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Administrators’ duties when selling assets – the importance of exercising independent judgment

calculator, £20 and £10 notes with a black pen with the lid off Print publication

13/11/2019


The recent case of Brewer and Another v Iqbal [2019] EWHC 182 (CH) looks at the scope and extent of administrators’ duties and highlights the importance of obtaining a proper valuation of the assets to be sold in order to obtain the best possible price.

ARY Digital UK Limited (the Company) was a company that acquired TV channels catering to the Southeast Asian community in the UK. It was part of the wider ARY Digital Group (the Group) which describes itself as a broadcaster of customised streaming content. The Company’s UK and Europe operations consisted of 3 channels – entertainment, current affairs and Islamic education. In order to facilitate the broadcasting of these channels, the Company required Electronic Programming Guides (EPGs); all of which were acquired from British Sky Broadcasting Limited (Sky). EPGs are non-interactive menus providing programme scheduling information that are shown by a cable or satellite television provider to its viewers on a dedicated channel. When viewers tune into the channel, a menu is displayed listing current and future programmes.

By April 2011, the Company had several creditors, and was also in arrears with its payments to Sky for the EPGs. The Company entered into administration in May 2011 on the advice of the defendant, Mr Iqbal, who was appointed administrator.

In the period prior to filing the notice of intention to appoint, Mr Iqbal approached an agent, whom he had used many times before, to provide a valuation for the EPGs. The agent said the three EPGs together may be worth £4,000 to £10,000. A director of the Company then offered a figure of £35,000. Once the Company had entered administration, Mr Iqbal instructed the agent to sell the EPGs and it was agreed that they would be advertised from 24 to 31 May 2011. On 27 May 2011 Mr Iqbal instructed the agent to raise an invoice for all the Company’s assets in the sum of £57,000 plus VAT (of which £40,000 plus VAT was attributed to the EPGs) to the only interested party, ARY Network Limited (the Associated Company), another company within the Group. Mr Iqbal then wrote a report to the creditors recommending that the Company enter into a creditors’ voluntary liquidation, and that he should be appointed liquidator. Mr Iqbal’s administration proposals were rejected and the Company entered into liquidation with different insolvency practitioners appointed as joint liquidators. Expert evidence in court later valued the EPGs at approximately £2 million.

Claim and Defence

The joint liquidators sought equitable compensation for a breach of fiduciary duty to the creditors and for a breach of Mr Iqbal’s duty to exercise reasonable care and skill care to achieve the best price for the EPGs. They claimed that Mr Iqbal had entered into an agreement with the directors to sell to the Associated Company. This was based on the fact Mr Iqbal had preferred information provided by the directors (who had an interest in the Associated Company) by: (i) failing to obtain a proper valuation for the EPGs; (ii) accepting a valuation provided by the directors; and (iii) only marketing the EPGs for a very short amount of time. In any case, Mr Iqbal had failed to exercise independent judgment when exercising his duties.

Mr Iqbal argued that the Associated Company was the only party to make an offer, and the sale needed to go through immediately or Sky would switch off the channels, rendering the EPGs valueless.

Duty of Care and Skill

The court found that Mr Iqbal had not acted with reasonable care and skill. This was based on several factors.

Firstly that Mr Iqbal did not obtain a proper valuation prior to marketing the EPGs; nor were they marketed properly, both in terms of forum and time. The advertisement also failed to even refer to the EPGs, the channel numbers and the likely audience figures. The court pointed out that there was no evidence that Mr Iqbal had obtained knowledge and understanding of the Company and its assets – Mr Iqbal should have recognised the EPGs were a specific type of intangible asset with a “restrictive but competitive market”. Furthermore, a competent administrator would have consulted more than one agent when working with unusual or unfamiliar assets.

Secondly, Mr Iqbal’s failure to appreciate the applicability of SIP 16 (pre-packaged sales in administrations) and to have any regard to SIP 13 (disposal of assets to connected parties in insolvency proceedings) were strong indicators that there had been a failure to act with reasonable care and skill.

Thirdly, Mr Iqbal relied too heavily on the advice of the directors of the Company. While he was entitled to rely on them to provide information on the Company’s finances, assets and liabilities, and the reasons for its insolvency, he placed too much reliance on their valuation of the EPGs. He further failed to negotiate a better price and allowed the directors to push through the sale before the end of the marketing period.

Finally, throughout his engagement, Mr Iqbal had failed to keep a diary or attendance notes of meetings and telephone conversations. This meant he had little evidence, apart from the odd email to support him in his defence. The court’s view is that an administrator, just as any professional, should know to keep records, especially of important meetings and conversations on which he may later wish to rely.

The court recognised that while the EPGs were worth in the region of £2 million, potential purchasers would have taken advantage of the financial position of the company. Taking a reduction in price into account, an order was made for equitable compensation of £743,750 for the breach of fiduciary duty.

WM Comment

There are a number of practical implications that arise from this case:

  • it is a reminder to practitioners of the importance of maintaining independent judgment and taking proper advice when realising company assets
  • it is possible in an appropriate case to prove breach of fiduciary duty (as opposed to mere negligence) on the part of an administrator even though the hurdle is a high one
  • where a breach of fiduciary duty is proved, a ‘substitutive performance’ measure of equitable compensation (ie the value of the assets in question at the date of trial), as distinct from a quasi-negligence measure at the date of the sale of the assets, may be available.

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