Administrators should act in the best interest of company’s creditors as a whole - in the absence of a special relationship it should not favour any particular creditor

Published 30 March 2020

Fraser Turner Limited v PricewaterhouseCoopers LLP and others [2019] EWCA Civ 1290

The Court of Appeal has upheld a decision striking out claims against administrators which alleged that they owed a duty to a specific creditor and were guilty of misfeasance.

Fraser Turner Limited (FT) was party to an agreement (“Royalty Agreement”) with London Mining plc (“LM”) and London Mining Company Ltd (“LMCL”) which provided for FT to receive a royalty in respect of iron ore produced at the Marampa mine. LMCL was a wholly owned subsidiary of LM.

LM entered administration and the administrators were also appointed as receivers (along with another individual and under Sierra Leone law) of LMCL. LMCL’s business and assets, including the mine, were sold to a purchaser. The purchaser had no knowledge of the Royalty Agreement.

Prior to the sale, FT had contacted the administrators to make them aware of the Royalty Agreement. FT’s evidence was that it had been led to believe that the administrators would do everything necessary to bring the Royalty Agreement to the attention of a purchaser and ensure that a purchaser would take on responsibility for payment of the royalties.

FT’s claim raised issues, inter alia, regarding the duties of administrators. FT’s claim was that the administrators had breached their duties by failing to obtain a proper price for the business and assets of LMCL and for failing to bring FT’s rights to the attention of the purchaser. FT also claimed that the administrators were guilty of misfeasance (under paragraph 74 of Schedule B1 to the Insolvency Act 1986).

FT’s claim was struck out and the decision was upheld on appeal. The Court of Appeal confirmed that the position of an administrator is the same as that of a director; for there to be personal liability there must have been an assumption of responsibility such as to create a special relationship. However, there was no special relationship in this case. The administrators had merely done what happens in most administrations – they had acted in the best interests of the general body of creditors. FT’s evidence did not demonstrate that the administrators had ever intimated that they would prefer the interests of FT over the interests of the general body of creditors and it was not open to the administrators to do so.

There was no express or implied term in the Royalty Agreement obliging LM or LMCL to procure that a purchaser paid the royalties due to FT. However, the Court found that even if there had been such a term then the administrators would still not have breached their duties. That comment derives from the obligation on administrators to perform their functions in the interests of a company’s creditors as a whole.

The decision was therefore based on the commercial realities faced by administrators and the fact that, on the evidence, they had said nothing to FT which gave rise to a special relationship. In view of the fact that the administrators were acting in the best interests of creditors as a whole, there could be no unfairness so as to engage misfeasance under paragraph 74. It was found that FT did not suffer harm as a creditor (its proof was admitted and it received a dividend) – rather its complaint was that the administrators did not assist it in its private capacity to obtain a new or continuing royalty contract.

The judgment will be welcomed by insolvency office holders as it recognises the commercial reality of decisions they face when dealing with the sale of a business out of administration and the fact that their duties are owed to the general body of creditors. A disgruntled creditor has no cause for complaint if the actions taken by administrators are in the best interests of creditors overall. That said, the decision was of course based on the facts of the case and administrators need to be mindful when dealing with creditors in the high pressured circumstances of an administration. Providing too much assurance to a particular creditor could give rise to a special relationship and render administrators exposed to claims of breach of duty and/or misfeasance.