Zinc Hotels (Investment) Limited and Top Zinc Ltd  v Beveridge and others: Administrators’ conflicts of interest and the Court’s power to appoint an additional “conflicts” administrator

Conflicts of interest on the part of Administrators and the Court’s powers to grant remedial relief by appointing so-called “conflicts” administrators have become real hot topics in insolvency litigation, in particular following the decisions this year in VE Vegas Investors IV LLC  and Davey v Money.

On 20 July 2018, Mr Justice Henry Carr gave judgment in Re  Zinc Hotels (Holdings) Ltd and other companies in administration (aka Zinc Hotels (Investment) Limited and others v Beveridge and others [2018] EWHC 1936 (Ch)), in which Marcia Shekerdemian QC, leading Joseph Curl, appeared on behalf of the Security and the Security Trustee.

The judgment contains important guidance on (i) the source, nature and extent of the Court’s power to appoint a conflicts administrator and (ii) the ambit of any material conflict of interest.

This was an application by Shareholders for interim orders (i) for the appointment of a concurrent conflicts administrator to represent their interests pending the trial of the main action and (ii) a direction requiring the administrators not to distribute the sale proceeds of a portfolio of Hilton-branded hotels to the companies’ secured creditors (a consortium of banks) pending the trial of the main action.

The incumbent administrators had been appointed by Marcia’s clients as qualifying charge holder on behalf of the banks. The main proceedings sought their removal under paragraph 88 to Schedule B1 to the Insolvency Act and/or relief for unfair harm under paragraph 74. It was common ground that there might be a surplus for the shareholders from the sale of the hotels.

It was argued on behalf of the Shareholders (i) that the Administrators (and their former solicitors) were hopelessly conflicted because they had been heavily involved in advising the Banks on contingency planning for some time prior to their appointment and (ii) the Court had inherent jurisdiction to appoint an additional administrator pending trial.

The application for interim relief was opposed by the Administrators, by the Banks and the Security Agent and Security Trustee.

Dismissing the Interim Application, the Judge found:

1. That the Court does not have any inherent jurisdiction to appoint an additional administrator.
2. That the Court does not have power to appoint a provisional administrator before a company has gone into administration
3. That the Court does have power to appoint a concurrent administrator on an interim or final basis, provided that the conditions under paragraph 103 of Schedule B1 are complied with.
4. Where the administration appointment has been made by a qualifying floating charge holder, only they (or the administrators on application to court) can appoint an additional administrator.
5. The Shareholders had no standing to seek the appointment of an additional administrator where the appointment had been made by a qualifying floating charge holder under Paragraph 14 of Schedule B1.
6. There was in any event no conflict of interest on the part of the Administrators.
7. It is well established that the existence of a prior relationship between an administrator and a creditor is not a bar to the former taking the appointment.
8. In most insolvencies of any size and complexity, the administrator will have been engaged prior to his appointment to do the necessary preparatory work. The subsequent appointment as administrators was unlikely to involve any investigation of the work done by him prior to his appointment.
9. This was to be contrasted with “pre-pack” cases, such as VE Vegas and Clydesdale Financial Services v Smailes in which it was alleged that the administrators themselves had been involved in wrong doing and were conflicted because they could not investigate their own conduct.

A copy of the judgment is available to download here.