Dealing with conflict – the additional administrator
Insolvency Bitesize - November 2018
The High Court has confirmed that it has the power to appoint an interim additional joint administrator but will exercise it only sparingly.
In Re Zinc Hotels  EWHC 1936 (Ch), shareholders sought interim relief in the form of the appointment of additional “conflicts” administrators. Their function would be to represent the shareholders’ interests in circumstances where, they alleged, the existing administrators lacked independence and were conflicted due to their close relationship with the secured lenders.
Carr J clarified several important points:
- no provisional administration: the court has no power to appoint a provisional administrator (i.e. before the company has been put into administration);
- additional administrators allowed: once a company has been placed into administration, the court does have power to appoint an additional administrator under Paragraph 103 of Schedule B1 (but it has no inherent jurisdiction to do so);
- interim administrators are possible: as well as on a final basis, the court may exercise its power under Paragraph 103 on an interim basis, albeit that would be unusual; but
- no derogation from Paragraph 103 permitted: the court has no power to appoint an additional administrator unless the conditions in Paragraph 103 are complied with.
The shareholders’ application was refused on the facts because they had no standing to make the application. The administrators had been appointed by the secured lenders under Paragraph 14 of Schedule B1. Paragraph 103 provided that in those circumstances, an additional administrator could only be appointed by the secured lender or by the court on the application of the existing administrators. The court had no power to ignore the conditions in that Paragraph. In what was essentially an attempt by the shareholders to disrupt the sales process (which would see realisations paid to the secured creditors), the High Court was fairly scathing of the shareholders' conduct and disapproved of the various unsubstantiated/incorrect allegations that had been made by the shareholders.
The decision is also helpful for potential administrators and their lawyers as it reminds us that:
- prior relationship not an absolute bar to appointment: there is no inherent conflict of interest where an administrator and the secured creditors have a prior relationship – e.g. where the administrators’ firm has previously carried out a contingency planning exercise. This was acknowledged as “neither unusual nor out of the ordinary”; and
- lawyers may act for more than one interested party: there is no inherent conflict of interest where the same firm of solicitors acts for both the office-holder and for a creditor.
The decision contrasts with situations where administrators are required to investigate their own conduct or potentially bring claims in respect of work done by their own firm before administration. In those cases, given the very clear risk of conflicts, it will be appropriate to remove the incumbent administrators and appoint new ones – as we highlighted in our April 2018 edition in relation to the pre-pack case VE Vegas.