A recent decision of the High Court (Goel and another v Grant and another [2017] EWHC 2688 (Ch)) has provided a useful reminder that care must be taken when administrators enter into pre-contract negotiations and the risk of inadvertently entering into a binding contract before terms are finalised. It also deals with the risks of disposing of assets, even those that are difficult to value, without due process.

The Facts

Mr Goel and Mr Gupta (the “Applicants“) and Mr Sumner (the “Second Respondent“) were both creditors and members of Meem SL Ltd (the “Company“). The Company was formed to exploit a mobile phone charger, which backs up and saves data, invented and patented by Mr Goel. The Second Respondent was also a director of the Company. Stephen Grant and Anthony Cook (the “Administrators“) were appointed as joint administrators of the Company in April 2016, following a resolution of the board in March 2016. The Administrators had arranged a pre-pack sale of the business and assets of the Company to a newco formed by the Second Applicant and co-directors of the Company.

The Applicants brought a derivative claim on behalf of the Company and a personal claim for conspiracy against Mr Sumner. The basis for these claims was that there was an unlawful-means conspiracy to put the Company into administration and to dispose of the assets at an undervalue by way of the pre-pack sale back to the former management of the Company. The damages were said to be at least £11.8m. E-mail correspondence took place between the Applicants and the Administrators regarding a potential assignment of the Company’s claim, which the Applicants alleged resulted in a concluded agreement that the Administrators would assign the Company’s claim to them for £5,750. However, the Administrators disagreed and sought to sell the Company’s claim by auction to ensure they achieved best value.

With a view to stopping this auction, the Applicants brought a claim against the Administrators and Mr Sumner, alleging that:

1. they had concluded an agreement over a series of emails between the Applicants’ solicitors and the Administrators directly; and
2. failing this, that the proposed auction of the Company’s claim would unfairly harm the Applicants’ interests as creditors/members of the Company pursuant to Paragraph 74 for various reasons, including that Mr Sumner would be in a position to purchase and effectively stifle the Company’s claim.

The Decision

Following a detailed review of the language of the emails, the Court held that no binding contract had been concluded. Mr David Halpern QC considered that there was no more than a tentative idea discussed over the emails, which was held not to be an offer capable of acceptance. The Applicant’s solicitors knew that the Administrators would be instructing their own solicitors in relation to the proposed sale document. Therefore, the Applicants knew that further documents would need to be drafted and agreed before completion of the assignment. In light of this, the Court held that the email exchange was impliedly subject to contract, despite there not being explicit reference to this.

In relation to the second ground, the Judge commented that treatment that harms a creditor or creditors by treating them less favourably than others is not of itself sufficient to cause ‘unfair harm’. It must be shown that such treatment cannot be justified by reference to the interests of the creditors as a whole or to achieving the objective of the administration. Whilst this can include the transfer of an asset for an undervalue, in a case where there is no differential treatment of creditors the Judge stated that “the court will not interfere with the administrator’s decision to sell an asset unless the decision does not withstand logical analysis“.

In this case, the Applicants were being treated the same as the other creditors and the decision to auction the Company’s claim was not unreasonable in the circumstances given the difficulty in valuing the claim. Further, the Applicants would have the opportunity to bid at the auction and therefore the Administrators’ proposal to sell the Company’s claim at auction would not unfairly prejudice the Applicants’ interests.

Comment

It is clear from this case that email correspondence directly between an administrator and a creditor (or their solicitor) is capable of forming a binding contract, but it depends on the circumstances. The decision that the email exchange was impliedly subject to contract should provide relief to Insolvency Practitioners. However, given that each case will depend on its own facts, care should be taken when entering into pre-contract discussions to ensure that all correspondence is marked ‘subject to contract’ to prevent such discussions being construed as a binding contract.

The case also re-affirms that there is a high threshold for the Court to interfere with the decision of an administrator, given that they must perform their functions as quickly and efficiently as is reasonably practicable.

As an aside, the Court also confirmed, on an obiter basis, that administrators (like liquidators and trustees in bankruptcy) had the power to sell a bare right of action, by way of exception to the rule against champerty. This provides welcome authority for a practice that has become more prevalent in recent years.