How the courts expect insolvency practitioners to behave and make decisions

At our annual Insolvency Conference 2023, which was held on May 12^th, Insolvency Guru Malcolm Niekirk gave a presentation where he looked back at Atlantic Computers and its enduring influence on insolvency practice.

He used the case as an example of how the courts expect insolvency practitioners to behave and make decisions more generally. This followed the general theme of the Insolvency Conference, ‘Success in Negotiations’.

This is the summary of that presentation. If you missed the Insolvency Conference, we will be holding another one next year (with plenty of Coffee Break Briefings in between). You can sign up for updates here.

Malcolm presenting.

Atlantic Computers – The background

Although this is an older case, it still contains many good points that are relevant today. It’s about administrations and the rights of secured creditors.

Administration orders were a new procedure in 1986. They had features taken from receiverships and liquidations. They were designed to hold together a distressed business and give it breathing space. The moratorium ‘ring fence’ was an important element of that.  Present day administrations are not very different.

While an administration order was running, there were restrictions on security enforcement and repossession of goods (on lease or retention of title).

In either case, the creditors needed permission from the administrators or the court. The court could set conditions. There were similar restrictions on legal proceedings, processes and execution.

Wider background

Nothing in the Insolvency Act 1986 said anything about:

• When the court should refuse repossession
• When the court should allow repossession
• When courts should set conditions; or
• What those conditions should be.

That’s what Atlantic Computers (the Court of Appeal ruling) is about.

Atlantic Computers – background to the business

The company, Atlantic Computers, was a computer leasing company. It was funded by several banks who owned the kit.

The banks leased the kit to Atlantic Computers in the form of 7-year leases. The rent varied with bank base rates.

Atlantic Computers sub-let the kit to end users (its customers) in the form of 7-year leases (with break clauses) and fixed rents.

Rising bank base rates killed the business.

The administrators’ proposals

The administrators’ proposals were as follows:

• Keep the sub-leases running (and collect the rent from end users)
• Bring in other suppliers to offer replacement leases
• Negotiate early breaks with end users (and take a break premium)

The administrators didn’t have enough income to pay the company’s own rent. The banks could see how the proposals would help the unsecured creditors, but worried that they would be left holding security over nothing.

So, they asked the administrators to pay for their use of the kit and for permission to repossess the kit.

Where the court is not told what to do, the judge has discretion. How should a judge exercise that discretion?

How the Atlantic Computers ruling set the law

In a legal negotiation, knowing how the judges apply the rules helps you decide what’s realistic.

The Atlantic Computers ruling includes rules about how administrators should make decisions. Some of those rules are good guidance for all insolvency practitioners.

What happened?

The banks won. The court allowed them to repossess their kit from the insolvent company.

This meant that the banks were able to tell the end users to pay them, not the administrators.

And the banks, not the administrators, were able to renegotiate the contracts.

The court ordered the administrators to hand over to the banks the rents they had collected from the end users.

The ruling

The court handed down two sets of guidelines to explain their decision. One set is the specific one about how to deal with secured creditors who want to use their security. The other set is more general.  It’s about how insolvency practitioners should make decisions.

How to deal with secured creditors in administrations

Ask yourself, will repossession hurt the purpose of the administration? If not, allow them to repossess.

If it will, balance up the damage done on both sides? Make sure to look at both probability and consequences.

In that balance, property rights count for a lot. Administration does not change property rights. The damage might be mitigated, if the administrators pay the rent.

How insolvency practitioners should make decisions.

1. Remember: You’re (often) an officer of the court

So, you’ve got special powers and privileges.

You have to use them responsibly. This is particularly relevant in:

• Administrations;
• Bankruptcies;
• Compulsory liquidations.

And perhaps also, for example, when using ss234-236 powers of investigation.

2. Be quick

Make an interim decision, if you can (and if you can’t make the final one) - this might be you paying something as a gesture of good faith.

3. Be responsible

Your powers are not given to you for personal benefit. You shouldn’t use your power to grant consent (or deny it) as a bargaining counter. Not even if you benefit the unsecured creditors by doing that.

4. Be reasonable

Explain why you have made your decision.

5. Be judicial

What decision would the court be likely to make? Follow that lead.

Also, as an aside from those 5 points, make sure to be impartial and neutral.

The wider significance of the ruling

When the decision is important:

1. Creditors may have a right to have your decision reviewed in court.
2. For example, if your actions (as administrator) are causing unfair harm (under paragraph 74 of schedule B1).
3. Courts don’t like intervening unless the decision is:
   1. Perverse; or
   2. Bad faith.
      1. Wednesbury principles:  a decision so unreasonable that no reasonable IP could have decided that.
      2. Procedural irregularity.
      3. Illegality.

Conclusion

Use the guidelines as a basis for making decisions, particularly when other parties are trying to persuade you to make a decision in a particular way. (They’re negotiating with you)

Remember, impartiality and neutrality can get you a long way.

Dates for your diary

2024 – Frettens’ Third Annual Insolvency Conference

Date and venue TBC

10 July 2023 – Coffee Break Briefing

Assessing creditors’ claims – part 2

(We’ll email you booking details, if you're not already you can subscribe to our list for free here)

7-8 September, 5 October – SESCA seminars and conference

(Reading University, and Denbies Wine Estate)

Specialist Insolvency Solicitors

If you have any questions after reading this article, please don’t hesitate to get in touch with our bright and experienced team.

Call us on 01202 499255, or fill out the form at the top of this page, for a free initial chat.