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Administrator’s Power To Enter Into Settlement Agreement

It is widely known that an Administrator has the power to enter into settlement agreements and compromises without recourse to the court. Schedule B1, paragraph 60, and subsequently Paragraph 18, Schedule 1 of the Insolvency Act 1986 grants this power stating clearly that an Administrator has the ‘Power to make any arrangement or compromise on behalf of the company’.

However, in times of uncertainty or when seeking approval to enter into a settlement agreement that would result in a particularly momentous decision, an Administrator may seek approval from the court. The judgment in the case of Re Nortel Networks UK Ltd and Others sets out the factors which the court will consider before granting approval.

By way of a background:

  • The Nortel Group operated through more than 130 subsidiary companies across numerous jurisdictions
  • Following administration, the largest creditors were pension funds located in the United Kingdom and the United States
  • Realisations were an estimated 7.3 Billion US dollars
  • The numerous groups were unable to agree the distribution of the funds despite extensive negotiations which included mediation
  • The US and Canadian courts were tasked with determining how the funds should be distributed
  • Following their judgment, a French company, NNSA, decided to appeal the decision, however was refused permission to appeal the US and Canadian judgment
  • As such, a further global mediation was held and a conflict administrator appointed
  • The conflict Administrator made an application to the High Court for approval of the Global Settlement

Despite acknowledging that an Administrator has the power to compromise and enter into settlements, Snowdon J, stated that he would approve and authorise the settlement. This was on the basis that the matter was of a particularly momentous nature. Snowdon J proceeded to set out when the court will provide directions:

  1. In commercial matters, an Administrator is generally expected to exercise his own judgment without seeking approval from the court, however, when exercising the power to settle or compromise an Administrator can seek directions from the court if there is a particular reason for doing so.
  2. One such reason is where an Administrator has exercised his own judgment and decided a settlement or compromise is in the best interests of creditors, however, he may apply to court for approval of the settlement or compromise if it is a particularly momentous decision.
  3. The proposed course of action must be within the Administrator’s power.
  4. The Administrator genuinely holds the view that what is proposed will be for the benefit of the company and its creditors.
  5. The Administrator is acting rationally and without being affected by a conflict of interest in reaching his view.
  6. The court will not give its approval if it is left in any doubt as to the propriety of the proposed course of action because approval will prevent subsequent challenge by a creditor. As such, an Administrator must produce all relevant material to the court, including a statement of his reasons.
  7. The court should not withhold its approval on the basis that it would not have exercised the power in the way proposed.

This case confirms that an Administrator may seek approval from the court for settlement given the presence of exceptional circumstances and gives some indication of the factors which will be considered upon such an application.

Posted: 26.07.2017
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