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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Zinc Hotels (Investment) Ltd & Anor v Beveridge & Ors [2018] EWHC 1936 (Ch) (20 July 2018) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2018/1936.html Cite as: [2018] EWHC 1936 (Ch), [2018] WLR(D) 570 |
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Neutral Citation Number: [2018] EWHC 1936 (Ch)
Case No: CR-2018-000182
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY & COMPANIES LIST (ChD)
IN THE MATTER OF: ZINC
HOTELS
(HOLDINGS) LIMITED;
ZINC
HOTELS
FREEHOLDS LIMITED;
ZINC
HOTELS
LIMITED;
ZINC
CROYDON 1 LIMITED;
ZINC
CROYDON 2 LIMITED;
ZINC
EAST MIDLANDS AIRPORT 1 LIMITED;
ZINC
EAST MIDLANDS AIRPORT 2 LIMITED;
ZINC
LEEDS CITY 1 LIMITED;
ZINC
LEEDS CITY 2 LIMITED;
ZINC
LONDON KENSINGTON 1 LIMITED;
ZINC
LONDON KENSINGTON 2 LIMITED;
ZINC
WATFORD 1 LIMITED;
ZINC
WATFORD 2 LIMITED;
ZINC
PUCKRUP HALL 1 LIMITED;
ZINC
PUCKRUP HALL 2 LIMITED;
ZINC
PUCKRUP HALL 3 LIMITED;
ZINC
PUCKRUP HALL 4 LIMITED;
ZINC
NORTHAMPTON 1 LIMITED;
ZINC
NORTHAMPTON 2 LIMITED;
ZINC
COBHAM 1 LIMITED;
ZINC
COBHAM 2 LIMITED;
ZINC
NOTTINGHAM 1 LIMITED;
ZINC
NOTTINGHAM 2 LIMITED;
ZINC
YORK 1 LIMITED;
ZINC
YORK 2 LIMITED (ALL IN ADMINISTRATION)
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
Date: 20thJuly 2018
Before:
Mr Justice Henry Carr
- - - - - - - - - - - - - - - - - - - - -
Between :
1) Zinc
Hotels
(Investment) Limited
2) Top Zinc
Limited
Applicants
-and-
1) Alastair Beveridge
2) Ryan Grant
3) Catherine Williamson
4) Daniel Imison
(Joint Administrators of the above-named companies)
5) FCCO DESIGNATED ACTIVITY COMPANY
6) FCCD DESIGNATED ACTIVITY COMPANY
7) GLOBAL LOAN AGENCY SERVICES LIMITED
8) GLAS TRUST CORPORATION LIMITED
9) HAYFIN OPAL III LP
10) HAYFIN OPAL LUXCO 2 SARL
11) HAYFIN TOPAZ LUXCO 2 SCA
12) HAYFIN SPECIAL OPS LUXCO 2 SARL
Respondents
- - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - -
Stephen Davies QC and Rowena Page(instructed byClarion Solicitors Limited) for theApplicants
Tom Smith QC and Hannah Thornley(instructed byFreshfields Bruckhaus Deringer LLP) for theRespondents 1-4
David Alexander QC and Alex Barden(instructed bySidley Austin LLP) for theRespondents 5-6
Marcia Shekerdemian QC and Joseph Curl(instructed byProskauer Rose (UK) LLP) for theRespondents 7-8
Guy Morpuss QC and Christopher Charlton(instructed byMacfarlanes LLP) for theRespondents 9-12
Hearing dates: 10th, 11thand 12thJuly 2018
- - - - - - - - - - - - - - - - - - - - -
APPROVED JUDGMENT
MR JUSTICE HENRY CARR:
Introduction
1. The Applicants, (“the Shareholders”), are the ultimate shareholders of 25 companies in the Zinc
Group of companies (“the
Zinc
Companies”). On 9 January 2018, AlixPartners LLP, (“AlixPartners”), were appointed by the secured creditors of the companies as joint administrators of the
Zinc
Companies (“the Administrators”).
4. All allegations made against the Administrators are strongly denied. The Administrators contend that they have performed, and are continuing to perform, their duties properly. They claim that they are seeking to realise the assets of the Zinc
Companies in accordance with the statutory objectives of administration. They have considered the Shareholders’ allegations, which they reject. The Administrators claim that they face competing demands as to how they should proceed: on the one hand from the Shareholders, and on the other hand from the lenders, who are owed hundreds of millions of pounds of unpaid debt. It is alleged by the Administrators that the Shareholders are seeking to disrupt and delay the sales process in order to pressurise the lenders to reduce the amount of the debt, which they are not willing to do. The Administrators consider that their duties require them to proceed to realise the
Zinc
Companies’ assets.
(1) First, an order appointing“additional concurrent joint administrators”. According to the order sought, the function of the additional administrators will be“to represent the interests of contributories/shareholders for the purpose of achieving the statutory purpose of the administrations”; and
(2) Secondly, an order restraining the Administrators from distributing the proceeds of any assets realised in the administrations pending the resolution of certain legal claims.
The Background Facts
7. The Zinc
Companies hold the freehold and long leasehold titles to 10
hotels
which trade under the Hilton brand (“the
Hotels”).
These comprise the Kensington Hilton and nine other Hilton
hotels
in different parts of the country, (“the Regional Nine”).
8. The beneficial interest in the long leaseholds is held by Zinc
Hotels
Limited, (“ZHL”), and the
Hotels
are leased under occupational leases to companies in the Hilton group.
9. The First Applicant is the sole shareholder of Zinc
Hotels
(Holdings) Limited, (“ZHHL”), which is the sole shareholder of ZHL. The Second Applicant is the sole shareholder of the First Applicant. The Applicants are controlled by Mr Vincent Tchenguiz and Mr Dror Pasher.
10. Prior to 2002, the Hotels
were owned by the Hilton Group. In August 2002, they were subject to a sale and leaseback transaction. The current financing arrangements were put in place pursuant to a restructuring which took place in 2014 and which included:
(1) A £249,948,351 term loan facility dated 11 November 2014 between ZHL as borrower and the lenders, (“the 2014 Facility”), which was repayable on 10 July 2017;
(2) A debenture dated 11 November 2014 granted by ZHL and other companies in the Zinc
group as guarantors in favour of GLAS Trust Corporation Limited as security trustee, (“the Security Agent”). This comprises legal mortgages and fixed and floating charges over the property of the chargors, including the
Hotels;
and
(3) Interest rate and inflation rate swaps which were entered into between ZHL and one of the lenders, Bayerische Landesbank, (“BLB”), (“the Swaps”).
12. On 9 January 2018, certain partners of AlixPartners were appointed as administrators of ZHL and 24 other companies in the Zinc
Group. The appointments were made by the Security Agent as the holder of qualifying floating charges pursuant to paragraph 14 of Schedule B1 to the 1986 Act. By the date of the appointments, the 2014 Facility had been in default for about six months. Originally, Alastair Beveridge, Ryan Grant and Catherine Williamson were appointed. Daniel Imison, who has served witness statements on this application, replaced Ryan Grant in March 2018 pursuant to a block transfer order, when Mr Grant left AlixPartners.
13. Prior to the appointment of the Administrators, AlixPartners had been engaged by the lenders to undertake a contingency planning exercise, including preparing to accept an appointment as administrators of companies in the Zinc
Group, if that proved to be necessary. This forms an important aspect to the Shareholders' complaint of a conflict of interest on the part of the Administrators.
14. Prior to the administration, in 2016 and 2017, a sales and marketing process was undertaken in respect of the Hotels.
At that time, the process was under the control of the
Zinc
Companies. During the 2016 marketing process, a verbal offer of £267 million was made by Cola Holdings Limited (“Cola”) for the Kensington Hilton, and during the 2017 process, non-binding heads of terms dated 6 December 2017 were entered into with Cola in respect of an offer of £261.5 million for the Kensington Hilton. The relatively modest difference between the two Cola offers was because the 2016 offer was on a share sale basis, whereas the 2017 offer was on an asset sale basis and as a result, stamp duty land tax would be payable by Cola.
15. The 2017 sales process was undertaken by Savills (UK) Limited ("Savills") and Jones Lang LaSalle Limited (“JLL”), who are of course well-known sales agents. The sales agents were appointed by the Zinc
Companies. The heads of terms with Cola were entered into when the
Zinc
Companies were under the control of Mr Tchenguiz and Mr Pasher. In my view, this shows that, at the time, they considered the Cola offer was one which it was appropriate to accept.
16. During 2016 and 2017, Savills had expressed some views on the possible sales proceeds which might be achieved. Firstly, in a pitch in May 2016 and secondly, in a pricing overview document in 2017. The Shareholders rely on the estimates given at that time of the value of the Hotels
as between £550 million and £600 million. If this sum was realised, this would produce a surplus to the Shareholders of between £50 million and £100 million. However, neither the pitch nor the pricing overview was a valuation, still less a formal valuation, undertaken in accordance with the RICS Valuation Professional Standards, which is known as the“Red Book".
17. Following their appointment, the Administrators commissioned a formal “Red Book”valuation from Christie & Co, who are experienced and reputable hotel
valuers (“the Christie & Co Valuation”). The Administrators’ evidence is that this formal valuation was undertaken because the views which had been expressed by Savills were not a valuation, let alone a formal“Red Book”valuation. Christie & Co were selected as they were independent. The Christie & Co Valuation indicated that the value of the
Zinc
Companies' assets would break within the secured debt and that there would be no return for the unsecured creditors or shareholders.
18. Since the sales process for the Hotels
is currently ongoing, the Christie & Co Valuation is regarded by the Administrators as confidential. Understandably, the Administrators do not wish bidders to have the benefit of being aware of the confidential valuations provided to the Administrators.
22. The liabilities of the Zinc
companies as at 9 January 2018 comprised:
(1) About £519 million of secured liabilities, being about £275 million owing under the 2014 facility and about £244 million, being the mark-to-market valuation of the liabilities under the swaps; and
(2) About £3.5 million of unsecured liabilities.
The Administrators' Proposals.
“(1) The administrator of a company must perform his functions with the objective of
“(a) rescuing the company as a going concern, or
“(b) achieving a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being in administration), or
“(c) realising property in order to make a distribution to one or more secured or preferential creditors.
“(2) Subject to sub-paragraph (4), the administrator of a company must perform his functions in the interests of the company's creditors as a whole.
“(3) The administrator must perform his functions with the objective specified in sub-paragraph (1)(a) unless he thinks either
“(a) that it is not reasonably practicable to achieve that objective, or
“(b) that the objective specified in sub-paragraph (1)(b) would achieve a better result for the company's creditors as a whole.”
25. InDavey v Money [2018] EWHC 766 (Ch), Snowden J explained that the first objective is concerned with achieving a result in which all creditors are paid in full and the company is restored to financial health for the benefit of its shareholders. This cannot be achieved if all of the assets of the company are sold. He said at 283:
“The concept of rescuing a company as a going concern is not achieved by successfully realising all of its assets so that distributions of surplus monies can be made to shareholders after paying creditors in full. It connotes the retention of all, or a material part, of the business of the company, together with a restoration of the solvency of the company, so that the company can properly continue to trade as a going concern.”
26. In the present case, the Administrators contend that there was no credible proposal for the rescue of the Zinc
Companies as going concerns. Accordingly, the proposals prepared by the Administrators stated that the Administrators were of the view that it was not reasonably practicable to pursue objective 1.
27. The proposals also expressly noted that the Administrators had become aware of certain potential claims of the Zinc
Companies and that, depending on a review of those claims, they might seek to revise the proposals to change the objective of the administrations. The proposals stated that the Administrators would pursue the second objective of administration, namely to seek to achieve a better result for the
Zinc
Companies’ creditors as a whole than would be likely if the companies were wound up without first being in administration.
The sales and marketing process for the Hotels
28. In order to realise objective 2, the Administrators considered that it was appropriate to continue with the existing sales and marketing processes underway in respect of the Hotels,
which had already been undertaken on behalf of the
Zinc
Companies.
31. The process for marketing the Kensington Hilton by Savills and JLL was subject to a variety of criticisms by the Shareholders. First it was said that the Kensington Hilton was not marketed to institutional buyers. This was factually incorrect. The correct position is recorded in a recommendation letter from JLL and Savills to Zinc
Hotels,
in administration, care of Ryan Grant dated 16 March 2018.
35. The Administrators’ evidence is that they are satisfied that the sales and marketing processes which have been, and are being, undertaken for the Hotels
are appropriate and will result in proper market value being obtained for the benefit of all stakeholders, including the Applicants.
The interim application
“a) grant relief;
b) dismiss the application;
c) adjourn the hearing conditionally or unconditionally;
d) make any interim order;
e) make any other order it thinks appropriate.”
39. The starting point for the Shareholders' argument that such a power exists, is that an administrator is an officer of the Court whether or not he is appointed by the Court (see in particular paragraph 5 of Schedule B1). Therefore, the Act is formulated against the backdrop of the Court's overarching power of control and management of the insolvency process. This was pointed out inDonaldson v O'Sullivan [2009] 1 WLR 924 at 39, pages 938 A to B.
40. In theDonaldsoncase, Lloyd LJ said at 41, having reviewed the relevant case law:
“All of those cases seem to me to support the thesis that bankruptcy is a court-controlled process in relation to which the court has wide powers exercisable for the purpose of the insolvency process as a whole, which are not limited to those conferred expressly by the relevant legislation. There are non-statutory elements in the law of bankruptcy, such as the principle inEx P JamesLR 9 Ch App 609, even though these may result in an application of assets which is not strictly in accordance with legal rights and obligations. There is also scope for the court to direct that things be done or not done in apparent conflict with the express provisions of the legislation.”
41. The Shareholders contend that the wide ambit of the Court's supervisory jurisdiction to control its officers is recognised throughout the case law. InRe Atlantic Computer Systems plc [1992] Ch 505 Nicholls LJ held at 543G, regarding the Court's ability to impose conditions, that:
“It may do so directly by giving directions, or in the exercise of its control over an administrator as an officer of the court.”
42. Similarly, inRe Mirror Group Holdings Limited [1993] BCLC 538, the Vice Chancellor said:
“The only footnote I add is that Mr Trace contended that in any event, the court has no jurisdiction to give any directions as sought because the Insolvency Act makes no provision for an application for directions such as this. I do not accept this. As noted inRe Atlantic Computer Systems [1990] BCC 859 at page 881 G, the court may exercise control over the administrators as officers of the court and may give direction to that end. So the court has jurisdiction.”
43. The extent of the jurisdiction has been expressly recognised in the context of paragraph 74 applications. David Richards J, as he then was, said inClydesdale Financial Services v Smailes [2009] EWHC 1745 (Ch) at paragraph 15:
“However, I have no doubt that under the general power conferred by paragraph 74(3), the court could remove an administrator and appoint a replacement.”
44. It has also been recognised that there is power to appoint an additional administrator to “hold the ring” pending an application to remove the existing administrators. InClements v Udal [2001] BCC 658, Neuberger J, as he then was, held that he had power under the Court's general jurisdiction to appoint an administrator on a temporary basis, pending an application for removal of the existing administrators. He said at page 661D:
“So far as administrators and liquidators are concerned, there is no statutory power which in terms gives the court power to do that which I am invited to do. However, I think that Mr McCormack-Smith is right to say that there is an inherent jurisdiction to grant such relief.”
45. He then cited Lord Millett inDeloitte & Touche AG v. Christopher D. Johnson and Another(Cayman Islands) [1999] UKPC 25 and said:
“Whilst that does not precisely cover this case, it seems to me that it is consistent with those observations to hold that there is a power to add, in appropriate cases, a liquidator in a compulsory liquidation, and if that is right, then it must follow that in an appropriate case where good grounds are shown, a temporary order to that effect may be made.”
50. Finally, inRe Switch Services Limited [2012] Bus LR D91 the Court was concerned with the appointment of an interim administrator in respect of a proposed application for an administration order. The Court held, again, that there is no such thing as an interim administrator without there first being an administration.
“A person may not be appointed as administrator of a company which is in administration subject to the provisions of paragraph 90 to 97 and 100 to 103 about replacement and additional administrators.”
55. Paragraph 103 provides, insofar as material:
“(1) Where a company is in administration, a person may be appointed to act as administrator jointly or concurrently with the person or persons acting as the administrator of the company ...
“(3) Where a company entered administration by virtue of an appointment under paragraph 14, an appointment under sub-paragraph (1) must be made by
“(a) the holder of the floating charge by virtue of which the appointment was made, or
“(b) the court on the application of the person or persons acting as the administrator of the company ...
“(6) An appointment under sub-paragraph (1) may be made only with the consent of the person or persons acting as the administrator of the company.”
58. Sealy & Milman also explain the purpose of paragraph 103(6). The authors state that:
“This provision applies in each of the cases covered by paragraphs 103(2) to 103(5). It ensures that anyone already in office is not to have wished on him a newcomer that he does not feel happy to work with, even where the new appointment is made by the court.”
59. In this regard, it is relevant to refer to the judgment of Lord Neuberger inReLehman Bros International (Europe) (in administration)(No 4) [2017] UKSC 38, [2017] 2 WLR 1497. Lord Neuberger said at paragraph 13:
“Further, despite its lengthy and detailed provisions, the 1986 legislation does not constitute a complete insolvency code. Certain long-established judge-made rules, albeit developed at a time when the insolvency legislation was far less detailed, indeed by modern standards positively exiguous, nonetheless survive.”
He then gave various examples from the case law of such judge-made rules.
“Provided that a judge-made rule is well established consistent with the terms and underlying principles of current legislative provisions and reasonably necessary to achieve justice, it continues to apply. And as judge-made rules are ultimately part of the common law, there is no reason in principle why they cannot be developed, or indeed why new rules cannot be formulated. However, particularly in the light of the full and detailed nature of the current insolvency legislation and the need for certainty, any judge should think long and hard before extending and adapting an existing rule, and even more before formulating a new rule.”
62. In my judgment, the relevant principles, in brief summary, are as follows:
(1) The Court does not have power to appoint a provisional administrator before a company has been placed in administration.
(2) Once a company has been placed in administration, the Court does have power to appoint an additional administrator pursuant to paragraph 103 of Schedule B1 to the 1986 Act.
(3) The Court has power to grant an interim order to appoint an additional administrator pursuant to paragraph 74(3)(d) of Schedule B1. As illustrated by the judgment of Neuberger J inClements v Udal, it may be appropriate to exercise this power, albeit in unusual circumstances.
(4) However, the Court does not have power to appoint an additional administrator, whether on an interim or on a final basis, unless the conditions of paragraph 103 of Schedule B1 are complied with.
Other Arguments
65. It was submitted on behalf of the Shareholders that the familiar three-stage approach set out inAmerican Cyanamid v Ethicon (No. 1) [1975] AC 396 is not appropriate where the application is to appoint an additional administrator. It is said that no injunction is sought, no one is being mandated to do or not to do something and no obvious harm could result. The relief sought in the instant case is simply an example of the general control that the Court has over its officers. It is not an injunction between two private individuals, but rather an application brought by interested parties to restore and uphold the integrity of appointment which creditors, members and the general public are entitled to expect that an officeholder will maintain.
66. The Shareholders relied on the decision of Mr Registrar Jones inVe Vegas Investors IV LLC and Others v Henry Shinners and Others [2018] EWHC 186 (Ch), in particular at paragraph 18. When considering whether to remove administrators, the learned registrar said:
“The application, by raising a conflict of interest, required me to decide whether there is a serious issue for investigation, not whether the claims identified for investigation have merit. That is because removal may be ordered if an independent review cannot be carried out because of conflict.”
See alsoClydesdale Financial Services Limited v Smailes [2009] BCC 810 at 30 per David Richards J, as he then was, andSisu Capital Fund Ltd v Tucker [2006] BCC 463 at 89 per Warren J.
68. The case before me does not raise any such issue. The somewhat unusual nature of such an investigation was emphasised by Norris J inBLV Realty Organization Limited v the Joint Administrators of Zegna III Holdings Inc [2009] EWHC 2994 (Ch) at 17. Referring to the facts of the case before him, he said:
“The circumstances of the decision-making are, it seems to me, miles away from those considered inClydesdale Financial Services Limited v Smailesto justify the removal of an administrator and thereby facilitate examination of a pre-packed sale on questionable terms which he himself had negotiated immediately before appointment.”
Serious Question to be tried
Prior engagement of AlixPartners
75. Hoffmann J said at 374A-B:
“Pricewaterhouse ought to be appointed administrators on the grounds that they are already in possession of a great deal of information and that they are able to carry out the administration more cheaply, effectively and quickly on account of their existing knowledge of the company than Touche Ross.”
“The second point to be derived fromCommonwealth Bank of Australia v Fernandezis that the judge did not think that there was an absolute bar upon the appointment of administrators who had had a prior business relationship with the secured creditors and had been nominated by them. Instead, he plainly thought that the question of whether the insolvency practitioners could be relied upon to act impartially and in accordance with their duties required an assessment of all the circumstances.”
“The proposed administrator will ordinarily undertake an investigation of the company's affairs and financial position, and consequently offer advice before being appointed, which will include advice on the timing and manner of appointment.”
82. The Administrators' evidence is that they were in compliance with the relevant provisions of the Ethics Code. In particular, the 2014 engagement was more than three years before the appointment. The work done on the 2017 engagement, prior to the administration, was contingency planning and did not involve the provision of advice that administrators should be appointed. The work did not impact on the financial state or stability of the Zinc
Companies. The appointment as administrators was unlikely to involve any consideration or investigation of the work done pre-administration by AlixPartners, and the fees for the engagement were not abnormal for this type of work. This final proposition concerning the fees was challenged on behalf of the Shareholders, who calculated that 400 hours was spent by the Administrators during the 2017 engagement.
85. The Shareholders complain that AlixPartners did not specifically disclose to the Zinc
Companies that the Administrators intended to accept the appointment. It is correct that the Security Agent who appointed the Administrators did not give prior warning to the
Zinc
Companies of the appointment of Administrators. The demand for payment and the appointment of the Administrators took effect on the same day, on 9 January 2018. In these circumstances, the Ethics Code requires that the Administrators should consider whether the circumstances give rise to an unacceptable threat to compliance with the fundamental principles. The Administrators were satisfied that there was no unacceptable threat. In these circumstances, on the evidence before me, I do not accept that there has been any breach by the Administrators of their professional duties in accordance with the Ethics Code.
Engagement of Ashurst
87. It is, however, well established that there is no bar to the same firm of solicitors acting for both the office-holder and for a creditor. For example, inAvonwick v Shlosberg [2017] Ch 210, Arnold J stated at 46:
“There is nothing inherently objectionable about a solicitor acting for both a trustee in bankruptcy or liquidator and a major creditor of the bankrupt or insolvent company. On the contrary, it has been recognised that this may well be convenient because of the creditor's familiarity with the debtor's affairs and because of absence of any real likelihood of a conflict of interest between the trustee and liquidator and the creditor: seeIn reSchuppan (A Bankrupt) [1996] 2 All ER 664 (Robert Walker J)”
Failure to seek to achieve objective 1
94. During the course of the administrations, the Administrators engaged with the Applicants, as the ultimate shareholders in the Zinc
Companies, on a number of occasions. Seven meetings have been held with Mr Tchenguiz and Mr Pasher since the start of the administrations. There has therefore been considerable opportunity for the Shareholders to put forward any proposals for a funded rescue or recapitalisation.
96. Secondly, the Shareholders claim that an offer made on 2 May 2018 by Consensus Business Group (“CBG”), which is an entity owned and controlled by Mr Tchenguiz, was a refinancing offer which would have permitted the pursuit of objective 1. However, the offer on 2 May was an offer to acquire the portfolio of hotels
with the acquisition to be structured, either as a corporate deal whereby CBG would acquire the shares in the
Zinc
nominee companies together with an assignment of ZHL interest, or an asset deal whereby CBG would acquire the long leaseholds themselves. It was not an offer to refinance or recapitalise the
Zinc
Companies.
97. Next, the Shareholders relied upon an offer received on 14 June 2018 which it is said would enable objective 1 to be achieved. However, this offer related solely to the Regional Nine and did not make any proposal to deal with the Kensington Hilton, which it said would be dealt with separately. In substance, it was an offer to acquire the Regional Nine for an acquisition of the shares in the relevant Zinc
Companies. Accordingly, in my judgment, it was not possible for the Administrators to pursue objective 1. The decision of the Administrators that it was appropriate to pursue objective 2 and seek to sell the
Hotels
for the maximum value was, in my view, the only option realistically open to them.
Failure to assess, value and realise the claims
100. The Shareholders rely upon the following claims:
(1) A claim by Zinc
Companies against the Hilton tenants for alleged breach of their obligations under the occupational leases to meet capital expenditure requirements in order to maintain the
hotels
to the Hilton brand standards. This was referred to by the parties as “the Capex Claim”.
(2) Claims by the Zinc
Companies against BLB to rescind the Swaps and/or for damages in relation to the Swaps, (“the Swaps Claim”), and a claim to rescind the 2014 facility, (“the Loan Reduction Claim”).
(3) A claim by the Zinc
Companies against the Hilton Group for alleged unlawful conspiracy in relation to the sales and marketing process for the
hotels,
(“the Assets Claim”).
The Capex Claim
101. The Capex Claim was commenced by the Zinc
Companies prior to the start of the administrations. The Administrators have since taken over the conduct of the claim and have retained the same counsel team comprising two well-known silks who were previously engaged by the
Zinc
Companies.
103. As to the damages claim, the Zinc
Companies' skeleton argument before Mr Hochhauser QC in support of specific performance stressed the great difficulty in quantifying any damages. The Shareholders assert that the Capex Claim could be worth £111,572,000. However, this is not supported by the advice which the Administrators have received in respect of the Capex Claim from their barristers. In his judgment dismissing the appeal against the strike out of the specific performance claim, Mr Hochhauser QC concluded that the suggestion that damages, which are based on the alleged diminution in value of the
Zinc
Companies' reversionary interest in the
Hotels,
could amount to £100 million, was unachievable (see in particular paragraph 48.3.2 of his judgment).
(1) The offers made by Cola in 2016 and 2017 for the Kensington Hilton were made on the basis that the sale would be effected by a share sale and thus Cola would acquire all the assets of the lessor, which would include any benefit of the Capex Claim. Therefore, those offers necessarily took into account the Capex Claim.
(2) Although the sale is now to be completed as an asset sale rather than a share sale, Cola has not reduced its previous offer, other than to reduce the stamp duty land tax now payable on an asset sale.
(3) Cola plainly does not regard the Capex Claim as an asset, since it requires that the part of the Capex Claim attributable to the Kensington Hilton must be discontinued as a condition of the sale.
106. As to the Regional Nine, bidders have been supplied with information regarding the Capex Claim, as Mr Imison explains in his second statement at paragraph 69. Accordingly, they have been fully aware of the existence of this claim. Furthermore, the final bidders have been asked to submit offers on the basis that the Capex Claim in relation to the Regional Nine will not be transferred and will remain with Zinc
Companies. Therefore, if there is a value in that claim, it will be recovered by the
Zinc
Companies.
107. I have briefly referred to the allegation by the Shareholders that the sales and marketing process for the Hotels
has failed properly to exploit the fact that the Hilton tenants might be willing to pay a surrender premium in order to exit the occupational leases. On the evidence before me, I do not consider that there is any serious question to be tried in respect of this allegation. The bidders for the
Hotels
are aware of the existence of the leases under which the
Hotels
are leased to the Hilton tenants. They are therefore aware that, as in any case where premises are subject to a lease, there might be a possibility of agreeing a surrender premium with the tenants.
109. In those circumstances, it appears to me that bidders who wish to pursue the surrender premium, as opposed to choosing the option to retain Hilton as blue chip tenants, must have factored it into their assessment of what they are willing to pay for the Hotels.
110. I should record that very serious allegations were made against the sales agents Savills and JLL by the Shareholders. It was said that, because of a deep relationship with the Hilton Group, they had deliberately undervalued the Hotels.
That is an allegation of dishonesty. The allegation is, in my view, implausible and is strongly denied by the sales agents.
111. It is particularly curious that this allegation is raised in respect of the Kensington Hilton, when the same sales agents were chosen by the Zinc
Companies and obtained the same offer from Cola immediately prior to the administration, which at the time Mr Tchenguiz plainly regarded as acceptable.
113. In any event, this does not explain why the Zinc
Companies were apparently prepared to accept the Cola bid at that stage if it is in fact an undervalue; they obviously wish to get the best price possible for the Kensington Hilton, irrespective of the amount of their outstanding loan.
The Swaps Claim and the Loan Reduction Claim
116. Similarly, Ms Tolaney's advice was also sought in relation to the Loan Reduction Claim. Ms Tolaney's advice is, again, confidential, but in the light of that advice, the administrators do not believe that there is any merit in the Loan Reduction Claim. For my part, it is difficult to see how, even if the Zinc
Companies could rescind the 2014 facility, that this would somehow enable them to escape the obligation to pay the sums due under that facility.
118. In the circumstances, the Administrators disagree with the views expressed by the Shareholders about the Swaps Claim and the Loan Reduction Claim as valuable assets of the Zinc
Companies. On the contrary, the Administrators consider that the 2014 Facility and the Swaps give rise to valid liabilities owed by the
Zinc
Companies to the lenders. On the evidence before me, I consider that this view is entirely reasonable.
The Assets Claim
119. I then turn to the Assets Claim. This relates to an alleged unlawful conspiracy by the Hilton Group in relation to the sales process for the Hotels.
Certain Hilton directors have been included as personal defendants in this claim. The decision to include these individuals personally will require explanation and justification should this claim proceed.
120. The particulars of claim contain a number of serious allegations directed at the Hilton Group, including allegations of breach of confidence. In essence, it is alleged that the Hilton Group unlawfully interfered with the sales and marketing processes in order to drive the prices for the Hotels
down, either so that the group itself could acquire the
Hotels
at a reduced price pursuant to its right of first offer under the terms of the leases, or so that it could minimise the amount of any surrender premium which might be negotiated with any purchaser.
121. By a letter dated 2 February 2018 from Teacher Stern, who were then acting for the Shareholders, it was alleged on behalf of the Zinc
Companies that the lenders had disclosed confidential information concerning the bidding process to potential bidders. That was a very serious allegation which was not pursued in the particulars of claim. The allegation should never have been made. Mr Davies withdrew the allegation during his reply speech. The fact that the Shareholders were prepared to make such an allegation of misuse of confidential information against the lenders, apparently without any foundation whatsoever, undermines the credibility of the allegations of misconduct which they still seek to pursue.
122. The Administrators do not consider that they have seen any evidence which supports these serious allegations. The Administrators take the view that they have seen no evidence that the Hilton Group has improperly interfered with the sales and marketing process, or that the sales and marketing process has not and will not result in proper value being obtained for the Hotels.
I should record that, on this application, I have not seen any such evidence. Indeed, no evidence was presented in support of these allegations, in spite of numerous witness statements having been served on behalf of the Shareholders.
“Prior to the appointment of the administrators, some or all of Alix, the lenders, Ashurst and Savills/JLL have communicated information to Hilton in such a way as to jeopardise the value of the surrender premium and improve Hilton's position under the ROFO.”
The ROFO refers to Hilton’s Right of First Offer.
Assignment Proposal
131. So far as the Capex Claim is concerned, in relation to the Kensington Hilton, Cola has indicated that it wishes that part of the Capex Claim attributable to that hotel
be discontinued. As the Administrators wish to accept the Cola offer, they consider it appropriate to comply with this condition, rather than to assign the action to the Shareholders.
132. In relation to the Regional Nine, the Capex Claim will remain with the Zinc
Companies. Accordingly, if, following the completion of the administrations, the
Zinc
Companies wish to pursue the Capex Claim in relation to the Regional Nine, then they will be at liberty to do so. Insofar as there is any value in the Capex Claim in relation to the Regional Nine, it will therefore remain with the
Zinc
Companies.
133. Finally, the Administrators do not consider that it would be appropriate to assign either the Swaps Claim or the Loan Reduction Claim given the advice received on the merits of those claims. It seems to me that the Administrators' decisions are entirely reasonable. They also do not consider it appropriate to assign the Assets Claim. If, following the sale of the Hotels,
the administrations are concluded and the
Zinc
Companies are returned to their directors, then the
Zinc
Companies will be able to take a decision as to whether to pursue the Assets Claim at that point. There is no question of the claim becoming time-barred until 2023.
Alleged Breach of Duty
137. If the matter involves a commercial decision by administrators, then the court will not interfere with that commercial judgment, unless it was based on a wrong appreciation of the law or was conspicuously unfair to a particular creditor or counterparty. See, for example,BLV Realty Organization Limited v Batten [2010] BPIR 277.
141. In addition, it was made absolutely clear on behalf of the Shareholders that there is no offer of a cross-undertaking in damages which, given the financial position of the Zinc
Companies, would need to be fortified. This means that any loss suffered by reason of disruption to the administrations, including the loss of the Cola offer in respect of the Kensington Hilton, would not be compensated. Of itself, this is a reason to refuse the application.
“In this particular case, I would expect interim conflict administrators to undertake the following functions:
“1. Investigate the background to and circumstances giving rise to the Cola bid.
“2. Review the merits and any appropriate strategy for pursing or settling the various claims of the companies in administration.
“3. Reconsider with the Administrators the statutory proposals, with a view to bringing into consideration the point of view of the Shareholders (especially the need to evaluate and realise the surrender premium/CAPEX claim).
“4. Review the alleged need to sell any of the Hotels
pending trial and to report thereon to the Administrators and, if necessary, the court.
“5. To the extent necessary to achieve 1 to 4 above, instruct agents, including independent lawyers, to advise on the various claims and independent selling agents for advice.
“6. In so far as necessary pending trial, to place the Hotels
on the market in a fresh sales process conducted by independent agents.”
Injunction to restrain distribution of sale proceeds
148. The Hotels
are presently subject to legal mortgages and fixed-charge security in favour of the Security Agent. Accordingly, in order to proceed with the sales, it will be necessary for the Security Agent to consent to the release of the security or for the court to make an order under paragraph 71 of Schedule B1 releasing the security, as explained by Snowden J inDavey v Moneyat paragraph 593:
“Additionally, where an administrator seeks to sell an asset which is subject to a charge, further statutory considerations intervene. An administrator is generally authorised to dispose of assets subject to a floating charge as if the assets were not subject to that charge: see paragraph 70(1) of Schedule B1 to the 1986 Act. He is not, however, generally authorised to dispose of assets subject to a fixed charge unless the charge-holder gives its consent to such a disposal. The rights of the fixed chargeholder can be overridden by the court granting an order under paragraph 71(1) enabling the administrator to dispose of the property as if it were not subject to the fixed charge, but only if the conditions set out in paragraph 71(2) of Schedule B1 are satisfied, and then only on terms providing for payment of the proceeds to the fixed chargeholder together with any additional amounts necessary to produce the amount determined by the court to be full market value: see paragraph 71(3) . As such, a sale by an administrator of a property subject to a fixed charge will necessarily require the administrator to seek the consent of the holder of the fixed charge to that disposal or to make an application to court if consent is not forthcoming.”
149. I must approach the application on the basis that the sales of the Hotels
will be proceeding, since no interim relief has been sought seeking to restrain such sales. If the sales of the
Hotels
take place, there is, in my judgment, no proper basis for not paying the sales proceeds to the Security Agent. The Security Agent holds valid security over the
Hotels,
which will need to be released in order to enable the sales to take place. There are no grounds for disputing the validity of the liabilities to the lenders under the 2014 Facility, or the Swaps, or the validity of the security. In these circumstances, the Security Agent is entitled to receive the net proceeds of the sales.
150. In circumstances where the Security Agent vigorously opposes the interim order to freeze the proceeds of the sale, in my judgment, the requirements for the grant of an interim injunction are not satisfied. In particular, there is no serious issue to be tried because, as holders of the legal mortgages and fixed-charge security over the Hotels, the Security Agent is clearly entitled to receive the sale proceeds. Furthermore, there is no risk of an actionable wrong occurring, which is of course an essential requirement for the grant of an injunction. And, finally, no cross-undertaking with suitable fortification has been offered.
Conclusion