In the recent case of Green v SCL Group Ltd and others [2019] EWHC 954 (Ch), the High Court considered whether to appoint the incumbent administrators of the Cambridge Analytica companies as liquidators, where objections to their conduct were raised by a disgruntled contingent creditor. In his judgment, and in granting the appointment, Norris J provided some useful guidance to administrators with regard to their decision-making and duties.
Background
The business of the ‘Cambridge Analytica’ group of companies involved the acquisition and analysis of data and the use of that analysis to create targeted advertising for clients. Famously, amongst the clients of Cambridge Analytica were certain political parties and campaign groups who used their services in an attempt to influence voting behaviour.
Following controversy around the Cambridge Analytica business model, a number of companies in the group faced financial difficulties and, on taking insolvency advice, it was proposed that they should enter administration. The parent company agreed to provide a guarantee for payment of the proposed administrators’ fees.
The intention of the proposed administrators was to achieve a sale of the business of the companies. On that basis, the administrators confirmed that they considered that the objective of the administrations was reasonably likely to be achieved, notwithstanding the negative press around Cambridge Analytica at the time. In reliance on their assessment, the court granted the administration order.
However, upon the making of the administration order, it quickly became apparent that the companies could not continue to trade because the Information Commissioner’s Office had seized the companies’ laptops and servers. The sale of the business could not therefore be achieved and the administrators sought (with creditor approval) to place the companies into liquidation.
It transpired that one contingent creditor (PC) had previously issued proceedings against two of the group companies, prior to the making of the administration order for failure to comply with a data subject access request. PC objected to the appointment of the incumbent administrators as liquidators on a number of grounds.
- Failure to disclose PC’s ongoing proceedings at the time of making the administration order
The court held that the then proposed administrators were under a duty to give an independent opinion, based on what they knew at the relevant time as to whether the objective of the proposed administrations was reasonably likely to be achieved. They also had a duty to disclose to the court any relevant facts which were material to their appointment.
It was found that the proposed administrators had not as a matter of fact known about the ongoing proceedings at the time of taking the appointment, and were not bound to make enquiries about ongoing proceedings prior to taking the appointment. Further, even where a proposed administrator does know about ongoing proceedings against the company, they are not bound to inform the court about those proceedings, which would otherwise be stayed by the administration moratorium.
- Lack of candour in relation to funding of fees
The court found that it is not unusual for a parent company, which is also a major creditor, to underwrite the cost of an administration in order to obtain the best possible recovery. The administrators are, however, under a duty to consider whether the funding arrangement could be said to impair their judgment or impartiality at any stage.
- Lack of candour relating to costs
In their proposals, the administrators sought approval for fees which were nearly double those contained in their initial estimated outcome statement. The court found that the administrators could not be criticised for revising their initial fee estimate, which was originally based on just four days of familiarity with the companies’ businesses. The approval of creditors was needed in any event for the fee proposals, which acted as a check on their ability to draw fees.
- Professional incompetence in stating that the objective of the administrations was reasonably likely to be achieved
The proposed administrators had a duty to make reasonable enquiries to support their statement that the purpose of the administration was reasonably likely to be achieved. The administrators were considered to be highly experienced professionals, acting on information from the directors about “concrete expressions of interest” in the businesses. The court found that the considered view of the proposed administrators was not “irrational, perverse or outside the range of views that might be held by reasonably competent practitioners”.
- Bias against PC
The argument of bias arose from PC’s request for provision of all the materials adduced at the administration application hearing. The administrators’ solicitors had refused the request on the basis that the costs of that exercise would have been borne by the creditors as a whole (given PC made no offer to meet their reasonable costs of complying with the request).
Whilst the court broadly agreed with this approach, Norris J did found that the administrators ought to have disclosed to PC their pre-appointment certificates, estimated outcome statement and skeleton argument for use at the administration application hearing when asked, given they were short documents and readily to hand. However, the Court did not consider that the administrators were biased against PC such that they should be disqualified from being appointed as liquidators.
- Misconduct in failure to petition for liquidation sooner
The court found that the administrators could have sought directions from the court sooner once it became clear that a sale of the business could not be achieved. However, Norris J did not think it was outside the proper range of decisions to await the delivery of the Statement of Affairs in order to ascertain the creditor population, and to seek their views on the proposal to petition for liquidation.
- Misconduct in relation to subject access request
Norris J considered that the administrators ought to have asked themselves:
- what they could do to enable the company to meet its obligations in relation to the data subject access request; and
- was it in the interests of the creditors as a whole to take such action?
Norris J agreed with the administrators’ judgment that the costs of compliance with the data subject access request would be disproportionate and detrimental to the body of creditors as a whole. Non-compliance in the alternative, resulted in reduced costs and an additional unsecured creditor claim.
He further commented that “an insolvency process does not take the place of an investigation by the ICO at public expense (though the Joint Administrators have the duty of co-operation I have mentioned)”. The administrators’ role is not to carry out an investigation in the ‘widest sense’ in to the activities of the companies, which should be left to the appropriate regulatory and criminal public bodies.
Outcome
In light of the above, the court found that the appointment of the administrators as liquidators was “conducive to the proper operation of the liquidation”. Given their familiarity with the companies’ businesses, it would be pointless to appoint new officeholders, especially in circumstances where the appointment of the incumbent administrators was supported by the majority of creditors (whose views were a “major factor” in the decision process).
This case is worthy to note in that the court has provided some useful guidance in relation to a number of issues which regularly arise in practice for insolvency officeholders. The ultimate decision reached and near-complete exoneration of the administrators will no doubt be welcomed by appointment-takers and the wider insolvency profession.
Tim Carter