BLV Realty Organization Ltd & Anor v Batten & Ors

Zegna III Holdings Inc (“Zegna”) is a BVI registered company. It was incorporated as a special purpose vehicle to undertake a redevelopment of properties at 3-10 Grosvenor Crescent (“the Property”). The Property was acquired utilising a £146.5 million facility provided by the Royal Bank of Scotland Plc (“the Bank”). The Bank’s lending is secured in the usual way (including by means of a qualifying floating charge contained in an English debenture).

In 2007 Zegna entered into a contract with BLV Realty Organisation Limited (“BLV”) under which BLV agreed to provide general management and co-ordination of the development and refurbishment of the Property (including the management and co-ordination of contractors) (“the Agreement”). (There was subsequently an assignment of the benefit of the Agreement to a company associated with BLV and also a change of name. It is not suggested that this is of significance. It accounts for the fact that there are two applicants: but I will refer to them together and without distinction as “BLV”). The Agreement is for a fixed term expiring in December 2009 and is thereafter terminable on notice.

It is common ground that the redevelopment of the Property is over budget and behind schedule and that Zegna is in default under the Bank’s facility. The delay in redevelopment is potentially fatal. The freeholder is entitled to forfeit Zegna’s lease of the Property if the redevelopment is not completed by 31 March 2010. The freeholder may, of course, extend that date: but will almost inevitably require a premium for doing so, which will add to the costs. The fact that the development is over budget is also serious. The redevelopment costs now exceed available funding, currently by something over £15.5 million: and although Zegna was afforded the opportunity (with the assistance of BLV) to raise further equity funding, the shortfall has not been met. The reality is that the Bank is the only available source of funding (unless the Bank is able to induce another equity funder to participate).

Because of the defaults, on 25 June 2009 the Bank made demand of Zegna for repayment of the loan. It also made demand upon the holder of the shares in Zegna (which had guaranteed the facility) and on 26 June 2009 appointed Mr Batten and Mr Gilbertson of Price Waterhouse Coopers (“PwC”) as joint fixed charge receivers of Zegna’s shares. On 29 June 2009 the receivers appointed new directors of Zegna, to replace the Isle of Man fiduciaries who had previously constituted the formal board of Zegna (but who probably acted at the direction of others).

The financial pressures on Zegna had meant that it had been unable to pay certain invoices of BLV. On 1 July 2009 BLV threatened the new board that it would seek to wind up Zegna.

The presentation of a petition could be prevented if Zegna entered administration. The Bank was a qualifying charge holder and could appoint administrators out of court. But because Zegna was a BVI company the Bank thought it appropriate to seek an appointment through the court so that Zegna’s centre of main interests could be established and the insolvency regime put upon an unchallengeable basis.

On 10 July 2009 the Bank applied to the court for an administration order seeking the appointment of Mr Batten together with Mr Haig (also of PwC) as joint administrators. In their Forms 2.2B the proposed administrators disclosed a prior professional relationship with Zegna in that PwC had been instructed by the new board to provide services relating to (a) the status of the redevelopment of the Property and (b) Zegna’s financial position. They also disclosed that Mr Batten was a receiver of Zegna’s shares. Each proposed administrator stated that he was of opinion that the purpose of the administration was reasonably likely to be achieved.

The purposes of an administration are stated in paragraph 3 of Schedule B1 to the Insolvency Act 1986. They form a hierarchy. The administrators must perform their obligations with the objective (first) of rescuing the company as a going concern (paragraph 3(1)(a)): but if it is not reasonably practical to achieve that objective (or that objective would not achieve the best result for the creditors as a whole), then (second) with the objective of achieving a better result for the company’s creditors as a whole than if the company were immediately wound up (paragraph 3(1)(b)). Whilst pursuing either of these objectives the administrators must perform their functions in the interests of the company’s creditors as a whole. If the administrators form the view that it is not reasonably practicable to achieve either of those objectives then (third) they may seek simply to realise property in order to make a distribution to one or more secured creditors, but only if by so doing they do not unnecessarily harm the interests of the creditors of the company as a whole (paragraph 3(1)(c)). (Leading Counsel for BLV submitted that this hierarchy reflected scenarios in which the unsecured creditors would receive 100p in the £1, in which they would receive a dividend, and in which they would receive nothing. But I do not agree.)

In its evidence in support of the application for an administration order the witness for the Bank stated as follows:-

First, it is impossible in proceedings such as this finally to decide whether the termination of the Agreement was wrongful (which is what BLV sets out to establish). The hearing before me was no substitute for a trial in the Technology and Construction Court complete with disclosure and oral factual and expert evidence about what BLV did or did not do in relation to the matters identified in the Notice of Termination, and their significance. Such would, I think, be necessary in order finally to resolve the issues between Zegna and BLV. Certainly on the material I have seen BLV would not get summary judgment against Zegna in respect of its outstanding fees. The evidence from BLV itself makes it impossible to say that the allegation that BLV had committed breaches of contract is baseless. Zegna and BLV acknowledge that “there have been certain failings on [BLV’s] part in the past” and as at 5 June 2009 asserted that “[BLV] have now gained good control of the costs involved if this was not considered to be the case previously”. Further, although BLV complain about a lack of specific instances and about the generation of an overly critical atmosphere, they do not fundamentally challenge the administrators’ case that the principal contractors lack confidence in BLV’s abilities.

The emphasis has rather been upon legal argument that the administrators could not lawfully terminate the contract notwithstanding these breaches and difficulties. The argument was run that the Company could not rely on breaches occurring prior to February 2009 as repudiatory breaches because it had in that month in law affirmed the contract (by agreeing to pay increased fees to BLV). The argument was run that upon the true construction of the Agreement once the payment terms in Clause 5 of the Agreement had been performed it was not possible to terminate the contract upon the ground of any breach subsisting at the invoice payment date. But that clause would have to be read together with clause 19 (which dealt with what might amount to a waiver under the Agreement). It was argued that the Agreement could only be terminated if fifteen days notice was given under the provisions of clause 9.2 (which provided for the service of a “notice to remedy”, but said nothing of notices in the case of irremediable breaches). These are not arguments which can be dismissed: indeed there is considerable force in them. But they do not compel the conclusion on the facts as they are at present known that the Agreement was incapable of immediate lawful termination. After all, the termination notice alleged irremediable breaches, some of the breaches complained of undeniably continued after February 2009, and at some point after February 2009 BLV had ceased to work because of non-payment of its invoices.

So in my judgment BLV has not established that its Agreement was wrongfully terminated. (I hope this makes clear my view that on this application it is not for the administrators to establish that the contract was rightfully terminated.)

Second, a wrongful termination of the Agreement (assuming such) would not necessarily constitute a breach of the administrator’s duty to perform their function in the interests of the creditors as a whole nor would it necessarily constitute unfair harm to BLV.

As to the former, administration is a form of class remedy. The obligation of the administrators is to perform their functions in the interests of “the creditors as a whole”. That does not mean that the obligation falls to be performed in an identical way in relation to each and every constituent of the class. It may be in the interests of the creditors as a whole that one particular contract with one particular creditor is terminated (even wrongfully): for example if the administrators thought that a particular service could be provided more cheaply or to a higher standard than was currently being done by a creditor with a continuing contract for a service necessary to the ongoing trading, with a beneficial result to the creditors as such. Or it may be that whilst in general ongoing contracts with creditors were being terminated (even wrongfully), one particular contract (e.g. to maintain the principal asset) was kept in being, with a beneficial result to the creditors as such. It would in each case be the interests of the creditors as a whole that would have to prevail over the particular interest of individual creditors: and that might result in different treatment. In the instant case, the administrators think that BLV is doing a less satisfactory job than other team members and that the other team members do not have confidence in BLV. That perception is not without foundation. What the administrators decide to do about it is a matter of commercial judgment. They have decided to terminate the relationship. The different treatment of BLV is not a breach of the obligation to the creditors as a whole.

As to the second, I will assume (for the purposes of the argument) that wrongful termination of a contract current at the date of the administration and under which the counterparty claims as a creditor in the administration is capable of constituting “harm”. Leading Counsel for BLV said that it did so here because such termination would give rise a claim for damages, but such a claim would be subject to the moratorium arising under paragraph 43 of Schedule B1, and the claim would (if pursued) in any event constitute an unsecured claim in an administration where (on present forecasts) the unsecured creditors stand to get nothing. Furthermore, BLV gave uncontradicted hearsay evidence that at a meeting on 30 July 2009 one of the joint administrators had told the adviser to one of the secured creditors that “the main reason for them being appointed in the first place was to terminate the role of BLV”. That would be consistent with the evidence of the Bank to the Court. It was foreseen from an early stage that BLV would be treated differently from some of the other creditors: in particular the principal contractors and their professionals who were not to have their contracts terminated.

But in my judgment even if (a) the termination is treated as wrongful and (b) it is assumed to constitute harm and (c) it is established that BLV was selected for different treatment this does not compel the conclusion that BLV’s interests have been “unfairly” harmed by the administrators. Unequal or differential treatment is not necessarily unfair treatment. It may be in the interests of the creditors as a whole (secured and unsecured) that a project be completed and marketed (rather than sold as a half-done job). But it might appear, as a matter of commercial judgment, to the administrators that the project was placed in jeopardy by the weak performance of one of the development team (a view that might be supported by other development team members). It would in those circumstances not be unfair to terminate (even wrongfully) the contract of the weakly performing member in the interests of the creditors as a whole. The weak contractor is being treated differently, but not “unfairly” because there are sound commercial reasons relating to the interests of the creditors as a whole for choosing some (rather than all) existing contractors to carry the project to completion. Almost invariably different treatment will require an explanation: but if a cogent rational explanation is put forward then the harm caused is not “unfairly” caused. Such is the case here. The Bank recognised that its desired result was subject to the view of the administrators that it was proper. The administrators have made a commercial judgment and have explained why they made it. It is not for the Court to interfere with such a decision unless it is based on a wrong appreciation of the law (which has not been established in any event) or is conspicuously unfair to a particular creditor or contractor: Re C E King Ltd [2000] 2 BCLC 297 at 303a.

I think the heart of BLV’s complaint is really that it has been unfairly harmed by the decision of the Bank not to funds its fees. That of course will not suffice. So BLV argued that it had been unfairly harmed by the decision of the administrators not to call the Bank’s bluff and to threaten not to trade unless the Bank paid BLV. But it seems to me self evident that to put at risk the only possible source of funding in the administration purely in order to advance the contractual interests of one of the creditors would not have been in the interest of the creditors as a whole, and that all of the considerations set out in the preceding two paragraphs apply with equal force.

Third, (and this addresses the assumption upon which the last argument proceeded) it is not BLV’s interests as a creditor that are being harmed. BLV has exactly the same rights as an unsecured creditor in respect of its outstanding invoices as the Isle of Man fiduciary directors of Zegna have in respect of their outstanding fees. BLV’s true complaint is not that its interests as a creditor have been harmed but that its interests as a contractor after the date of the administration have been treated less favourably than other contractors, because the other contractors have been kept on whereas BLV has not. I agree with Leading Counsel for the administrators that it is well established in other company and insolvency contexts that where an application may be made as “a creditor” then it must be made by that creditor in his capacity as such (and not in any other capacity). Mr Collings QC cited J E Cade & Son Limited [1992] BCLC 213 at 228 b-d; Sisu Capital Fund Limited v Tucker [2006] BCC 463 at paragraph [70] and Doorbar v All Time Securities Limited [1995] BCC 1149 at 1159 a-c. The relief sought exemplifies the point: BLV seeks, by one means or another, to be restored as development manager until the conclusion of the development (or earlier expiry of the Agreement). It is not its interest as creditor that is thereby served.

Fourth, Leading Counsel for BLV submitted that whatever judgments (legal or commercial) the administrators had made the court should not give weight to them because they were not the product of independent and objective consideration: the administrators were mere puppets carrying out the preordained intentions of the Bank. Mr Parker QC submitted that the fact that PwC had been advising the Bank in relation to its security before the administration, and the fact that the joint administrators chose to instruct as their advising solicitor someone who had previously been advising the Bank meant that independence of judgment was impossible, that the administrators must always have considered themselves as not being in a position to disagree with the wishes of the Bank (and in no position to negotiate with the Bank), and that BLV had been unfairly harmed by a process of decision making that was unreasonable. He relied on the hearsay evidence to which I have referred as confirming this analysis.

I do not consider that the fact that the administrators’ firm has previously advised the principal secured creditor or the fact that a solicitor who advised the Bank has been retained to advise the administrators of itself creates a conflict of interest for the adviser which disables him from acting (or somehow disentitles the administrators from accepting or acting on his advice). Far from a conflict in the present case there seems to be unity of purpose: that if at all possible the development shall be built out so as to realise the maximum value from the work that has already been undertaken (even if that involves the Bank continuing to fund the trading). I accept that one of the reasons why the Bank wished to appoint the administrators was to address the BLV problem; but I do not accept that simply because the administrators chose to terminate BLV’s contract it must follow (as a matter of inference) that the administrators were solely doing the Bank’s bidding without exercising any independent judgment. The nature of the business decision itself does not suggest perversity or bad faith such as would justify the removal of an officeholder (see Re Edennote Ltd [1996] 2 BCLC 389): so I do not see why I should draw the inference that they are the Bank’s puppets in the face of the administrators’ evidence that they themselves considered the position and made up their own minds. There is a coincidence of view deriving from a common (and entirely sustainable) analysis of the commercial realities. The circumstances of the decision making are, it seems to me, miles away from those considered in Clydesdale Finance v Smailes [2009] EWHC 1745 (Ch) to justify removal of an administrator and thereby facilitate examination of a “pre-pack” sale on questionable terms which he himself had negotiated immediately before appointment.

As an aspect of this argument BLV argued that the administrators said that they had adopted the course taken “as a result of” legal advice, that the administrators declined to waive privilege in the advice (so as to afford BLV access to it), that accordingly the Court could not in those circumstances infer that the advice supported the course taken, and that in consequence because there was an admittedly key element in the decision (legal advice) which the Court could not know, the decision must be regarded as flawed. If the decision was flawed BLV was unfairly harmed by the decision making and the administrators should be removed. This argument confuses outcome with process. If the decision itself does not cause unfair harm the creditor cannot complain about the means by which it was reached.

Fifth, in my judgment this entire application is an endeavour to enforce the Agreement, and is not really about how Zegna’s undertaking and assets should be best managed in the interests of its creditors as a whole during the administration. If BLV is right it has a claim for breach of contract. The claim is subject to the statutory moratorium. Given the nature of the contract it is a claim for money (in respect of unpaid fees) and which sounds in damages (in respect of other loss). As a money claim the Court would not lift the moratorium and grant permission to commence an action during the administration: AES Barry v TXU Europe [2005] 2 BCLC 22. I see no reason why I should subvert the statutory scheme by ordering the removal of the administrators unless they pay BLV in full.

The same arguments were deployed in support of an alternative application to remove the administrators under paragraph 88 of Schedule B1. I would give the same answers in relation to that jurisdiction.

In the result I dismiss the application.

I will formally hand down this judgement at 10.00am on 20^th November 2009. I do not expect attendance by legal representatives.

On the evidence deployed and on the basis of matters drawn to my attention in the course of the hearing my provisional order on costs would be that the applicants should be jointly and severally liable to pay the administrators’ costs, those costs to be the subject of a detailed assessment on the standard basis. If either party says that I should make some other order I will consider the matter entirely afresh. It is the responsibility of the party seeking any other order to notify the other in writing of the order sought by 4.00pm 27^th November 2009 and to restore the case for mention before me.