The duties of administrators in solvent companies

A question not frequently encountered by insolvency practitioners ('IPs') acting as administrators is how to exercise their powers, and discharge their duties, where a company is or might be solvent in the context of a contested application to remove them as office holders.In a scenario where there is likely to be a surplus after payment of creditors and expenses, and thus a likely return to members or shareholders of a company, this usually signals a reasonably happy outcome for the member who at best expects little return.Unusually, this outcome may be compromised by a lender who was willing to forebear on defaulting loans in order to assist in the realisation of assets at a higher price than what might otherwise have been obtained in a forced sale.In this instance the share of return to the lender would increase, but it would be at the expense of the members or shareholders.This 'commercial tension' or conflict between competing interests raises an important question as to what the administrators' duties to shareholders are, and to whom their duties primarily lie.This matter of interest was examined by Mr Hugh Sims KC, sitting as a deputy High Court judge, in his decision in Nardelli v Richardson (Nardelli). 1The facts of Nardelli are worth briefly noting, Proceedings arose out of the proposed development of a new 6,000 unit 'Eco Town'.The three companies which were formed had shareholders and directors in common and had acquired land or options over land and outline planning permission.Loans were provided to these companies in the form of fixed and floating charge security.A developer had brought proceedings for breach of contract against one of the companies and obtained a judgment for 13.4 million plus interest and costs.The secured lender sent letters of demand to each of the companies in relation to its loans, which were then in default.The companies were unable to meet the demands, which led to the appointment of the administrators.The administrators established that since the companies were balance sheet solvent the creditors would not only be paid in full, but a surplus would be available for shareholders after the companies' property were sold.Subsequently, the administrators received a higher offer for the land, requiring them to exercise an option to buy.The secured lender agreed to inject additional funds to accept this offer, which in turn significantly reduced the expected return to shareholders.