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Insolvency administrator’s lack of attention to the sale of complex assets

A UK insolvency administrator has been found to have acted in breach of his duties to a broadcasting company, some 8 years after the conduct in question, in an action brought by the company’s liquidators.  Compensation exceeding £740,000 was ordered.  

The breaches involved his conduct in selling the company’s assets, in particular its Electronic Programming Guides (“EPG”), being ‘digitally displayed, non-interactive menus providing programme scheduling information that are shown by a cable or satellite television provider to its viewers on a dedicated channel’. The EPGs were acquired by the company on a fixed-term basis from British Sky Broadcasting Limited.

The background

The Court opened with these words, as paraphrased:

Mr Iqbal was appointed administrator of the Company on 19 May 2011. He sold its assets to another company incorporated by the Company’s management (the “directors”). Mr Iqbal then produced a report to creditors and gave his proposals for the administration. The creditors failed to approve them. The Company entered insolvent liquidation and Mr Iqbal was discharged.

‘Six years from his appointment, to the day’, joint liquidators of the Company applied for leave to examine the conduct of Mr Iqbal, which was granted.

Mr Iqbal was unsuccessful in defending allegations that in effecting the sale of the Company’s assets shortly after he was appointed administrator he acted negligently or in breach of his equitable duty of care, breach of trust, fiduciary duty or statutory duty.

These extracts, again paraphrased, indicate some of the facts and elements of the findings.

Failure to record details

In giving evidence, due to his failure to record meetings in writing or make notes he had to rely on sparse e-mail exchanges and a few letters to the directors. Critical to his evidence was his dealings with the EPGs and the directors of the Company.

Lack of familiarity with Statements of Insolvency Practice (SIP)

‘He was asked about his familiarity with SIP 16 and SIP 13. He knew of SIP 16 but thought that it did not apply and accepted, again with candour, that he did not consider SIP 13’.

‘By accepting these matters, he was accepting that he had not acted in accordance with best practice and, agreed in cross-examination that he had been “careless”. Mr Iqbal was asked about his failure to keep written records “Would you agree that your failure to keep written records is a recurring feature of this case? He answered: “Could be” but accepted that he kept no diary and that he was “careless” in that regard’.

He honestly accepted that he had no specialist knowledge about EPGs and that he gained his knowledge about the Company from its directors.

SIP 16 concerns pre-packaged sales, and SIP 13 concerns the acquisition/disposal of company assets by/to related parties.

Expert evidence

An expert reported on “whether Mr Iqbal’s conduct when selling the EPGs was that of the reasonable administrator in the circumstances” in which he found himself.

Based on this evidence, the Court found that Mr Iqbal’s failure to appreciate the applicability of SIP 16 and failure to have any regard to SIP 13 were strong indicators of a failure to act with due care and skill in respect of his dealings as administrator of the Company.

These failures are failures of a duty owed to the Company’s creditors, to realise property of the Company for the benefit of creditors in accordance with his statutory duty.

Over-reliance on the directors

Mr Iqbal was entitled to rely on the directors to appraise him of the Company’s finances, its assets and liabilities and as to the reasons for the Company’s insolvent position.

His reliance on them crossed the permissible line.

He placed too much reliance on the directors to provide a value for the EPGs, approval for the marketing of the EPGs and the timing of their sale.

Failure to properly ascertain the value of the EPGs by failing to obtain a proper valuation prior to sale constituted a failure to exercise reasonable care and skill. The expert’s opinion was accepted, that

‘Mr Iqbal should have complied with his code of ethics and obtained “knowledge and understanding of the entity….” and acquire “an appropriate understanding” of the complexities of the business.

There were no contemporaneous documents that may have supported a finding that Mr Iqbal did obtain knowledge and an understanding of the Company and its assets.

Mr Iqbal, if he were acting as a competent office-holder, should have established, during his investigations, that an EPG was a specific category of intangible asset with a “restrictive but competitive market”.

He should also have established and acted on knowledge that “there were specialist EPG acquisition and sales agents operating in that market”.

While there was nothing to suggest any secret deal with the directors (see SIP 13),

‘Mr Iqbal did not, as a matter of fact, rely on suitably qualified or competent professional advice, nor did he materially rely on any professional advice in connection with the selling of the EPGs’.

Comment

As should be clear, this summary does not explain the various elements of the breaches, including the refined elements of a breach of a fiduciary duty; the judgment bears full reading. There are some differences between UK and Australian law in relation to duties on sale, in particular by receivers and mortgagees.

The judgment also refers to two of the UK SIPs, and the UK Code of Ethics of Insolvency Practitioners. As in Australia, a court can have regard to such soft law in determining the conduct of a practitioner.

And while the administrator understandably struggled in remembering his conduct of the administration, many years before, this was not helped by his lack of attention in keeping a good ‘paper’ record of the matter.

See Brewer & Anor v Iqbal [2019] EWHC 182 (Ch) (11 February 2019).

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