Re St Georges Property Services in CA: removal of administrators

Re St Georges Property Services in CA: removal of administrators Bulletin No 354

Case: Re St Georges Property Services (London) Ltd (In Administration); Finnerty and White v Clark and Whitehouse [2011] EWCA (CA (Civ Div)), 21 July 2011 (Mummery, Carnwath and Richards LJJ) Synopsis The CA upheld the Chancellor’s decision that the Administrators’ removal by the Registrar in exercise of her discretion under para 88 Sched B1 IA 1986 was not justified and he was correct to reinstate them. Topics Covered: Administration; Administrator’s powers and duties; Procedure; Removal; para 88 Sched B1 IA 1986

The Facts The facts of the case are set out in our bulletin 305 on the High Court decision.  To summarise briefly, St Georges Property Services Ltd had gone into administration after defaulting on a loan.  Two shareholder/directors (the “Guarantors”) had guaranteed the loan.  They contended that the default interest rate payable on the loan (3% per month) was extortionate within the meaning of s244 IA 1986.  They urged the Administrators to challenge it by application to court.  In support of their request, the Guarantors offered to pay for the application and to provide a full indemnity to the Administrators in relation to any adverse costs order they might suffer, and deposited some funds with their solicitor. However, the Administrators’ advisors were lukewarm about the prospects of success and declined to make the s244 application. The Guarantors then applied to court under para 88 Sched B1 IA 1986 to remove them and replace them with other insolvency practitioners who were apparently willing to bring the case to court. The Registrar’s decision At first instance, the Registrar granted the application to remove the administrators, but in terms that did not criticise the Administrators, finding that the Administrators were entitled to reach the conclusion that they were not prepared to bring the proceedings. She acknowledged that appointing a new administrator meant no more than that an independent mind would be brought to bear on the issue. It did not automatically mean that the s244 claim would be brought, let alone be brought to a successful conclusion. However, the Registrar considered that there were certain exceptional circumstances that persuaded her to grant the application, including (i) the fact that the Guarantors were the majority unsecured creditors; (ii) they were continuing to pay another secured creditor and had deposited a significant sum (£950,000) with their solicitors, which the Registrar records was to discharge costs and expenses of both the action and the administration; (iii) if the Administrators were not replaced, there would be no challenge to the default rate to the detriment of the Guarantors; and (iv) without a s244 application, the Company stood no chance of being rescued as a going concern. The First Appeal to the High Court On appeal, the Chancellor overturned the Registrar’s decision. Removal should only be ordered for good or sufficient cause, which should be ascertained by reference to the purposes of the office and the facts of the case.  Although the proposed s244 proceedings constituted a serious issue to be investigated, it did not follow that bringing the s244 application would achieve the statutory purpose of rescuing the Company as a going concern – the outcome desired by the Guarantors was too remote from the Administrator’s removal. In addition, the Chancellor considered that an application for directions to establish whether the Administrators should bring the claim to court was a good and acceptable alternative to removal of the Administrators.  The Chancellor therefore held that the Administrators’ removal was not justified on the facts. The Guarantors appealed to the CA.  The Issue on appeal The issues on appeal were: What are good and sufficient grounds for the court’s exercise of its discretion under the IA 1986 to remove administrators from office? In what circumstances should a court on appeal disturb a first instance decision to remove administrators? The Guarantors submitted that the Chancellor on the first appeal had no proper legal basis for interfering with the Registrar’s order, and that the CA should re-instate the Registrar’s order removing the Administrators.  On an appeal, the Registrar’s decision based on her wide discretion should only be overturned if the Chancellor found that it was one that no judge, properly instructed as to the law with regard to the relevant facts, could have reached (Re MTI Trading Systems [1998] BCC 400 at 404E-F), which they argued it was not. In addition, the Guarantors argued that the Chancellor’s suggestion that they should use an application for directions to resolve their differences with the Administrators was not an adequate alternative remedy because (a) creditors could not bring an application for directions (this option was reserved for the Administrators) and (b) even if there were a hearing for directions, the Guarantors would face the uphill struggle of persuading the court to require the Administrators to do something that the Registrar had already said they were entitled to refuse to do. The Decision The CA upheld the Chancellor’s decision.  Mummery LJ, giving the judgment, agreed with the Chancellor’s summary of the legal principles and their application to the facts.  He concluded that the Registrar’s order was plainly wrong on the evidence before her.  No good ground had been established for removing the Administrators from office. As the Chancellor had done, Mummery LJ also emphasised the independence of liquidators and administrators as officers of the court.  In the ordinary case, the decision whether or not to institute proceedings in relation to the company’s property is one for the office holder.  In the event of substantial disagreement amongst the creditors, the office-holder may, in the last resort, seek the directions of the court. If an administrator is unbiased and entitled on the material before him to reach a relevant decision, such as a decision not to bring legal proceedings, his decision should be respected until the court concluded otherwise, and the fact that another administrator might reach a different conclusion may be a reason to challenge the decision, but cannot be a reason to remove the administrator altogether. Finally, Mummery LJ expressed the obiter view that the Guarantors would be able to make an application to court, either under the IR 1986 or pursuant to the court’s general jurisdiction, for directions to challenge the Administrators’ decision not to bring s244 proceedings. Comment Once again, the Court has confirmed that absent any impropriety or unfair harm on the part of administrators, it will not interfere with their commercial decisions as independent officers of the court.  A decision whether or not to institute proceedings in relation the company’s property is reserved to the office holder, with the option of a directions application if any substantial dispute cannot be resolved. However, Mummery LJ’s obiter comment that it would have been open to the Guarantors in this case to apply to court to decide whether or not to direct the Administrators to bring the s244 action merits some thought.  Para 63 of Sched B1 enables the administrators to apply to court for directions. Para 74 of Sched B1 (challenge to administrator’s conduct of the company) and para 88 Sched B1 (removal of administrator from office) are the express provisions in IA 1986 giving a creditor wishing to challenge an administrator’s conduct power to apply to court for relief.  Para 74 was initially considered in this case and rejected, presumably because there was no suggestion of unfair harm or that the Administrators were not performing their functions quickly and efficiently.  Indeed, the Registrar was at pains to point out that the Administrators had not acted improperly in refusing to bring the s244 claim. Since para 74 was not available to the Guarantors here because they could not meet the high test of unfair harm, that left para 88, which does not require reliance upon unfair harm. However, the CA determined that para 88 did not apply in this case either because removal was not justified. It is settled that, under common law, the High Court has a jurisdiction to control its own officers and hence to control administrators (cases known to members as Atlantic Computers (1990) and Sibec (1992) were early examples of this). The jurisdiction is unbounded save that it must be judicially exercised. What is the position where statutory provisions such as paras 63, 68(2) and 74 of Sched B1 already prescribe who may apply for directions and the conditions for doing so?  How far is the inherent jurisdiction ousted by the express rules represented by the statutory provisions? To answer that question one must generally distinguish between affirmative and negative provisions: the common law can co-exist with a statutory provision with which it is not inconsistent. Thus whether there exists an inherent jurisdiction in the High Court such that it might direct its administrators as its officers as to what they should or should not do, a jurisdiction alongside the many statutory provisions on the same subject, cannot be answered without a careful look at what the legislature has prescribed and the manner – be it negative or positive – in which it has done so. On the first appeal in this case, the Chancellor seemed to suggest that the Guarantors could (and perhaps should) have applied under para 63 of Sched B1. Despite the fact that para 63 confers a power to apply for directions on administrators only, the court in Re Mirror Group (Holdings) (1993) held that its statutory predecessor should be read broadly so as to enable creditors to apply.  This is a neat solution - although it would be a rare case where the court would, at the instance of a creditor, direct an administrator to litigate after a reasoned decision has been made not to do so. 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