Abstract

Company – Administration order. The Chancery Division of the High Court allowed the administrators' appeal against a decision of the registrar that the guarantors of a loan to a company were entitled to apply to remove the administrators pursuant to para 88 of Sch B1 to the Insolvency Act 1986. The court took the view that the registrar's concern at the consequences for the guarantors of the administrators' decision was not enough to justify the order she had made.

Citation

[2010] All ER (D) 84 (Nov)

Alternative Citations

[2010] EWHC 2538 (Ch)

Hearing Date

14 October 2010

Court

Chancery Division

Judge

Sir Andrew Morritt C

Catchwords

Company – Administration order – Administrator – Removal of administrator – Company failing to pay sums due under facility agreement at specified date – Creditor increasing interest rate under facility – Creditor subsequently appointing administrators in respect of company – Guarantors of company's loan requiring administrators to commence proceedings against creditor on basis that facility both extortionate and a penalty – Guarantors successfully applying to registrar for removal of administrators for failure to commence said proceedings – Whether registrar erring in granting application – Insolvency Act 1986, Sch B1. para 88.

Summary

The judgment is available at: [2010] EWHC 2538 (Ch)

On 7 December 2007, SGPSL Ltd (the company) concluded a facility agreement (the facility) with DT plc (DT) or a loan of up to £834,950 in connection with the acquisition and refurbishment of a property in south west London (the property). The loan was to be secured by, inter alia, unlimited guarantees from the two shareholders and directors of the company, F and W (the guarantors). The loan was to be available for nine months from the date of first drawdown and was to carry interest at the rate of 1.6% per month, however, 'if [the Company] fails to pay any sum due in connection with the facility on its due date, Davenham reserve the right to charge interest at the default rate of 3% per calendar month on the full facility balance until it is paid.' On 27 March 2009, the period of nine months since drawdown having expired, DT demanded repayment from both the company and the guarantors and claimed interest thereafter at the default rate of 3% per calendar month. DT was not satisfied by a part payment of £340,000 made on 14 July, and an offer of a further £810,000 in full and final settlement put forward on 3 September 2009. On 17 September, DT appointed two insolvency practitioners (the administrators) as administrators of the company pursuant to the power contained in para 14 of Sch B1 to the Insolvency Act 1986 (the Act). The guarantors' solicitor wrote at length to the administrators, stating that he considered that the facility was both extortionate within the meaning of s 244 of the 1986 Act and, in respect of the default interest, a penalty. He concluded that his client required the administrators to apply to court pursuant to s 244 of the 1986 Act. Correspondence ensued, however, on 1 March 2010, one of the administrators reported that he was unable to progress the application and that he was of the opinion that that application was speculative. On 4 April, the guarantors applied under para 88 of Sch B1 to the Act for an order to remove the administrators and to appoint in their place one of three identified insolvency practitioners each of whom was willing to make the application sought. The application came before the registrar on 7 July. The registrar granted the application, taking the view, inter alia, that there was a triable issue. The administrators appealed against that decision.

The issue as set out in the first ground of appeal was whether the facts on which the registrar relied demonstrated a good or sufficient reason for removing the administrators. By the second ground of appeal, the administrators submitted that that question should be answered in the negative on the basis that the registrar had been wrong on one matter of fact and had omitted to consider two others. The matter of fact arose from her referral in her judgment to the guarantors 'potentially facing financial ruin' if no proceedings were brought in respect of the default rate, or, having been brought, were unsuccessful. It was submitted that that was an overstatement in that any shortfall in respect of the property, possibly £400,000, was less than half the sum, £950,000, lodged by the guarantors with their solicitors. The suggested omissions were that the registrar had failed to take account of the facts that: (1) the guarantors might have raised the same issues in defence of any claim by DT under their guarantees; and (2) the effect of the removal of the administrators on their professional reputations.

The appeal would be allowed.

The free-standing power under para 88 of Sch B1 to the Act appeared to be unlimited. However, it was not easy to think of any circumstances in which the court would remove a liquidator under that paragraph without cause being shown. There had to be a good ground for removing an administrator but the ground need not involve misconduct, personal unfitness or imputation against his integrity. The court would have regard to the wishes of the majority of creditors. The issue raised by the applicant need not be resolved in his favour at the time of the application. He only had to show that the evidence raised a serious issue for investigation (see [8], [9] of the judgment).

In respect of the first ground of appeal, the registrar had concluded that there had been a 'triable issue', in the context of the previous sentence that had to mean 'a serious issue to be investigated'. The considerations that the issues were only 'triable' and the consequences of thereby rescuing the company as a going concern less than reasonably practicable were relevant to the existence or otherwise of 'good reason' to remove the administrators but were not themselves sufficient to preclude good or sufficient reason. It depended on all the facts of the case (see [25], [28] of the judgment).

The first ground of appeal would be rejected (see [28] of the judgment).

Clydesdale Financial Services Ltd v Smailes (No 1) [2009] EWHC 1745 (Ch) applied; Edennote Ltd, Re;Tottenham Hotspur plc v Ryman [1996] 2 BCLC 389 considered; Sisu Capital Fund Ltd v Tucker [2005] All ER (D) 200 (Oct) considered.

(2) In respect of the matter of fact referred to in respect of the second ground of appeal, no evidence had been shown demonstrating the financial consequences to the guarantors of the proceedings not being brought or, having been brought, failing. In respect of the suggested omissions, so far as the first was concerned, it was true that the registrar made no reference to the possibility that the guarantors might have raised the same issues in defence of any claim by DT under their guarantees, but there was no reason why she should have done so. The cause of action under s 244 of the Act was only available to an office-holder, hence the need to remove the administrators; it was not available to secondary debtors. So far as the second omission was concerned, the registrar had gone out of her way to emphasise that misconduct had not been a prerequisite of an order for the removal of the administrators and had acquitted them of any such misconduct. In so doing she had recognised the potential impact of her decision on the professional reputations of the administrators. Equally, it was to be noted that the registrar had considered that the administrators should be regarded as 'efficient, vigorous and unbiased' and that they had been 'entitled to reach the conclusion that they are not prepared to bring the proceedings'. Although it was true that an administrator might be removed without any criticism of him. However, if an administrator had been unbiased and had been entitled on the material before him to reach a relevant conclusion, his decision should be respected unless and until the court concluded otherwise. That was the effect of the elaborate provisions of Sch B1 to the Act. The fact that another mind might reach a different conclusion might be a reason to challenge the administrator's decision but could not be a good reason to remove him altogether. In those circumstances, the registrar's concern at the consequences for the guarantors of the administrators' decision was not enough to justify the order she had made (see [29 ], [30], [35] of the judgment).

The registrar's order would be set aside and the originating application would be dismissed (see [36] of the judgment).

Eyton (Adam) Ltd, Re, ex p Charlesworth (1887) 36 Ch D 299 considered; Clydesdale Financial Services Ltd v Smailes (No 1) [2010] BPIR 62 considered.

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