The recent High Court decision in Nardelli v Richardson [2024] EWHC 2750 (Ch) analyses the duties of administrators to shareholders where a company in administration is either balance sheet solvent or where a return to shareholders is likely.
What are the key takeaways from Nardelli v Richardson?
The following principles provide guidance to administrators appointed to a company that is either balance sheet solvent or where a return to shareholders is likely:
- Administrators retain the duty to perform their functions in the interests of the creditors as a whole;
- Administrators should have regard to the interests of members as a whole too (including not causing them unfair harm);
- Where both creditors’ and shareholders’ interests may be affected, but potentially be in conflict, administrators will ordinarily be expected to give primacy to the interests of creditors as a whole; and
- Where creditors interests are not affected either way by the decision of the administrators, then administrators should perform their functions in the best interests of members as a whole.
In most cases, administrators can estimate with some certainty at the outset that there will be a shortfall to a company’s creditors. Shareholders’ interests will, therefore, not ordinarily be engaged.
However, where a company in administration is either balance sheet solvent or where a return to shareholders is likely, administrators must have regard to the interests of members as a whole. Administrators should be mindful that Paragraph 74 of Schedule B1 of the Insolvency Act 1986 provides a remedy to members (and creditors) whose interests have been unfairly harmed. A successful challenge to an administrator’s conduct may, among other things, result in their removal from office.
The decision also highlights that courts, when examining the conduct of an administrator, will generally be reluctant to intrude into commercials decisions. However, conduct that does not appear to be commercially justifiable or that does not withstand logical analysis (including, of course, decisions made out of bias or bad faith) may justify the court’s interference.
When making commercial decisions (and, in particular, difficult ones), administrators should seek professional advice and document, in detail, the commercial justifications and rational analysis supporting their decisions. This exercise is particularly important where shareholder interests are engaged (for example, where a company is balance sheet solvent or where a shareholder distribution is likely), but the options presented to an administrator cause creditors’ and shareholders’ interests to be (or potentially be) in conflict.
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