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Kavan Gunaratna, barrister at Enterprise Chambers, examines the details of Re VE Interactive Ltd, a case which involved a pre-packaged sale of the company’s business and which illustrates the court’s powers to remove administrators.
Re Ve Interactive Ltd (in administration); Ve Vegas Investors IV LLC and others v Shinners and others  EWHC 186 (Ch),  All ER (D) 34 (Mar)
Ultimately the bankruptcy registrar (now an Insolvency and Company Court judge) was faced with a fairly limited question of whether the administrators should remain in place for a period of five business days, after they volunteered to resign with effect from a date shortly following trial.
Having said that, the background to the case involved a pre-packaged sale of the company’s business in highly distressed circumstances. The case is likely to add to a perception that IPs would face a real risk of having to vacate office where they had worked, to achieve an urgent sale of the business alongside directors whose conduct might subsequently come under fire.
In practice, one of the implications of the case may therefore be an increased reluctance on the part of well-established IPs to assist with a pre-packaged sale in those sorts of highly distressed scenarios, at least where the IPs do not have a guarantee of unimpeachable conduct by the company’s directors in progressing such a sale.
VE Interactive supplied software and other services to online retailers. It was set up in 2009 but never reported a profit and, instead, made heavy losses totalling £25m by 2015, including £13m of losses in that year. The company had persuaded many high-net worth individuals to invest millions in its share capital, but was balance sheet insolvent to the tune of at least £9m by late 2016.
By April 2017, the company had paid its staff late several times over, was threatened with the loss of business-critical services from core suppliers such as Microsoft and Google and was subject to a second winding-up petition presented by HMRC. A new board of directors had been appointed a few weeks earlier in March 2017, and had concluded that the company urgently needed to raise £20m to pay creditors and provide short-term working capital, but it failed to secure such further funding.
In light of the winding-up petition, the IPs’ (the respondents) firm was retained to advise the company on its insolvency options. The respondents worked with the company’s management staff over a period of around six business days, following the Easter weekend, to achieve a pre-packaged sale of the business before a threatened collapse. During that period, the IPs encountered some delays in the provision of information by the company’s management staff, which heightened the difficulty of securing a competitive sale. The respondents ultimately entered into a pre-packaged sale of the company’s business (excluding certain assets and high quantum third-party claims) for a price of £1.75m plus other consideration. The purchasing entity was a ‘NewCo’, which was connected to the company’s management staff and which was the highest of the limited pool of potential bidders whom the respondents were able to attract at short notice.
A group of aggrieved creditors (the applicants) alleged that the company’s management staff had secured such a pre-packaged sale by acting in breach of their duties and by prejudicing other bidders, and that there were grounds to investigate them and the respondents’ firm, which necessitated the respondents’ removal.
The registrar decided that the respondents should be removed as the company’s administrators rather than remain in place for a further five days. He regarded the underlying facts as supporting a number of possible conclusions.
One was that the company’s management, as well as the respondents’ firm, did the best they could in the urgent circumstances and achieved the only realistic sale and the best price that was possible. Another was that the company’s management took improper advantage of their position, sought to exclude others from a realistically competitive pre-pack process and secured a purchase of the business at an undervalue.
In light of that second possible scenario, the registrar concluded that there were serious issues to be investigated and that matters requiring investigation might include the conduct of the company’s management as well as the role which the respondents’ firm had in the process. By reason of their firm’s contractual retainer by the company, the registrar concluded that the respondents were inextricably bound up in the process and therefore could not carry out those investigations. The registrar noted that that did not necessarily mean the IPs must therefore vacate office. Alternative solutions might have included the appointment of ‘conflict administrators’ to act in parallel with some, or all, of the respondents if still in office, although this became academic when the respondents volunteered their resignations.
After hearing their oral testimony, the registrar considered that the respondents had become primarily concerned with the defence of any claims against their firm, causing them to lose a level of perspective on the claims that might be brought in connection with the sale and on the conflict arising, such that their removal would be appropriate on the facts of the case.
Interviewed by Stephanie Boyer.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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