In the recent case of Loveridge v Povey and Ors [2024] EWHC 329 (Ch) a company shareholder sought to challenge the administrators’ decision to rescue a balance sheet solvent company as a going concern by securing additional funding, as opposed to pursuing a sale of the business.
Background
The application made by Mr Michael Loveridge was the latest instalment of a complex family dispute. The company in administration, Breton Park Residential Homes Ltd (the company), was run by Michael’s mother and brother, Ivy and Audey Loveridge respectively. Audey Loveridge was the sole shareholder in the company until 2019, when he transferred his shareholding in the company to Michael and Ivy (50:50) shortly prior to his divorce. The divorce proceedings between Audey and his ex-wife, Melinda, were ongoing at the time of this application but in the course of those proceedings the transfer of the company shares by Audey was challenged by Melinda as a transaction defrauding creditors under section 423 of the Insolvency Act 1986 (the Act). Ownership of the shares in the company was therefore disputed.
The company’s financial position
The company was balance sheet solvent but owed a number of substantial intercompany loans (£1.25m) to various family businesses, which had been called for repayment, and had a secured liability of £1.6m to RBS. The administrators took the view that the company had insufficient working capital to discharge its debts so it was proposed that a sale of the business would be better for creditors than a liquidation (the second statutory objective). On marketing the business, the highest offer (in the sum of £5.75m) was made by Michael Loveridge. Subsequently, Ivy Loveridge made a proposal to set up a SPV to grant a secured loan for £3.95m to the company to refinance its debts, pay all creditors in full and enable the rescue of the business as a going concern (the first statutory objective). A rescue of the business was preferred by Ivy, Audey and Melinda.
The administrators sought and obtained a court direction permitting them to achieve the first statutory objective through the refinancing, and to revise the administrators’ original proposals which had been approved by the company’s creditors. Michael then applied to court under paragraph 74 of Schedule B1 of the Act to challenge the administrators’ decision to pursue the refinance rather than a sale of the business, on the basis it would cause unfair harm to his interests as a member of the company.
The application
Paragraph 74 of Schedule B1 provides that a creditor or member of a company in administration may apply to the court claiming that the administrators propose 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). The administrators opposed the application on the basis that it prevented them from fulfilling the statutory objective of administration, in accordance with the prescribed hierarchy. Ivy and Melinda Loveridge also opposed the application on the same basis.
Administrators are bound to perform their functions in accordance with the statutory objectives unless they think it is not reasonably practicable to do so or that the second statutory objective would achieve a better result for the company’s creditors as a whole. Michael argued however that as the company was balance sheet solvent, the administrators had a duty to have regard to the interests of the company’s members as a whole when deciding how to act. The administrators argued that the refinancing proposal was practicable (the SPV had proof of funding) and would enable all creditors and administration costs and expenses to be paid in full. Therefore, they argued that there was no jurisdiction for the court to direct the administrators to pursue a sale of the business rather than rescue of the business as a going concern.
The decision
The court determined that administrators have a wide degree of latitude when exercising commercial judgments and that judges are not entitled to substitute their own views as to whether a decision ought to have been taken. The court only has jurisdiction to intervene if satisfied that “no reasonable administrator” could have thought it was reasonably practicable to rescue the company as a going concern in all the circumstances. Given the company was balance sheet solvent, the court would also need to have regard to the interests of the members as a whole, as the creditors would be paid in full anyway.
The court first considered the issue of standing to make an application under paragraph 74 of Schedule B1 of the Act. The court considered that the inevitable outcome of the section 423 application (within the divorce proceedings) was that Michael had no beneficial shareholding in the company, as he had failed to participate in those proceedings and had been debarred from arguing any interest in the shares which had been transferred to him. Therefore, his application was bound to fail as Michael did not have any standing to bring an application under paragraph 74 of Schedule B1 as a member and could not show that his interests were being unfairly harmed in that capacity, rather than as potential purchaser.
However, the court also helpfully went on to consider whether Michael could argue “unfair harm” even if he did have the appropriate standing (i.e. if he were a shareholder). The court considered that a bidder in a bidding process was not prevented from bringing an application under paragraph 74 if they were also a shareholder. Where there is no differential treatment of members, the court held that it could only interfere with the administrators’ decision where it lacked commercial justification or did not withstand logical analysis. While unfair harm often takes the form of differential treatment, the decision must also be unfair with reference to the interests of the members as a whole. The court found that an immediate sale of the company’s assets would be contrary to the wishes of those who would most likely benefit from the surplus of such a sale, a view which was (surprisingly) supported by Michael Loveridge also making an offer to refinance the business. The business had previously been profitable, and was projected to continue to be so. The court therefore concluded that the decision to rescue the business via refinancing was a decision that a reasonable administrator could have reached, and one which was supported by those likely to benefit from its rescue (namely, Ivy, Audey and Melinda). The rescue of the business was also being pursued in good faith by the administrators who were seeking to fulfil the primary statutory objective of administration. Therefore, even if Michael had standing to challenge the administrators’ decision, the court concluded that he had no legitimate grounds on which to do so.
Key points
The court provided useful guidance on when it is appropriate to challenge administrators’ conduct, particularly in the context of a balance-sheet solvent business. Stripping out the contextual oddities of this case, some of the key takeaways are as follows:
- The bar for challenging administrators’ decisions is high. The court afforded a high degree of latitude to the administrators here and confirmed that it will only intervene if no reasonable administrator would have taken the same decision, and the result is that the applicant suffered unfair harm.
- An application to challenge administrators’ actions can only be brought by a creditor or member of a company whose interests have been harmed in that capacity. While a shareholder or creditor could also be otherwise interested in the administrators’ actions (e.g. as potential purchaser of the business), it must be their interests as creditor or shareholder that are prejudiced.
- “Unfair harm” often includes differential treatment between different categories of creditors/shareholders, but where it does not the court will only interfere with administrators’ decisions where they lack commercial justification.
- In a solvent context, the court (and the administrators) must have regard to the interests and expressed wishes of the members as a whole, as the creditors will be paid in full in any event.
David Steinberg
Lucy Trott