Analysis of the UGL/DTZ Deal and the Role of CY Leung from the Perspective of Corporate Rescue
The sale by DTZ Holdings plc of its assets (including all its
subsidiaries and trade marks) to UGL in December 2011 involved intricate issues
of company and insolvency laws. It was carried out by way of a mechanism called
“pre-pack sale”. Such mechanism is rather unique in England and not very well
understood by the public, especially those outside England. This article
explains the basics of a “pre-pack sale” and the legal issues involved in the
transaction, in particular the role of CY Leung.
What is a “pre-pack sale”?
A “pre-pack sale” is a mechanism of corporate
rescue that has become popular in England since the Enterprise Act of 2002. When
a company is insolvent, but its underlying business is still a viable one, the management
of the company may try to work with the major creditors to rescue the
underlying business by selling it to a third party (sometimes it could be the
company’s management) in an attempt to realize the maximum value of the
business and use its sale proceeds to repay the creditors (as far as possible).
Usually this process will yield nothing for the shareholders. But, when
properly carried out, it could yield a much higher return to the general
creditors than an ordinary liquidation process or other corporate rescue
methods (such as scheme of arrangement).
The key of a “pre-pack sale” is that it has to be
effected by an “administrator” of the company appointed by the court. Before
the court appointment, the administrator (at that time called the “administrator-in-waiting”)
has already worked out with the major creditors, company management and the
intended purchaser the detailed terms of the sale. After the terms of the sale
have been agreed upon, the company will make an application to the court to
appoint the “administrator-in-waiting” as the “administrator”. Then, the administrator
would have the power to sell the assets of the company to the intended
purchaser. The sale proceeds would be used to repay the creditors, and the
holding company will usually be wound up and the shareholders get nothing.
Problems with Pre-pack Sale and
Safe Guard for Creditors/Shareholders
The major problem of pre-pack sale is the lack of
transparency. Apart from the company’s top management, the major creditor, the
intended purchaser and the administrator-in-waiting, little would be known by
the outside world about the terms of the sale before the application is made to
the court for the administrator’s appointment. And the sale is usually
completed immediately after the appointment, leaving no time for any objections
to be raised.
In order to safeguard the fairness of the process,
the Association of British Recovery Professionals issued a statement of
practice – SP 16, which requires administrators to disclose details of the sale
to the general creditors as soon as possible after the sale to justify the
pre-pack sale and satisfy the creditors that their interests have been duly
taken care of. Such information to be provided include:-
1. The consideration for the transaction, terms of payment, and any condition of the contract that could materially affect the consideration;
2. If the sale is part of a wider transaction, a description of the other aspects of the transaction;
3. Any connection between the purchaser and the
directors, shareholders or secured creditors of the company.
Although SP 16 only requires the administrator to disclose
these matters after the sale, the court, when considering the application for
appointment of administrator, will expect the lawyers to disclose them in the
application.
Although many professionals and academics regard
the safeguard of SP 16 as insufficient, at least the disclosure will allow the
court, when considering the application to appoint administrator, to consider
if the “pre-pack sale” is really in the best interest of the creditors, and
creditors still have a chance (albeit not a very practical one) to challenge or
seek remedies against the company’s management or the administrator if they
find out, after the disclosure, that they have been unfairly treated.
The UGL/DTZ sale
The UGL/DTZ sale was such a pre-pack sale. According to disclosed information, after its largest shareholder’s failed attempt to acquire DTZ, the management of DTZ started to look for alternative buyers in October 2011. On 8 November 2011, DTZ announced that UGL was the “preferred bidder”. Probably around that time, RBS, DTZ’s major creditors, its advisor Ernest and Young (who was subsequently appointed as administrator) and UGL started to work on the detailed terms of the sale. In the morning of 4 December 2011, a Sunday, the application was made to the English High Court for the appointment of administrator (EY). At 5.02 pm, the judge issued the appointment order. The “pre-pack sale” was immediately completed and announced. On 5 December 2011, Monday, DTZ was delisted from the London Stock Exchange.
The sale proceeds of 77.5m pounds, was, of course,
insufficient to pay off RBS (owed 106m pounds) and other creditors. The
shareholders got nothing from the sale.
The UGL/CY Leung side deal
The UGL/CY Leung side deal, in the form of a 6-page
letter, was signed by CY Leung in Hong Kong on 2 December 2011. It is obviously
part of the conditions of the sale and is one of the matters to be disclosed
under SP 16. UGL chairman Richard Leupen told Fairfax Media that: “RBS and
their advisers were aware of the arrangements and RBS agreed to the resulting
reduction in the purchase price of DTZ, to offset the payment to CY Leung….”.
There are conflicting reports as to whether EY, RBS
and the board of DTZ were aware of the side deal and their detailed knowledge.
At this stage, it is impossible to reach a definite view one way or another. However,
when Mr. Leupen said “it was a confidential arrangement, which is standard
business practice for such non-poach, non-compete regimes…”, he is definitely
wrong. It is hard to imagine that EY would not be aware of the deal unless the
parties involved (UGL and CY Leung and other directors who knew) deliberately
concealed it from EY. EY had a professional duty to disclose the deal under SP
16. If it knew of the deal and failed to disclose it, it would probably face
disciplinary action against it. Moreover, it could be guilty of deliberately
misleading the English High Court when the application was made for its
appointment as administrator.
Possible Breach of Fiduciary Duty
A director’s fiduciary duty to the company entails
that he would not put himself in a position of conflict of interest with the
company. It is also well established under common law that when a company is
insolvent, such duty is owed to the creditors of the company instead of its
shareholders.
UGL chairman Mr. Leupen acknowledged that the price
paid for DTZ was reduced correspondingly by the payment to CY Leung. If he took
less, the creditors took more. If he were to be paid 3million pounds (instead
of 4 millions), the creditors would have gotten one million pounds more. As
such CY Leung was obviously in a position of conflict with his company. Unless
he had disclosed such conflict to RBS and EY and obtained their approval, he
would be in breach of his fiduciary duty to his company.
On the other hand, if EY and RBS knew of the side
deal and approved it, CY Leung would not be in breach of fiduciary. EY’s
failure to disclose would still be a breach of professional duty but likely to
be regarded as a mere technical breach with no real victims.
For enquiries, please contact our Litigation
& Dispute Resolution Department: |
E:
insolvency@onc.hk T:
(852) 2810 1212 19th Floor, Three
Exchange Square, 8 Connaught Place, Central, Hong Kong |
Important: The law and
procedure on this subject are very specialised and complicated. This article is just a very general outline for
reference and cannot be relied upon as legal advice in any individual case.
If any advice or assistance is needed, please contact our solicitors. |
Published by ONC Lawyers © 2014 |