On May 20, 2022, Judge Adam Johnson delivered his judgment in the case of Swiss Cottage Properties Limited (in liquidation)  EWHC 1495 (Ch). Deloitte, represented by Derrick Dale QC and Ben Griffiths as instructed by DAC Beachcroft LLP, successfully defended a negligence claim. A copy of the judgment is available here.
Richard Highley, partner at DAC Beachcroft responsible for conducting the deal for the administrators, commented: “Our clients, the two administrators, have been fully rewarded for the work they have done to complete the sale of two properties of great value in difficult circumstances. This is a case that should never have been brought. »
The case involved allegations of breach of duty by two company directors and former associates of Deloitte. They were appointed directors on October 14, 2013 of two companies (the “Companies”) whose business involved the development and sale of two properties, No. 40 and No. 38 Avenue Road (the “Properties”).
The majority of the financing for the development of the properties was provided by Barclays Bank Plc, as the lead secured lender (approximately £66.89 million including fees and interest). Funding was also provided by junior secured creditors BMBSCI (approximately £7.1m) and BMBAR (approximately £2.7m) and large unsecured shareholder loans of approximately 19, £6 million. .
The properties were very large, high quality properties, each measuring over 21,500 square feet. During their construction, the properties together had been valued (at various times between 2008 and 2011) at over £100 million and were put on the market with guide prices of £75 million each – the one “dressed” and the other less advanced and “undressed”. The pre-administration marketing period lasted approximately two years, and despite approximately 160 viewings, the properties remained unsold. After the failure of discussions on a possible refinancing, the Directors were appointed to the Companies on October 14, 2013.
Once appointed, the administrators agreed with the incumbent agents, Knight Frank and Savills, to an initial marketing period of 28 days with indicative prices at a reduced level of £35 million (“dressed”) and £30 million of pounds sterling (“undressed”). It was agreed that if no sale was found within that 28 day period, a third agent, Aston Chase, would also be appointed.
A buyer was found during this initial period and, crucial in judging whether the administrators have fulfilled their professional obligations, the two agents confirmed that in their opinion the properties had been sufficiently exposed to the market and that the offer higher had to be accepted. A sale has been agreed for the properties at £61.25million. The administrators entered into an exclusivity agreement and later a sales agreement with the potential buyer. These agreements were entered into before the encumbrances in favor of the junior secured creditors were lifted, either by consent or by court order.
Following the sale of the properties, after taking into account the considerable costs to sell, the administrators made a distribution to Barclays, as lead secured lender, which suffered a substantial shortfall of approximately £10m . No funds were available for junior and unsecured creditors of companies who sued the directors under insolvency law.
BMBSCI and the shareholder investors assigned their claim to Fitzroy Street Capital Inc (“Fitzroy”), and on June 11, 2020, BMBAR and Fitzroy filed for court clearance under Schedule B1, Section 75(6) of the Insolvency Act 1986 (the “Act”) to request the court to review the conduct of the Directors.
The plaintiffs’ claim was twofold.
- The main request: That the directors exceeded their powers by entering into the exclusive agreement and the sale agreement, which involved a disposition of the properties, as if the properties were not subject to fixed charge security, and without obtaining the authorization of the court in accordance with an. B1 par. 71 of the Act.
- Secondary claim: Other Claims of Dereliction of Duty by the Directors. The judge summed it up as “revolution[ing]around two themes: a. The Directors either ignored or insufficiently considered the interests of junior secured creditors; and B. Efforts to market the properties were inadequate such that they were sold below market value.
The judge denied the claim, dismissing both plaintiffs’ claims. Although he identified certain shortcomings in the conduct of the directors (the majority of which were admitted), these were not deemed to be material to the outcome of the administration. He concluded that:
- The administrators had not exceeded their powers. He decided that neither the exclusivity agreement nor the sale agreements could be interpreted as creating an immediate equitable interest in the properties (i.e. the properties were not “alienated”) given that the administrators had no power to dispose of the properties free of charge. in favor of junior secured creditors; and
- The Properties had in no way been sold at an undervaluation. He ruled that they had realized their market value and that the administrators were entitled to rely on the advice that the properties had been properly exposed to the market by commissioned agents Knight Frank and Savills.
Key points to remember
- Directors have the right to rely on appropriate professional advice in the performance of their duties. Essentially in the case against them, the judge found that the administrators were entitled to rely on the professional advice of the agents, Knight Frank and Savills, that the properties had been sufficiently exposed to the market.
DACB Comment: It is now a well-established principle that directors may rely on professional advice when discharging their duties and the existence and nature of such advice will no doubt figure prominently in future claims.
- Red Book valuation is not required in circumstances where value is determined by marketing. The claimants relied on a series of historical Red Book valuations placing a value on the properties at or near £100million. However, when tested against actual market interest, these valuations had failed to provide an accurate “barometer” of market value. The Directors were entitled to assume that there would be little point in commissioning another valuation report. The Judge agreed with the Administrators that putting the Properties on the market was the best way to determine their value.
DACB Comment: The Administrators could have chosen the “safe” option and obtained another assessment, as the Claimants argue, but they did not and they would have been wrong to do so. It would only have served to delay the placing on the market of the goods and to delay the realization of a sale, and to what end? They were right to test the market by marketing the properties and accepting professional advice that an offer should be accepted. Directors operate in the very real world of business realities and must behave accordingly. Their actions and business judgments were rightly approved by the judge.
- In malpractice actions, don’t get bogged down in the details. The judge observed that when every aspect of the directors’ conduct was examined, there was a risk that a mention of the detail would obscure the big picture. The key issue was whether the properties had been sold by the trustees at market value, and he concluded that they were. The judge referred, with approval, to Mr Dale QC’s warning to administrators: “against what he called the narcissism of small differences. This seductive and evocative phrase reminds us that the tendency to dwell on points of detail, quite natural in a case where ethics is in question, can sometimes make trees lose sight of the wood”.
DACB Comment: We anticipate that this approach will be cited with approval in future judgments in malpractice actions.
Kevin Hawthorn, a partner at DAC Beachcroft specializing in insolvency, restructuring and corporate advisory, commented, “The judgment will be welcomed by insolvency office holders and follows a number of similar cases which recognize that office holders are often required to make difficult business and commercial decisions in difficult circumstances which may include time constraints and funding constraints. Office holders are entitled to rely on appropriate professional advice to help them make these decisions and should not lose sight of the need to focus on those who have a genuine economic interest in the insolvency. Absent manifest perversity or unreason, an office holder’s decisions will be respected and should withstand challenge by disgruntled creditors or third parties.
Deloitte was represented by Richard Highley (Partner), Pippa Ellis (Director), Annabel Walker (Partner) and Isabel McNeil (Lawyer) at DAC Beachcroft LLP, and by Derrick Dale QC (Fountain Court Chambers) and Ben Griffiths (Erskine Chambers).