Guarding against challenge on the sale of properties - four practical tips for office holders

Disgruntled borrowers and affected third parties are often quick to point the finger at receivers and other office holders for failing to obtain what they regard as the best price that could reasonably have been obtained. As a result, office holders can find their decisions and decision making processes under scrutiny several years after the relevant events.

In the judgment in McDonagh v Bank of Scotland Plc, the duty to take care to achieve the best price reasonably obtainable was described as requiring “an exercise of informed judgment… in a reasonable way”, noting that an “error of judgment, without more, is not negligence or a breach of the relevant duty.”

Clearly therefore, the Court regards the manner in which a decision is made as relevant as the decision itself – in other words, receivers and other office holders need to “show their working out” as well as simply to report the outcome of their decisions in order to meet the requirement that they have performed an exercise of informed judgment in a reasonable way.

How should receivers and other office holders document their decision-making?

Here are our top hints and tips for documenting the process:

  1. The importance of available documentation

It is clear from the Absolute Living Developments Ltd v DS7 Ltd decision (which we discuss here) that not only are office holders expected to have all relevant information available to assist the Court, but that this can extend to another party who is asserting a claim against the office holders.

While the Serene Construction v Salata decision (discussed here) emphasises that it is generally quite difficult to successfully assert that receivers should have obtained a better price, what is common about unsuccessful challenges is that the Court has found the office holders’ evidence to be thorough and impressive. 

Good record keeping should be ingrained for every appointment, but even after the appointment is concluded, well-organised papers will assist with this burden on office holders which the Court is willing to extend to other parties asserting claims.

  1. File notes

While emails exchanged between office holders and agents, legal advisors and other third parties can provide contemporaneous evidence of advice sought and recommendations made, there are two potential pitfalls with this. First, a waiver of legal professional privilege might be required (see our comments on the Force India decision), and second, there is a risk that exchanges of correspondence only allow a court to infer what the office holder’s considerations were at that time of a decision.

A separate note of the issues considered and reasons for particular decisions will provide a vastly more direct record of the judgment being exercised, particularly useful several years later when the details of the decision making may have faded.

In fast-moving appointments, it can be difficult to have detailed file notes for every stage. Where it is unlikely that detailed file notes can be produced in time with the pace of a transaction, consider preserving any handwritten notes, having a colleague take minutes of key meetings, or preparing an email with bullet points for the file as a reminder of information considered and decisions made on that day/week.

  1. Choice of advisor and consideration of advice

Office holders should be sure to instruct suitable advisors for any sales process, considering the property to be sold and the best suited advisors, taking into account all of the particular circumstances of the matter.

One of the allegations made against the administrators in the One Blackfriars case was that their choice of agent was unsuitable on the basis the agent had previously advised the syndicate of banks who had appointed the administrators. However, the Court was persuaded that while some office holders might have taken a different approach to bring fresh eyes to an assessment of the project, the appointment of the same agent was not something that no reasonable insolvency practitioner would have agreed to.

IPs who take insolvency appointments will be familiar with regulators’ requirements to document the reasons for choice of advisor, with particular focus on best value, service and experience for each insolvency appointment. Those acting as receivers may consider the benefit of a similar approach.

While most advice from advisors is likely to be documented by email, office holders should consider whether sufficient notes are made of telephone discussions, which are harder to recall several years later. In the Force India decision, the judge found the lead administrator to be a “measured and careful witness” whose evidence was “accurate and reliable”. However, he also found the administrator had a “faulty recollection” of a particular point relating to a conversation which had not been documented.

  1. Appropriate marketing

Another of the allegations against the administrators in One Blackfriars was that there had been a failure to ensure the property had been appropriately marketed. However, in that case there was clear evidence that a marketing strategy was discussed and agreed by the administrators and their agents, as recorded in a number of contemporaneous documents, allowing the judge to find that the process had been reasonable and appropriate.

The necessity of a thorough marketing process is particularly important when the successful bidder might be regarded as a special purchaser. For example, in Devon Commercial Property Limited v Barnett & Belcher, where the receivers sold the property to a subsidiary of the appointor, the judge accepted that marketing by signboards, multiple mailing lists and repeat advertisements in local and national press was “extremely thorough”, helping to lead to the conclusion that the receivers in that case had discharged their duties.

Any bidding process should also ensure fairness to third parties – see our article on the Force India decision.

It is inevitable that there will continue to be challenges to decisions made by receivers and other office holders on the disposition of properties and other significant assets. The decisions referred to above show that it is generally difficult to assert successfully that office holders have breached their duties, although it is very clear that defeating such challenges will be heavily reliant on the quality of evidence the office holder can produce. Ultimately, office holders need to show not just their answer to the question of why decisions were made, but all their workings out, if they are to sufficiently demonstrate an exercise of informed judgment in a reasonable way.

For further information on this article, please contact Katie Farmer or another member of our Restructuring & Insolvency team.

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