Court of Appeal upholds strike out of claim against administrators

• Commercial and practical approach taken to commercial realities of insolvency process
• No personal liability for office holder without a "special relationship"
• Fraser Turner Ltd v PricewaterhouseCoopers LLP and others [2019] EWCA Civ 1290

Two administrators were found to have not acted improperly when selling a mine in Sierra Leone without ensuring that the buyer of the mine also pay royalties related to production of iron ore at that mine under a royalty agreement previously entered into by the company in administration. The Court of Appeal confirmed that administrators owe a duty to all creditors, and outside of a special relationship, cannot be held personally liable for the economic loss of an individual creditor.

In 2005 Fraser Turner Limited (FTL) provided consultancy services to London Mining plc (LMP) and its wholly owned Sierra Leonean subsidiary London Mining Company Ltd (LMCL) in relation to the Marampa iron ore mine. In 2009 LMCL obtained a lease of the mine and a facilitation agreement was entered into with FTL. Under the terms of the agreement FTL was to receive royalties from LMCL. Following a legal dispute in 2011 in relation to the royalties, a settlement agreement was entered into (the royalty deed). Under the terms of the royalty deed LMCL agreed to pay FTL a 0.3% royalty based upon the production of iron ore. The payment was guaranteed by LMP.

The royalty was initially paid, however in 2014 LMP fell into financial difficulties and on 16 October 2014 Peter Dickens and Russell Downs from PwC were appointed as administrators. Following their appointment the royalty deed was brought to the administrator's attention by FTL.

Dickens, Downs and Felix Addo, from PwC in Ghana, were appointed as receivers of LMCL on 22 October 2014 and the business and assets of LMCL, including the lease of the Marampa mine, were immediately sold to Timis Mining. The mine was sold without Timis assuming any liability to pay the royalties to FTL and Timis had no knowledge of the royalty deed. In evidence the owner of Timis Mining said that had he known of the royalty obligation he would have taken it on or entered into a comparable agreement with FTL, as FTL's connections would be useful in making the mine a success.

FTL issued proceedings against PwC and the administrators alleging that they had: i) breached the royalty deed; ii) procured LMP/LMCL breach the royalty deed iii) acted together to ensure that the mine was sold without bringing the royalty deed to the purchaser's attention, in breach of contract and without regard to the interests of the creditors of LMP or LMCL; iv) breached their duties to FTL and other creditors, were liable for misfeasance and/or acted negligently; v) were liable for unfair harm under paragraph 74 of schedule B1 to the Insolvency Act 1986 (IA86). FTL's claims were struck out following a summary judgment application. FTL appealed to the Court of Appeal.

In relation to the interpretation of the royalty deed, the Court of Appeal said that the judge at the first hearing was wrong to imply a term into the royalty deed that LMP had a continuing obligation to procure and guarantee the payment of royalties. However, the judge was right to refuse to interpret the royalty deed to imply a term so as to provide an obligation on LMP or LMCL to ensure that a purchaser of the mine pay the royalties or enter into an accession deed.

In relation to the question of whether the judge at the first hearing was right to hold that the administrators owed FTL no duty to protect it against losses caused by failure to ensure a purchaser pay royalties or enter into an accession deed, the Court of Appeal applied the test used for establishing whether directors or other agents are liable in tort for economic loss.

For personal liability to arise there must have been an assumption of responsibility to create a special relationship. The test for such assumption is an objective one, with the primary focus being on things said or done in light of the relevant contextual scene, with primary focus on "exchanges which cross the line". The Court of Appeal said that the judge at the first hearing had been correct to find that no special circumstances or relationship had existed.

It said that "all that happened here was what happened in hundreds of administrations every year. A creditor brought a particular problem to the attention of the administrator, who listened politely and said he would look into it. No promises were made nor are any alleged. All that is alleged is that Mr Turner believed that the Administrators would do as he asked".

The Court of Appeal confirmed that administrators act to achieve the best realisation of a company's assets for the benefit of all creditors and it would not have been open to the administrators of LMP to prefer the interests of one creditor over another - nor did the evidence suggest that they had ever intimated that they would do so. That Timis Mining had indicated that it may for commercial reasons have paid the royalty did not make any difference to the administrators' duty to obtain the best possible price. The Court of Appeal confirmed that similarly, as receivers of AMCL, Dickens and Downs owed a duty to the secured lender and had "no business risking the value they were getting for the mine by asking Timis to pay an expensive royalty".

The appeal judge said that the same position would have applied even if LMP or LMCL had express or implied obligations to procure that a purchaser pay the royalty - the administrators duty was to sell the assets for the benefit of all creditors and if they had asked Timis to pay the royalty the chances are it would have wanted to pay less for the mine. The judge described this as an "a matter of commercial reality of a kind that administrators face all the time" and that a full trial of the issues would not "change these hard, but essential, realities of commercial life".

In relation to the paragraph 74 claim, paragraph 74 allows a creditor to apply to court where it claims that it has been or will be unfairly prejudiced by the actions or proposed actions of the company’s administrator. The Court of Appeal confirmed that there could be no unfairness sufficient to engage paragraph 74 without the suggestion that the administrators were acting other than in accordance with their obligations under IA86. The Court of Appeal, found that the administrators of LMP were acting in good faith in carrying out their functions and, therefore, FTL could not have been unfairly harmed within the meaning of paragraph 74. Further the court noted that FTL was not claiming to be prejudiced in its capacity as a creditor – it had submitted a proof of debt for future royalties and been paid a dividend like every other creditor. Its complaint lay in the fact that the administrators did not assist it, in its private capacity, to obtain a new royalty contract. Had the administrators done that then FTL would have had a benefit not available to other creditors and it could have resulted in a lower sale price being realised for the mine.