It might seem an unusual question, but is it important that your insolvency practitioner understands your business and its assets and the environment in which it operates if they are only liquidating it?
Perhaps this question was answered in a recent case that hit the courts?
In the case of ARY Digital UK Limited, the liquidators who followed on from an earlier administrator of the company argued that the administrator had not carried out his job with the degree of care his position warranted.
Points were made to the court about the choice of valuers he employed; the valuation methodology; the strategy for exposing the assets to the market; compliance with Statements of Insolvency Practice 13 (selling assets to connected parties) and 16 (prepack sales); the evidencing of his strategies, decisions and actions; and the degree to which he had relied on what the directors were telling him about the business and market. The Bailii transcript of the decision makes pretty unpleasant reading, and all on a job where it appears the administrator took shortcuts and adopted low cost strategies because he perceived the realisable level of assets was low.
And that’s the problem when you’re dealing with a company that operates in sector such as broadcasting, gaming, the internet and all manner of ‘new industries’ where a small sliver of information or difference in circumstances/product/service offering can make all the difference between the business and assets having real and no value.
My personal opinion from reading the transcript is that the IP simply lacked experience in the company’s sector – that of broadcasting; he did not give the assignment the attention it needed because in his mind it was of low potential realisable value; and he slavishly followed old asset sales methodologies when the business and collection of assets he was dealing with necessitated new marketing strategies.
Here’s a link to the Bailii transcript of the decision should you wish to read it – and if you are a director of a technology company that is struggling, you should read it: https://www.bailii.org/cgi-bin/format.cgi?doc=/ew/cases/EWHC/Ch/2019/182.html&query=(ary)+AND+(digital)+AND+(UK)
I hear you say, what does this all mean?
Well, quite a lot actually for the IP …
But first let’s put this in perspective, the IP thought the assets were worth a few tens of thousands of pounds (well that’s what he was told by the directors) …
What did it mean for him?…
… because the court found he hadn’t reached the required standard of a professional person who’s put in a position of quite a bit of responsibility, he should make good the creditors’ losses caused by his failures…
… a cool three quarters of a million pounds!
And all on what seemed to his firm to be a petty cash assignment!
Wow! Just wow!
So what does this all mean?
Firstly – and although this case has not been widely reported yet or taken on board by IPs – IPs are likely to be a little more careful about what jobs they take on, especially when it’s a ‘new age’ technology company or other unusual business. Such insolvencies will warrant more than usual thought, planning and heavily tailored work than the typical ‘old age’ business.
Let’s remember, there are a lot of IPs who have no experience of technology businesses and are very much stuck in their old ways.
Secondly, IPs will pay more heed to complying with SIPs 13 and 16, and this will have cost implications and lead to some delays in cases being processed.
Lastly, could there be any implications for the directors and investors in any newco which might be thinking about buying the business and assets from oldco. You see, sometimes the courts will chase into newco’s assets – and are probably more likely to do so if the directors of oldco are involved with newco – if the IP has not done his job properly. It’s important for any investor in newco that the IP dealing with oldco does his work properly because he might see his investment become worthless if the transaction is attacked by a replacement IP – because sure as eggs are eggs, creditors and investors in oldco will pay more regard to how its IP has carried out his work now they’ve seen what can happen.
Finally, it’s always good for IPs to receive a wake up call from time to time – it really isn’t possible for IPs to live in their own little bubble where the realities of the outside world of business can be conveniently ignored and packaged up into some legal process! Far too often I see and hear of IPs promising to do things they cannot guarantee, where frankly they are out of their depth and just playing Russian Roulette with their professional indemnity insurance – only two days ago I was consulted by a technology company who had been promised the Earth by an IP who simply had no clue about this case or how to deal with such an insolvency properly – they’re out there, BEWARE!