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Ve Vegas Investors IV LLC v Shinners [2018] EWHC 186 (Ch)

The Facts

This case is the latest twist in the ongoing saga of failed fintech "unicorn" Ve Interactive ("Ve"), who entered Administration in April 2017. Certain of Ve's creditors made an application to replace its Administrators, from Smith & Williamson LLP, with new Administrators from Deloitte.

Ve's demise will be familiar to regular readers of our bulletins. After severe financial difficulty,  in around April 2017 Ve's directors sought insolvency advice from Smith & Williamson. A new company, Rowchester Limited, was formed by the directors for the purpose of purchasing the Ve's assets out of Administration by way of a pre-pack sale. The sale took place on 26 April 2017 - about two weeks after Smith & Williamson were first instructed.

The Applicant creditors applied to remove the Administrators from Smith & Williamson. They alleged that the speed at which the sale had been completed raised questions about whether it had been in the interests of creditors, and therefore certain claims against the directors needed to be investigated by the Administrators. The creditors argued that, since the Administrators had been appointed to advise on the pre-pack sale, their remaining in their positions while the investigations were undertaken would give rise to a conflict of interest.

The Administrators initially opposed the application. However, following cross-examination from the Applicant's counsel, they accepted a conflict of interest had arisen and provided the court with a letter of resignation from their positions. The letter requested that the judge grant a 5 day "abridgement of time" before the Administrators vacated their positions.

The Decision

The Court's ruling was not on whether the Administrators had acted improperly. Rather, it was to decide upon whether the Administrators should be removed because a conflict of interest had arisen by virtue of the need to investigate potential claims.

The judge ordered that the Administrators be removed with immediate effect. Given that the Administrators had offered to resign by the end of the hearing, to a certain extent the order for their removal was academic - save for the fact that the abridgment of time was also refused. The purpose of the extended judgment was to set out the judge's reasons for making the order.

The Judge identified that, based on the facts, two potential scenarios arose regarding the pre-pack sale. These were that either (1) the sale had been completed within a very short timescale because of Ve's "dire financial position, deficient books and records and issues of dispute", and the Administrators had done the best they could in the circumstances; or (2) those behind Rowchester took advantage of their position as directors of Ve and engineered a purchase at an undervalue.

While clearly refraining from implicating the Administrators in any misconduct over the sale, the Judge identified that the existence of the second scenario as a possibility meant that a clear conflict of interest had arisen and the Administrators would need to be removed. The Judge further held that this should have been evident to the Administrators from the date of their appointment and that they should not have opposed the Application.

Ashfords' Comment

This case drives yet more speculation over pre-pack Administrations and how they are viewed by the courts. Whilst very careful to avoid any suggestion of misconduct by the Smith & Williamson Administrators, the Judge appeared critical of the directors' conduct and pre-pack sales in general, stating that "from the date the directors decided to proceed with a pre-pack purchase, a conflict of interest plainly arose, as it will always arise when directors … are seeking to purchase a company's business and/or assets". If the logic the courts adopt is that a conflict of interest will always arise in allsituations when directors are seeking to purchase a company's assets from Administration, it does raise some serious questions for the future of pre-packs. At the very least the directors really will have to demonstrate the sale was in the best interests of creditors.