CR-2018-009110 - [2025] EWHC 2115 (Ch)

An Administrator is a fiduciary. As explained in Lightman & Moss on The Law of Administrators and Receivers of Companies (6th Ed.) at [12-035]:

“…the Administrator’s powers, although deriving from statute rather than a contract, trust or security instrument, are properly regarded as fiduciary in nature as they are exercised by the Administrator on behalf of another in his capacity as a statutory office-holder acting as such is a fiduciary. “

This of course means that, like any other fiduciary, administrators “must guard against conflicts, including self-interest or self-review conflicts, and must be mindful when instructing third parties of any conflicts which might arise” (see per Hugh Sims KC in Nardelli v Richardson [2024] EWHC 2740 (Ch) at [46]).

It is established that the mere existence of a conflict (or the appearance of a conflict) is not enough to automatically require the replacement of an Administrator. The court should bear in mind that the replacement of an Administrator will necessarily involve some increased costs and delay, and ask itself whether it is possible to manage the relevant conflict through other means – usually the appointment of conflict Administrators – such that the increase in delay and cost may be minimised. As Warren J said in SISU Capital Fund Ltd v Tucker [2005] EWHC 2321 (Ch) (“SISU”):

“(a)

Removal may be ordered if an independent review cannot be carried out because of conflict. However, the existence of a conflict will not necessarily lead to removal. The additional time and costs and the loss of knowledge which may result from removal should be taken into account. The court should consider whether there are other available options to resolve any such problem without the need for removal (see Clydesdale Financial Services Ltd v Smailes [2009] EWHC 1745 (Ch), (at [30]), David Richards J, as he then was). For example, by appointing an additional office holder (see the approach of HHJ Stephen Davies QC in Re TPS Investments (UK) Ltd (in Administration) [2018] EWHC 360 (Ch), [2018] All ER (D) 15 (Mar)).

(b)

The court should consider but may not be persuaded by the views and wishes of the majority of creditors in their capacity as creditors (Sisu Capital Fund Ltd v Tucker [2006] 1 All ER 167, [2006] BCC 463; Re Zegna III Holdings Inc (in Administration) [2009] EWHC 2994 (Ch), (at [24]); and Re Maud [2016] EWHC 2175 (Ch)(at [97]–[98])).

(c)

It should not be easy to remove an office holder simply because conduct has fallen short of the ideal. Removal should not encourage unjustified applications or cause office holders to have to look over their shoulders (see AMP Enterprises Ltd v Hoffman [2002] EWHC 1899 (Ch), [2003]).

(d)

It is relevant to bear in mind that removal will have an impact upon professional standing and reputation (see Re Edennote Ltd, Tottenham Hotspur plc v Ryman [1996] 2 BCLC 389 at 398, [1996] BCC 718 at 725).”

The conflict of interest arises primarily in the context of the claims against the New Directors (the “Director Claims”), which were issued by the Administrators on behalf of the Company on 5 April 2024. The claims concern a series of transactions that the New Directors caused the Company to enter into, and which are alleged to have been contrary to the interests of the Company and its creditors.

The most significant of the Director Claims are those arising from transactions involving shares in DeepGreen (the “DeepGreen Claims”). The Company used to hold a valuable shareholding in a company called DeepGreen Resources Inc (“DeepGreen”). The Company invested in DeepGreen in around 2014. The DeepGreen investment was a valuable one. The.Administrators assert in the claim against the New Directors that the shares had, at one point, a value of c.£115 million. The New Directors transferred certain of those shares to themselves in 2017 and 2018 (the “DeepGreen Share Transfers”).

The Administrators challenge the DeepGreen Share Transfers as (i) transactions at an undervalue within the meaning of section 238 of the IA 1986; (ii) preferences within the meaning of section 239 of the IA 1986; and/or (iii) prohibited under Article 3F(b) and/or (c) of the Company’s Articles of Association, and consequently ultra vires and/or for an improper purpose and in breach of sections 171 and/or 172 of the Companies Act 2006 (together the “TUV Claims”). The total value of the Director Claims is approximately £150 million. The TUV Claims are valued at slightly more than £115 million: i.e., around three-quarters of the total.

The conflict came to the attention of BAT when the Administrators’ lawyers received and passed on to BAT the Points of Defence received in response to their pleaded claim. These included claims that the Directors are not liable to the Company because they relied on advice provided to them by Mr O’Connell at the relevant time. The relevant sections of the Points of Defence are as follows:

77.1

“Prior to deciding to make the transfer in 2017, the Directors sought and obtained advice from their accountant David Payne and, further, from Mr O’Connell that the transfer of the DeepGreen shares was permitted”. When advising, Mr O’Connell “was aware of all material information regarding Windward’s operations, investments and financial condition” (page 496).

77.2

In July 2017, Mr O’Connell discussed transferring shares in DeepGreen with Messrs Gower and Barron “via telephone and in person on several occasions”, including at a meeting on or around 19 July 2017. He advised the Directors that “the transfer of shares in lieu of salary was permissible” and “the directors were not expected to work for nothing” (page 496).

77.3

In 2018, the Directors made further transfers of DeepGreen shares “in the belief that Mr O’Connell’s prior advice applied in the same way to the further transfers”.

The Applicants raise two primary concerns about this position. The first is that the conflict may assist the Directors’ defence, e.g. by showing their good faith and/or lack of appreciation of the Company’s insolvency; and (b) that in conducting the Directors Claims, Mr O’Connell could be opening himself and his then firm, S&W, to substantial claims by the Company, on the basis that his advice was wrong and negligent.

It is now (I think) accepted by both parties that there is at least an apparent conflict here. The question which they raise is therefore as to whether it is a conflict of a kind which can be managed through the appointment of Conflict Administrators.

The appointment of a conflict administrator may be an appropriate alternative to the removal of an administrator where it would be in the best interests of the administration estate. This has been seen in particular in the context of multiple insolvencies of related companies (see the discussion in SISU Capital Fund Ltd at [91] onwards).

However, where there is a potential (and all the more so an actual) conflict, it is axiomatic that a conflict administrator is only a workable solution if it is an effective way of managing the conflict: SISU Capital at [108]. If the majority of the creditors oppose such a course, that is of course a relevant factor: TPS Investments at [98].

In Ve Vegas Investors IV LLC, the court (Mr Registrar Jones) concluded that the Administrators – which (coincidentally) included Mr O’Connell and Mr Hardman, the Administrators in this case – should be removed on the grounds of their conflict of interest. The applicants sought removal on the basis that new Administrators were required to investigate potential claims against the company’s directors and/or S&W (the Administrators’ firm) relating to a pre-pack sale of the company’s business and assets. The Administrators decided to resign part way through the hearing of the application, but Mr Registrar Jones nevertheless decided to determine the removal application because the resignation did not take effect immediately. He held that there were matters that made it clear there was a serious issue for investigation (at [22]) and that the Administrators should be removed (at [31]).

The judge also identified two further important points, namely, the need for Administrators to appreciate and remedy conflicts promptly and to conduct themselves in a professional and objective manner. As to these:

The judge held that Mr O’Connell, Mr Hardman and their co-appointees

“ought to have concluded, effectively from the date of their appointment or soon thereafter, that they as members of S&W were conflicted and could not carry out those investigations. S&W were inextricably bound up in the process by reason of their contractual retainer and, therefore, so were the Respondents. This is not technical legal analysis. It is obvious” (at [25]).”

He then concluded that the conflict and its consequences ought to have been “readily apparent to them at all material times” and that they should have raised the issue much earlier and sought directions from the court. The judge

“unhesitatingly reach[ed] the conclusion from that evidence that the Respondents have lost perspective of their role. Throughout, their evidence demonstrated that they are primarily and essentially concerned with the defence of any claim against S&W and not with the competing, conflicting interests of the Company. The answers and responses of Mr Shinners and Mr Hardman demonstrated that they had and have no adequate appreciation of their conflict” (at [32]).”

The judge also referred to the question of whether there might have been an alternative solution such as the appointment of a conflict administrator for a specific investigation ([26], [29]), but those questions were never explored or addressed by the judge because the respondents instead chose to resign (see [34]).

The Administrators maintain that they should stay in office – and indeed continue to manage the Director Claims – with Conflict Administrators being appointed to handle certain functions of the Administration. It seems clear that, at a minimum, the Administrators envisage the Conflict Administrators handling the settlement and negotiation of any settlement of the Director Claims; and any investigations considering the liability of Mr O’Connell and/or S&W and/or the Administrators in respect of the O’Connell Advice (and deciding whether proceedings should be issued, and if so, pursuing such proceedings). However, I note that if I were to decide that Conflict Administrators could in principle be appointed, the question of the scope of their responsibility would be a matter for a subsequent hearing.

The Applicants say that there are two sets of reasons why the appointment of a Conflict Administrator would provide no solution.

First, that there is a need for an investigation into whether Mr O’Connell and his firm are liable to the Company for breach of duty in respect of the advice he gave to it under its previous management; whether the Administrators or their firm are liable for failing to investigate such claims (and doing so within any applicable limitation period); whether the Administrators’ solicitors are liable for failing to investigate, advise etc. on these matters; and whether there are claims against the Administrators or their solicitors in respect of the conduct of the Director Claims. Put simply, they say that the Administrators’ independence is utterly compromised, and the widespread possibility of claims against them leaves no alternative to their removal (Re SISU Capital Fund Ltd at [89]-[90]).

Second, the conflict which arises is not capable of management. They argue that the scope of the Conflict Administrators’ appointment would have to be so wide as to deprive the continuing Administrators of any power to make determinations as to the conduct of the litigation, including whether and when to settle, and on what terms. Since this litigation is the primary asset of the Company, they say that such an appointment would leave the continuing Administrators with no meaningful role in the administration.