Insolvency: A claim on the administrators?

Paragraph 75 of sched B1 to the Insolvency Act 1986 allows the court, on the application of a stakeholder, to examine the conduct of a company’s administrator. If the court considers that breaches of duty occurred, it may order the administrator, among other things, to contribute a sum by way of compensation.

It is rarely invoked in Scotland and there is limited Scottish authority. Insolvency professionals therefore awaited with interest the Lord Ordinary’s judgment in Joint Liquidators of RFC 2012 plc, Noters [2021] CSOH 99 (6 October 2021).

The background is well publicised and stems from the demise of Rangers Football Club. Here, it is possible only to consider selected facets of the case.

Alleged failures

The liquidators of the club applied to the court under para 75, claiming almost £48 million of losses. Their allegations fell into two chapters: (1) that the administrators acted in breach of their duties by failing to manage costs properly during the administration; and (2) that the administrators failed to take reasonable care to obtain the best price for the company’s assets, or at least its heritable property.

It was claimed the administrators had failed to manage overheads by actioning their original strategy of playing and non-playing staff redundancies, and that the possibility of selling players for value was not examined. In particular, there was a breach of duty for failing to accept an offer of £1.7 million for (player) Steven Naismith.

On best price, the liquidators contended that the administrators failed to take advice on the value of the Rangers brand, and on the heritable assets, for example by exploring a sale and leaseback arrangement of Ibrox Stadium and Murray Park.

Further, they failed to address deficiencies in their original exit strategy of a CVA. This included the opposition of HMRC to a CVA and the inability to force a transfer of the shares in the company to any preferred bidder.

The tests

The court identified that an administrator owes a duty to the company to carry out their duties with the standard of care to be expected of “an ordinarily skilled and careful insolvency practitioner”. However, that standard is a spectrum. It ranges from mere “reasonable care” for functions not needing specialist skills from the administrator, to the Hunter v Hanley test at the other end of the scale.

Significantly, the court underlined that an administrator has a duty to take specialist advice on matters outwith their own expertise. Where an administrator seeks and follows advice from apparently competent advisers, they will have complied with their duty, even where that advice was incorrect.

The court further recognised that passions within the fanbase may present challenges for the administrators and staff in carrying out their duties. However, the court underlined that an administrator must not allow such distractions to deflect from fulfilment of their statutory duties.

Summary

The Lord Ordinary levelled significant criticism at the actings of the administrators. Their failings included an overreliance on advice from (manager) Ally McCoist, rather than from more dispassionate voices when considering redundancies, and a failure to inform themselves of options within the player transfer market.

However, the court did find that the decision to proceed by way of wage reduction rather than redundancies was reasonable, because this course did not produce a demonstrable difference in savings.

The court found that administrators should have considered a strategy for the sale of players. While not all of the eligible players could have been sold, the failure to pursue a sale strategy resulted in loss.

Regarding a failure to obtain the best possible price, the court did not accept that the failure to consider the value of the Rangers brand was a breach of duty. The inextricable link of brand to club meant it would not have been practical to sell the brand separately.

However, the administrators did breach their duties in relation to the heritable property. A valuation of Ibrox and Murray Park was obtained, but advice was not sought on the options available for realisation of the value of the property separately from the rest of the business. As offers for the whole business realised little more than the value of the property alone, it was incumbent on the administrators to explore alternative means of realising the value of the property.

Overall the case is a valuable examination of the approach a court will take in examining the conduct of a former administrator, and the award of £3.4 million a salutary lesson that breaches of duty can have financial consequences for the practitioner.