Enforcing Security – When Can A Secured Creditor Incur Liability?

Author:Mr Adam Pierce and Emma Zymanczyk

In Davey v. Money & Anor [2018] EWHC 766 (Ch) the owner of a company in administration alleged that the company's main asset, a commercial property, had been sold at an undervalue by the administrators, and argued that the secured creditor (Dunbar) that had appointed the administrators was liable as well as the administrators themselves. The court held that neither the administrators nor Dunbar was liable. But it did not discount the possibility that a secured creditor could incur liability for the actions of an administrator it had appointed, if it had sought to influence the administrator's actions. In this article, we explain the court's findings on this point in Davey, and summarise the extent to which a secured creditor can potentially incur liability when enforcing its security by other methods.

Sales by an administrator

Administrator acting as creditor's agent?

In Davey, the claimant attempted to fix Dunbar with liability for the administrators' alleged breaches of duty by arguing that the administrators were acting as Dunbar's agents. Dunbar argued that the administrators could not possibly be acting as its agents, because it is hard-wired into the Insolvency Act 1986 (the 1986 Act) that an administrator acts as agent of the company. The court concluded that this statutory agency does not automatically apply when an administrator sells assets subject to fixed security. The 1986 Act gives the administrator no powers to do so without the consent of the fixed charge holder or a court order. So an agency relationship could arise between lender and administrator in these circumstances, but it would require "something going beyond the legitimate involvement that a secured creditor could expect to have". An administrator can consult with a creditor, but it should not follow its directions unquestioningly.

Liability in tort

The claimant also argued that Dunbar was liable to it in tort for causing the various alleged breaches of duty by the administrators. The court held that an appointing creditor (or other third party):

cannot be liable in tort for causing administrators to breach their fiduciary duties to the company, as the law does not recognise such a tort; can be liable if shown to have dishonestly assisted a breach of fiduciary duty by administrators (although this was not alleged in this case); and can be liable if shown to have procured a breach of statutory duty (including duties under the 1986 Act) but only if it had both...

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