyone except Mr Goel and Mr Sumner, since a third party would not pay the full market price for an asset that was dependent upon Mr Goel’s willingness to testify and upon the prospect that his evidence would be accepted. iv) The Administrators have made no real attempt to value the Claim. They should have taken advice before reaching a decision as to how to dispose of it. v) The only known creditors are Mr Sumner and Mr Goel. If Mr Sumner were the successful bidder at the auction, he would gain no benefit as creditor, because the amount which he would recover by way of dividend in the administration would be less than the amount he was paying. The real benefit to him would be that he could stifle the claim, but that is not a benefit to him qua creditor. Conversely, the Applicants’ proposal that they take an assignment of the Claim and hold the fruits on trust for the Company (see paragraph 13 above) would confer a real benefit on Mr Sumner qua creditor. vi) Mr Sumner is much wealthier than the Applicants and would be likely to outbid him in order to stifle the Claim. An auction will not determine the true value of the Claim, but merely the amount which the Applicants can afford to bid. The evidence of the Applicants’ financial position is as follows. Mr Goel has no assets, whilst Mr Gupta has net assets of £3.5m. There is evidence from an Indian lawyer that an Indian resident may remit up to US $250,000 outside India each year and that this sum may be remitted by each of his immediate family members, thereby increasing the total in Mr Gupta’s case to $1m a year. Mr Gupta could apply to the Indian authorities for permission to remit more money, but their decision would be entirely discretionary. It can take up to 6 weeks to make the remittance. vii) The test of unfair harm requires the Applicants to prove that there is a causative link between the Administrators’ proposed actions and the harm to the Applicants, and that this harm is unfair. It does not require proof that the Administrators’ decision is perverse, although proof of perversity is likely to be good evidence of unfairness. Nor does it necessarily require differential treatment of different creditors.[28]Mr Lilly accordingly submitted that the Administrators should have accepted the Applicants’ proposal that they take an assignment of the Claim for a nominal consideration and hold the fruits of the litigation on trust for the Company, subject to recouping their costs (see paragraph 13 above). It is unpalatable that the Applicants should have to outbid the wrongdoer in order to obtain access to justice.[29]Ms Williamson and Mr Davies submitted as follows: i) The burden is on the Applicants to show that the Administrators have not put forward any cogent reason for their proposal to hold an auction. The court should not substitute its own decision. ii) The Administrators have cogent reasons for their decision, in that: a) It is desirable to dispose of the Claim and obtain payment quickly, so that the administration is not unduly prolonged. If the Claim is assigned to the Applicants, it could take many years before the litigation bears fruit; and b) It is also desirable in order to achieve certainty. If the Claim were sold to the Applicants, there is no certainty that the Applicants would be able or willing to fund the litigation and no certainty of success. c) There is a risk that the Administrators might be held liable for a third- party costs order, on the ground that they had a beneficial interest in the proceedings: Hamilton v. Official Receiver [1998] BPIR 602 at 604, Laddie J. iii) It is unclear whether Mr Goel and Mr Sumner are the only creditors; others might emerge. iv) It is irrelevant that Mr Sumner is allegedly a wrongdoer and would benefit from being able to stifle the Claim. The Court’s concern is only with the position of the creditors qua creditors. v) The Claim has a very low prospect of success and a very low value, because the directors acted in good faith and reasonably in selling the business to MML: a) The Company’s main asset was its intellectual property rights, but its product was not yet ready for mass production and the Company was saddled with liabilities. b) An independent valuer had concluded that the Company’s business was worth no more than £140,000. The information which Mr Brent withheld from Metis was merely a projection of future profits prepared for the benefit of funders and on the basis of the most favourable possible assumptions. In any event, Metis are experienced specialist valuers and well used to valuing in these circumstances. c) The price paid by MML reflected the value to MML as a special purchaser. d) The Applicants had put forward no sensible proposals to address the Company’s financial problems. The only proposal emanated from a Mr Vadhera, but it was too little and too late. e) Mr Sumner was not obliged to continue funding the Company, and nobody else was likely to do so whilst Mr Goel continued to have a controlling interest. Far from being engaged in a conspiracy, the evidence showed that Mr Sumner had tried to save the Company. f) Accordingly there was no sensible alternative to administration. If the Company had carried on business, the directors would have been at risk of being sued for wrongful trading. g) The directors could not be liable under section 175 of the Companies Act 2006 (duty to avoid conflicts of interest) in respect of the sale to MML, since that section expressly excludes transactions with the company. Although section 190 requires members’ approval for substantial property transactions between a company and its directors or persons connected with them, this does not apply to companies in administration (section 193). vi) If the Claim is really worth as much as the Applicants said, they would need to explain why they had not obtained third-party funding.[30]Ms Williamson also submitted that the proceedings are misconceived, because paragraph 74 applies only where the Administrators unfairly treat one or more creditors differently from other creditors. The Applicants’ real complaint is that the directors were motivated by an improper motive in appointing administrators. The Applicants should therefore have applied under paragraph 81 of Schedule B1 to have the Administrators removed from office. (Mr Davies, in contrast to Ms Williamson, accepted that paragraph 74 was not necessarily inappropriate in these circumstances.) The law[31]Paragraph 74(1) provides as follows:
“A creditor or member of a company in administration may apply to the court claiming that – …. (b) the administrator proposes to act in a way which would unfairly harm the interests of the applicant (whether alone or in common with some or all other members or creditors).” (b) the administrator proposes to act in a way which would unfairly harm the interests of the applicant (whether alone or in common with some or all other members or creditors).”
[32]In Re Coniston Hotel (Kent) LLP [2013] 2 BCLC 405, Norris J said at [36]:
“Paragraph 74 does not exist to enable individually disgruntled creditors to pursue administrators for compensation. Its focus is “unfair harm”: and that, I think, will ordinarily mean unequal or differential treatment to the disadvantage of the applicant (or applicant class) which cannot be justified by reference to the interests of the creditors as a whole or to achieving the objective of the administration. (The reference to an administrator acting unfairly to harm the interests of “all other members or creditors”, so that unequal or differential treatment had not occurred, would (I think) only arise in relation to issues concerning the expenses of the administration, or where the administrator was also an office holder in another insolvency and acted unfairly prejudicially as regards the stakeholders in Company A in promoting the interests the stakeholders in Company B).”
The two examples which Norris J gives involving unfair harm to all the creditors are both cases where there is differential treatment between all the creditors as a body and some other party, be it the administrator in relation to his own expenses or the stakeholders in an associated company. Norris J’s approach has been followed by McCloskey J sitting in the High Court in Northern Ireland in Re Sheridan Millennium Ltd, Curistan v. Keenan [2013] NICh 13.[33]However, in Hockin v. Marsden [2014] 2 BCLC 531, Mr Nicholas Le Poidevin QC, after referring to Coniston and Sheridan, said at [19]:
“Paragraph 74 requires unfair harm, not merely harm, and the requirement of unfairness certainly prevents a creditor complaining of a disadvantage to his own interests when the disadvantage is justifiable by reference to the interests of the creditors as a whole. But I do not myself see why the requisite unfairness must necessarily be found in an unjustifiable discrimination. A lack of commercial justification for a decision causing harm to the creditors as a whole may be unfair in the sense that the harm is not one which they should be expected to suffer. I am not sure that Norris J had such a case in mind in the passage quoted from the Coniston case [2013] 2 BCLC 405. In the Coniston case, the applicants (who appear to have been acting in person earlier in the proceedings) had muddled claims for professional negligence against the administrators for acts before the administration commenced with claims for harm suffered by them as members or creditors and the decision, given on a striking out application, was one of case management.”
[34]I respectfully agree. As a matter of language the term “unfair” is not limited to cases of unequal treatment but is capable of including conduct which is unfair to everybody within the class. Unfairness is, of course, used in the sense of unfair discrimination in section 994 of the Companies Act 2006, but it would be dangerous to look to that section for an analogy, because the language is different. The predecessor to paragraph 74 (section 27 of the Insolvency Act 1986) referred to unfair prejudice but that wording no longer appears in the current legislation.[35]I do not accept Ms Williamson’s submission that paragraph 74 cannot be invoked in a case which also falls within paragraph 81. There is nothing in the language of paragraph 74 to exclude cases falling within paragraph 81 and I see no reason to give the paragraph a restricted meaning. Where an applicant seeks to bypass the restrictions which would be imposed, if the application were made under a different paragraph, it is open to the court to exercise its discretion to refuse relief on the ground that Parliament did not intend those restrictions to be evaded. However, this can be done in the course of an application under paragraph 74. It accords with the general scheme of Schedule B1 that the court should have a wider, rather than a narrower, power to grant relief (subject to what I say in the next paragraph).[36]In Re Edennote Ltd [1998] BCC 718 at 722G-H, the Court of Appeal held that the court would only interfere with the decision of a liquidator if his decision was “so utterly unreasonable and absurd that no reasonable man would have done it, simply by selling an asset of the company without taking into account the possibility that a third party might well have made a better offer than he to whom it was sold.”[37]The threshold for the court to interfere with the decision of an administrator regarding the sale of an asset is at least as high as it is in the case of a liquidator, given that administrators are typically appointed in order to achieve speedy results. This is reflected in paragraph 4 of Schedule B1, which says that:
“The administrator of a company must perform his functions as quickly and efficiently as is reasonably practicable.”
In Re C E King Ltd [2000] 2 BCLC 297 at 302-3 Neuberger J said:
“First, prima facie, what the administrators should do about [a particular] contract is a commercial decision. Secondly, at least in principle and in general, it is not for the court to interfere with such commercial decisions: those are to be left to the administrator. Thirdly, if the administrators are proposing to take a course which is based on a wrong appreciation of the law and/or is conspicuously unfair to a particular creditor or creditors or contractor of the company, then the court can and, in an appropriate case, should be prepared to interfere. I put it in that somewhat neutral way because even it is appropriate for the court to interfere, the actual course the court should take must inevitably depend on the actual facts and circumstances of the case.”
[38]The position remains the same following the amendments to the Act in 2002. In Re Lehman Brothers International (Europe) [2009] BCC 632, Blackburne J said at [47] :
“It is plain in my view that within the confines of his duties and subject to whatever proposals are approved by the creditors under para.53, the administrator must be accorded a wide measure of latitude in the way he goes about the exercise of his powers so as to achieve the statutory purpose.”
[39]Mr Lilly placed considerable reliance on Faryab v. Smith [2001] BPIR 246. Mr Faryab was declared bankrupt at a time when the only asset in his estate was a claim against his former solicitors for negligence, which was valued at between £2m and £5m. The bankrupt asked the trustee in bankruptcy to assign the claim to him and undertook to hold the proceeds on trust for his creditors. However, the trustee in bankruptcy agreed to sell to the potential defendants for £17,000, which was just sufficient to cover his costs. Robert Walker LJ said at [32] that:
“[T]he realisation of a cause of action (especially a cause of action of some complexity) is a different matter and less obviously a matter for business commonsense than the realisation of more conventional assets such as freehold or leasehold property or other tangible moveable property.”
At [33], Robert Walker LJ also cited with approval a dictum from Edennote that a reasonable liquidator means one who had sought advice where necessary. At [38] he said that, the more difficult it was to evaluate a claim, the stronger the argument for using the sort of procedure described by Lord Hoffmann in Stein v. Blake [1996] AC 243 at 260 (i.e. the assignment of the claim to the bankrupt; Lord Hoffmann was not considering the possibility of an auction of the Claim). At [40] he held that the claim was “not obviously hopeless or near hopeless” and:
“(although I do not attach much weight to this) that there is a public interest element in such cases. Bankruptcy should not be too readily available as a means of stifling claims which may have substance. Sometimes, indeed, it may be proper and the only sensible course open to a trustee in bankruptcy who has no funds at all to assign a claim to the defendant to the claim, even knowing that that means that the claim will meet a sudden death.”
[40]On the facts of Faryab it is difficult to see how any reasonable trustee in bankruptcy could properly sell, for a fixed price of £17,000, a claim which was potentially worth at least £2m. At all events, no reasonable trustee in bankruptcy would have taken that course without seeking advice, and no reasonable adviser would have advised him to take that course without a proper valuation of the claim. However, this cannot be transposed to the present case, where the Administrators are proposing to auction the Claim, not to sell it for a fixed price.[41]There remains the question whether a claim that might have substance will thereby be stifled. In Hopkins v. TL Dallas Group Ltd [2005] 1 BCLC 543 Lightman J concluded at [105]:
“The action is a reminder of the dangers inherent in the modern practice of liquidators and trustees in bankruptcy selling causes of action. It would surely in the ordinary case be fairer to all concerned and more advantageous to the estate of the insolvent company or bankrupt, if before any such sale was concluded, the liquidator or trustee sought bids for the cause of action from the party against whom they may lie. It will often be worth that party making a payment exceeding the price otherwise obtainable from a third party to buy from and accordingly settle the claim with the liquidator or trustee. This must in any event have been likely in this case.”
[42]In Whitehouse v. Wilson [2007] BCC 595 the Court of Appeal upheld the decision of the judge who sanctioned the sale of a claim to the majority shareholder (who was the defendant to the claim) for a fixed price, instead of selling it to the minority shareholder (who wished to pursue the claim). The liquidator was entitled to conclude(i) that the transaction was of benefit to post-liquidation creditors on the grounds of certainty and finality and(ii) that the interests of pre-liquidation creditors (principally the minority shareholder) should not be allowed to trump the interests of post-liquidation creditors. Chadwick LJ cited Robert Walker LJ’s reference to the public interest and added at [55]:
“On a proper understanding of the judgment in Faryab v. Smith it is plain, if I may say so, that the decision did not turn on a perception that the public interest required meritorious claims to be pursued at the expense of the creditors; the decision turned on the Court’s view that the trustee in bankruptcy, in that case, had failed properly to identify where the best interests of the creditors lay.”
Lindsay J, with whom Wilson LJ agreed, considered that public policy had a greater role to play but accepted that it would not usually be a decisive consideration. He said at [78]:
“Whilst introducing such views into the balance might seldom tip a response to an offer one way or the other, it would never be imprudent for a liquidator, when consulting the Court, to set out his reflections upon the public interest in the circumstances of his particular case.”
[43]Finally, I will mention Expenses Reduction Analysts (UK) Ltd v. Marfleet [2013] EWHC 1089 (Ch), since Mr Lilly placed considerable reliance on it. The company in that case was put into administration by a secured creditor and subsequently came out of administration. Thereafter the applicant sought permission to continue a derivative claim on behalf of the company. The defendant submitted that the claim was unmeritorious, since the administrator had not seen fit to bring it whilst in office. HH Judge Cooke rejected the defendant’s argument, saying that it would not have been in the administrator’s interest to pursue a claim which might have rebounded on him. In my judgment this authority is of no real assistance to Mr Lilly. In the first place it does not decide whether a derivative claim may be brought whilst the company remains in administration. Secondly, the decision whether the claim was sufficiently meritorious to justify a derivative action was one which turned on its own facts.[44]The conclusions which I draw from these authorities are as follows: i) The paradigm case under paragraph 74 arises where the administrator treats the applicant (either alone or together with further creditors) less favourably than another creditor or creditors. This constitutes harm, but it is not necessarily unfair harm. In order to be unfair, the applicant has to show that the decision cannot be justified by reference to the interests of the creditors as a whole or to achieving the objective of the administration. Mr Lilly might well be correct in saying that unfair harm which consists of differential treatment does not have to be perverse, but it is unnecessary for me to reach any concluded view on that point. ii) I accept that the concept of unfair harm in paragraph 74 is not limited to differential treatment but can include a decision of the administrator to sell an asset at an undervalue, thereby causing harm to all creditors. However, in a case where there is no differential treatment of creditors, the court will not interfere with the administrator’s decision to sell an asset unless the decision does not withstand logical analysis. This probably means the same thing as perversity. iii) A cause of action is typically a difficult asset to value. If it appears that it might have a substantial value, no reasonable administrator would sell it for a fixed price without properly considering its value or finding a sensible way of bypassing the need to do so. In many cases it will not be possible to consider its value properly without obtaining expert assistance. iv) However, it does not follow that the administrator is necessarily acting unreasonably if he sells it by auction. Whether or not this is unreasonable will depend on an analysis of the facts in each case. In an appropriate case, the process of testing the market by holding an auction may make it reasonable to proceed without seeking valuation advice, particularly where the claim is a difficult one to value. v) Robert Walker LJ suggested in Faryab that there may be a public interest in preventing claims from being bought by defendants in order to stifle them, but he accorded little weight to this principle, at least on the facts of that case, and I have not been taken to any authority in which it has played a significant role in the decision. It is a relevant factor but one which is likely to be, at best, a marginal factor, save in an extreme case amounting to an abuse, such as the facts of Giles v. Rhind [2006] Ch 618 at [66]. Does the Administrators’ decision cause unfair harm to the Applicants?[45]Mr Lilly was faced with the dilemma that frequently faces anyone addressing the court in relation to a summary jurisdiction, viz. how to demonstrate that a claim is arguable without a mini-trial. Unsurprisingly he sought to show me a few nuggets, which Ms Williamson and Mr Davies then sought to demonstrate were dross, not gold. It soon became clear that I would be unable to come to any conclusion on the strength of the Applicants’ case, and that, in any event, I should say as little as possible about the merits of the Claim, so as not to prejudge the trial, if it ever happens.[46]I accept the submissions of Ms Williamson and Mr Davies that: i) The Applicants’ offer will lead to considerable uncertainty, since there is no certainty(a) that the Applicants will have the means to pursue the litigation,(b) that it will succeed, or(c) that it will result in substantial recovery. It will also lead to considerable delay, because it may take many years for the claim, if successful, to result in any recovery. By contrast, the proposed auction will result in the certainty of a fixed price without delay. ii) Mr Gupta is a man of substantial means. There would appear to be no real difficulty in his transferring at least $1m to England in order to bid for the Claim. Further, if the Claim is a good one, there is no satisfactory explanation for the Claimants’ failure to obtain third-party funding. iii) The court should not give much weight to the argument that it is in the public interest to ensure that substantial claims are not stifled. In any event, Mr Gupta is able to offer a substantial sum to buy the Claim, and can thereby ensure that Mr Sumner does not pay an insubstantial sum in order to stifle it. In these circumstances, the bidding process should be seen, not as a means of allowing a wrongdoer to stifle a claim, but as akin to negotiations between claimants and defendants in order to compromise a claim. iv) I am not in a position to make any finding of fact as to whether there are or might be other creditors; nor am I in a position to make any finding of fact as to whether Mr Sumner is conspiring with his fellow directors to stifle the Claim. Disposition[47]I therefore conclude that the Applicants have failed to establish: i) That the Administrators are contractually bound to sell the Claim to them or ii) That the Administrators’ proposal to dispose of the Claim by auction will unfairly harm the Applicants’ interests.[48]Accordingly the application is dismissed. I will hear the parties in relation to costs and any consequential matters on a date to be agreed. I direct, pursuant to CPR r. 52.12, that time for filing any appellant’s notice shall run from the date of that hearing.

Cited in 2 later judgments