Administrators’ duty of care in company sales

This is the first in a series of articles concerning the case of PJSC Uralkali v Rowley & Baker as Former Administrators of Force India Formula One Team Limited (in Liquidation).

Administrators’ duty of care in company sales

The December 2020 case of PJSC Uralkali v Rowley & Baker as Former Administrators of Force India Formula One Team Limited (in Liquidation) is an interesting case concerning, primarily, the duty of care owed by administrators in company sales.  It also deals with some interesting points concerning the duty of confidence, and the liability of jointly appointed administrators.

Firstly, it is useful to set out the background facts.  The company, Force India, entered into administration, with a number of parties interested in purchasing the team and/or the business and assets of the company.  The administrators decided, after some to-ing and fro-ing, to require interested parties to submit a both plan A (a rescue plan) and a plan B (an asset purchase).

One of the interested parties was PJSC Uralkali, who submitted a bid that was ultimately unsuccessful.  They then brought this claim against the administrators alleging amongst other things:

1. The administrators had been negligent in the sale process (specifically that they had made representations they knew to be false which had a detrimental effect on PJSC Uralkali).
2. The administrators had breached confidence.
3. The administrators were both liable individually.

In this series of articles, I look at each claim in turn, starting with the negligence claim.  By way of reminder, the essential elements of a successful negligence claim are:

1. The defendant owes the claimant a duty of care.
2. There is a breach of the duty of care.
3. There is a causal connection between the defendant’s careless conduct and the damage.
4. The damage to the claimant must not be too remote.

The most interesting part of the judgment concerns the first component of a negligence claim: does an administrator (Mr Rowley in this case) owe a prospective buyer (PJSC Uralkali in this case) a duty of care?

PJSC Uralkali argued that the answer was yes for the following reasons:

1. The administrator represented the criteria that would be adopted in the bidding process, which was uniquely within his knowledge.
2. The representation concerned how the administrator would act, rather than information about the company of which they were administrators.
3. The administrator knew that PJSC Uralkali would rely on the representation and would potentially suffer loss if it was untrue (relying on pre-contractual cases such as Esso v Mardon where Esso was held to be under a duty to a prospective tenant in relation to sale projections).
4. The administrator was akin to an auctioneer.
5. The fact that the administrator was an agent did not immunise him from liability.

The court disagreed.  Dealing with each point in the same order as above:

1. There is nothing unique about managing a sales process as an administrator. This is done on behalf of the company, in the same way in a non-insolvent situation a director organising a sales process on behalf of a company would not assume personal responsibly to potential buyers.
2. There is no real difference between statements the administrator made about the company and statements made about the administration. It is “unworkable” to dissect these statements: in carrying out their functions, an administrator will make “countless statements to an array of different parties”, covering a wide array of subjects, all in some way connected to the administration of the company.
3. The role of administrator is as agent, which is a distinct role from that of the company itself (and in the Esso case, the allegation was that Esso had made representations). It is not enough to show that the administrator knew that PJSC Uralkali would rely on his statements.  Something more was needed to make the administrator liable.
4. Not only was this not an auction, but see (1) above – undertaking a sales process is an entirely routine function of an administrator and does confer a personal responsibly to potential buyers.
5. The case of Williams v Natural Life Health Foods shows that PJSC Uralkali had to establish that the administrator was to be treated in law as having assumed a personal responsibility. They failed to do this.  In addition, administrators are not appointed for the benefit of one particular creditor, but generally for the creditors as a whole (subject to the statutory purposes).  Fraser Turner Ltd v PricewaterhouseCoopers goes further and expressly states that administrators do not owe a duty of care in tort to particular creditors.

This part of the decision in particular will be welcomed by administrators as allowing them to get on with sales processes without fear of owing specific duties of care to potential buyers.  Of course, this will not allow administrators to overcome fraud, and there may well be regulatory complaints.  As ever, administrators should take advice from specialist insolvency solicitors throughout these processes.

For more information or to discuss such cases, please do not hesitate to get in touch.