A lesson for secured creditors – don’t ‘over step the mark’ during an administration

Business Meeting 10 Print publication


The decision in Davey v Money [2018] EWHC 766 (Ch) serves as a useful reminder of the potentially broad-ranging scope of liabilities that secured creditors, such as financial institutions, may be exposed to during the course of an administration.


Mr Davey was the sole director and shareholder of Angel House Developments Ltd (AHDL), a property development company whose sole asset was an office block in south London. Mr Davey was also the guarantor of AHDL’s indebtedness to Dunbar Assets plc (Dunbar) which amounted to approximately £17 million.

When AHDL defaulted on loan repayments, Dunbar, which was the holder of a qualifying floating charge, appointed James Money and Jim Stewart-Koster as joint administrators (the Administrators). The Administrators elected to pursue the third statutory objective of realising AHDL’s property to provide a distribution to Dunbar as secured creditor. The Administrators then appointed a firm of property agents recommended by Dunbar to manage and market the property for sale. The Administrators agreed with the property agents that they would be exclusive agents and would receive an additional fee if the property was sold at a price exceeding the value of Dunbar’s debt.

Mr Davey brought a claim under paragraph 75 of Schedule B1 to the Insolvency Act 1986 alleging misfeasance by the Administrators on the basis that they:

  • failed to exercise independent judgment and instead paid excessive regard to the wishes and interests of Dunbar;
  • failed to involve Mr Davey in the administration which, according to Mr Davey, could have led to the rescue and survival of AHDL;
  • sold the main asset of AHDL at a significant undervalue through reliance on unsuitable agents who had been, in effect, selected by Dunbar;
  • had allowed Dunbar to interfere in the conduct of the administration so as to make the Administrators its agents and therefore liable for their breaches of duty.

The court dismissed all of Mr Davey’s allegations. However, the case was interesting because of the remarks that the judge made in relation to the ability, or not, of a secured creditor to get involved in the conduct of the administration.

The court noted that an administrator is entirely at liberty to consult with the appointing secured creditor to ascertain its views. However, the administrator is not bound to follow the secured creditor’s wishes and should not act with unquestioning obedience to the appointing creditor. In this case it made sense for the administrators to consider Dunbar’s views on the various offers received for the property.

The court went on to explain that there is established authority that a mortgagee who interferes with the conduct of a sale by a receiver who he has appointed can be liable if the property is negligently sold at an undervalue by the receiver. The reason being that if the mortgagee interferes substantially, the receiver is deemed to be acting as agent for the mortgagee rather than for the mortgagor. On the question of whether this reasoning could apply to administrations, the court concluded that there was no convincing policy reason why there should be any difference between the position that applies if the sale of the property were to be conducted by a receiver or an administrator. The fact that the administrator acts an agent for the company pursuant to paragraph 75 of Schedule B1 of the Insolvency Act 1986 does not mean that the administrator cannot be deemed to be acting as agent for the secured creditor.

That being the case, the court went on to consider the level of involvement required to justify a finding that the administrator was deemed to be acting for the secured creditor. The court held that the required level of involvement was the same as in receivership cases where a mortgagee might be liable if it “directed or interfered” in the conduct of the receivership. It requires something that goes beyond the legitimate involvement that a secured creditor could expect to have in the administration process and requires the administrator to have either unhesitatingly complied with directions given by the secured creditor or to have been unable to prevent some interference with the administrator’s intended conduct of the administration.

WM comment

In this case Mr Davey failed to prove any misfeasance, however the judgment highlights that secured creditors may be exposed to liabilities if they interfere or try to influence the conduct of the administration. Secured creditors should be careful not to try and control the administration and at the very least keep proper minutes recording dealings and communications with the administrator to show how decisions were made.