Clark & Anor v Finnerty & Anor

On 7th December 2007 St George’s Property Services (London) Ltd (“the Company”) concluded a facility agreement (“the Facility”) with Davenham Trust plc (“Davenham”) for a loan of up to £834,950 in connection with the acquisition and refurbishment of 84 Gowan Avenue, Fulham, London, SW6 6RG. The loan was to be secured by a first legal charge over the property, a mortgage debenture granted by the Company and unlimited guarantees from the two shareholders and directors of the Company, Seamus Finnerty and Mark White (“the Guarantors”). The loan was to be available for 9 months from the date of first drawdown and was to carry interest at the rate of 1.6% per month but

Davenham was not satisfied by a part payment of £340,000 made on 14th July 2009 and an offer of a further £810,000 (being the outstanding principal and interest at 18% per calendar month) in full and final settlement put forward on 3rd September 2009. On 17th September 2009 Davenham appointed two insolvency practitioners, Mr Clark and Mr Whitehouse (“the Administrators”), as administrators of the Company pursuant to the power contained in paragraph 14 Schedule B1 to the Insolvency Act 1986 (“Schedule B1”). Following an inconclusive meeting between representatives of the Administrators and the Guarantors and their solicitor, Mr Coyle, held on 22nd September 2009 on 2nd October 2009, Mr Coyle wrote at length to the Administrators. He stated that he considered that the Facility was both extortionate within the meaning of s.244 Insolvency Act 1986 and, in respect of the default interest, a penalty. He concluded:

Thereafter there was much correspondence, including two letters to the Administrators from two separate firms of solicitors dated 16th and 29th October 2009, and meetings, including one with counsel on 8th February 2010, to which I shall refer in more detail later, in which Mr Coyle pressed his clients’ demands. On 1st March 2010 one of the Administrators e-mailed the solicitors for the Guarantors stating

The application came before Registrar Derrett on 7th July 2010. For the reasons given in her reserved judgment handed down on 30th July Registrar Derrett granted the application and ordered the appointment of Mr Stephen Grant in place of the Administrators. Her reasons, to which I shall refer in greater detail later, are encapsulated in the following passages from paragraphs 57 and 58 of her judgment:

The Administrators now appeal with the permission of Newey J. They contend that the Registrar erred in law for, in essence, two reasons, namely:

This schedule is applied by s.8 Insolvency Act as amended by the Enterprise Act 2002. It provides a common statutory framework for the appointment of administrators by the court, the holder of a floating charge and the directors of the company. Any such administrator is an officer of the court (paragraph 5) and may apply to the court for directions (paragraph 63). Likewise a creditor or member may apply to the court if he considers that the administrator is not performing his functions as quickly or as efficiently as is reasonably practicable (paragraph 74(2)). The purpose of the administration is set out in paragraph 3 in, so far as relevant, the following terms:

Paragraphs 74 and 75 confer jurisdiction on the court to remove administrators in the circumstances specified in those paragraphs. In summary the circumstances are unfair conduct or misapplication and breach of trust respectively. On 20th May 2010 Registrar Simmonds gave permission to the Guarantors to amend so as to seek the removal of the Administrators under each of those paragraphs. In the event any allegation that the conduct of the Administrators came within either paragraph was abandoned at the hearing before Registrar Derrett. No allegation was ever made of tardy or inefficient discharge of the Administrators’ functions under paragraph 74(2). Accordingly the only provision relied on for the removal of the Administrators is paragraph 88 which provides:

That provision may be contrasted with ss.108(2), 171(2) and 172(2) Insolvency Act 1986 and their legislative predecessors, which enable the court to remove a liquidator in a voluntary or compulsory liquidation. In the case of the first but not the others the power to remove is exerciseable “on cause shown”. This distinction has no practical effect because as Nourse LJ recognised in Re Edennote Ltd[1996] 2 BCLC 389, it is difficult to imagine circumstances in which the court would remove a liquidator under s.172(2) otherwise than on cause shown. The same conclusion in respect of s.171(2) was reached by Warren J in Sisu Capital Fund Ltd v Tucker[2006] BPIR 154 para 87. In paragraph 88 Warren J continued:

The jurisdiction conferred by paragraph 88 was further considered by David Richards J in Clydesdale Financial Services Ltd v Smailes [2009] EWHC 1745 in the context of a claim by creditors to challenge a sale of a company’s assets in a ‘pre-pack’ administration. The Registrar (paragraph 16) correctly derived the following propositions from the judgment of David Richards J:

The powers of an administrator include the right as an office holder (a term which includes an administrator, see Insolvency (Amendment) Rules SI 2010/686) to apply to the court under s.244 Insolvency Act 1986 in respect of a transaction to which the company was a party which is or was extortionate and was entered into within the three years next preceding the administration. That section is modelled on similar provisions then contained in the Consumer Credit Act 1974 ss. 136-138 but applicable only to transactions entered into by individual consumers. A transaction is extortionate if, having regard to the risk undertaken by the person supplying the credit, its terms require “grossly exorbitant payments to be made” or “it otherwise grossly contravened ordinary principles of fair dealing” (s.244(3)). A transaction is presumed to be extortionate unless the contrary is proved (ibid). If the transaction is found to be extortionate the court has at its discretion the wide range of powers for which subsection (4) provides.

The evidence before the Registrar consisted of witness statements, on which there was no cross-examination, and documentary exhibits. There is no challenge to any of her findings of primary fact. In paragraphs 4 to 10 she described the context of this dispute. In paragraphs 11 to 15 she explained the impact on the parties of the administration and of their respective concerns. In paragraphs 16 to 18 she considered the law as to the removal of an administrator under paragraph 88. In paragraphs 19 to 29 the Registrar considered the relevant events post the administration. In that context the Registrar concluded that the administrators were protected from any costs incurred in relation to an application under s.244 by the undertaking of Mr Coyle (paragraph 23). She accepted that the Company’s trade creditors had been paid in full by the Guarantors (paragraph 24).

In paragraphs 25 to 28 the Registrar dealt with the advice received by the Administrators from counsel to which I have referred. She did not refer to the expressions of opinion given to the Administrators by the two firms of solicitors to whom I have referred, no doubt because they were asked to advise on the quantum of costs not the merits of the claim under s.244. Nevertheless both expressed an opinion on the merits. They were not optimistic. The first was Moon Beever. In a letter to the Administrators dated 16th October 2009 the solicitor pointed out that the provisions relating to extortionate credit bargains “have rarely been invoked with success”. In addition he warned the Administrators that Davenham would be likely successfully to apply for security for costs. In a note of advice to the Administrators dated 29th October 2009 the Administrators’ present solicitors, Ingram Winter Green, described any proceedings under s.244 challenging the Facility as “very much an uphill struggle”.

On 12th November 2009 the Administrators issued their Report and Statement of Proposals to the Creditors. In paragraph 4.1 they summarised the effect of paragraph 3.1 of Schedule B1 (see paragraph 6 above). In paragraphs 4.2 and 4.3 they continued as follows:

In relation to the advice of counsel given in conference held on 8th February 2010 the Registrar said:

In paragraphs 30 to 46 the Registrar considered at some length the arguments for and against making an order to remove the Administrators. In the course of that consideration she noted (paragraph 35) that:

In paragraph 37 the Registrar posed the question for her determination as:

In paragraphs 47 and 48 the Registrar indicated why, in her view, neither the Administrators nor Davenham were open to criticism, the one for refusing to take proceedings under s.244, the other for appointing the Administrators in the first place. She commented that the power of removal was unqualified so that it was not necessary to make any criticism of the Administrators as a ground for removing them. She continued (paragraph 50):

In paragraphs 53 to 55 the Registrar considered the third of the propositions derived by her from the judgment of David Richards J in Clydesdale Financial Services Ltd v Smailes [2009] EWHC 1745 (see paragraph 9 above), namely whether the evidence disclosed a serious issued to be investigated. She concluded (paragraph 54):

The first ground of appeal summarised in paragraph 5 above is prompted by a dictum of Bowen LJ in Re Adam Eyton(1887) 36 ChD 299. The case concerned the removal of a liquidator “on due cause shown”. The court expressed various opinions on what might be a due cause. Cotton LJ related it to “the interest of the liquidation, by which I mean all those who are interested in the company being liquidated”. Bowen LJ went further (p.306). He said:

Counsel for the Administrators submits by reference to the cases to which I have referred in paragraphs 8 and 9 above that the dicta in Re Adam Eyton apply to the removal of administrators under paragraph 88. He contends that the existence of a triable issue is insufficient cause to justify the removal of an administrator. Were it otherwise administrators could not perform their functions. Further the removal of one set of administrators would not advance the matter unless the incoming administrators are prepared to pursue the cause of action. And will other creditors who take a different view then be able to seek the removal of the incoming administrators?

Further, as counsel for the Administrators submits, the terms of paragraph 3 of Schedule B1 only require the administrators to pursue the objective of rescuing the company as a going concern if it is reasonably practicable of achievement. The institution of proceedings under s.244 in relation to the default interest payable under the Facility cannot be enough if the issues thereby raised are no more than “triable”. It follows, so he submits, that the removal of the Administrators so as to appoint others who will take those proceedings cannot advance the proper interests of the administration.

Counsel for the Guarantors accepts that administrators may only be removed under paragraph 88 for good or due cause, but, she submits, the terms of the dicta in Re Adam Eyton or Clydesdale Financial Services Ltd v Smailes [2009] EWHC 1745 should not be interpolated into paragraph 88 and then construed and applied as though they were statutory conditions. She points out that the Registrar was required to have regard to all the circumstances, which she did, and conclude only whether good or sufficient cause had been shown for the removal of the administrators. She submits that the facts on which the Registrar relied and summarised in both paragraphs 50 and 57 are sufficient.

I accept the submission of counsel for the Guarantors that the terms of the dicta to which I have referred should not be interpolated into paragraph 88 of Schedule B1 so as to constitute conditions to be satisfied before an administrator may be removed. Accordingly I do not accept the first ground of appeal, as summarised in paragraph 5 above. But such removal should only be ordered for good or sufficient cause. What is good or sufficient must be ascertained by reference to the purposes of the office and the facts of the case. Thus, the issue is, as counsel for the Guarantors submitted, whether the facts on which the Registrar relied demonstrated a good or sufficient reason for removing the administrators. By his second ground of appeal counsel for the Administrators submits that I should answer that question in the negative.

There are two relevant causes of action in relation to the default interest, namely (1) proceedings under s.244 and (2) proceedings at common law for a declaration that the provision for the payment of default interest is a penalty. With regard to the first, such proceedings may only be commenced by office-holders; it is not available to companies generally. An effective rate of 42% on default will be presumed to be extortionate unless and until Davenham establishes otherwise. With regard to the second, the principles are well established and were considered by Colman J in Lordsvale Finance plc v Bank of Zambia[1996] QB 752. The issue would be whether the provision of default interest was inserted “in terrorem” that is to say that its sole function was to ensure the Company’s compliance with the Facility. In Davenham Trust plc v Homegold Ltd Mercantile Court, Manchester 22^nd April 2009 (Unreported) HH Judge Hegarty QC had a witness statement from the Risk Director of Davenham to the effect that the default rate was charged to reflect the increased bad risk faced once the borrower defaults. Accordingly the contention of guarantors in defence of a claim for payment of the debt that the default rate was a penalty had no real prospect of success so as to justify withholding summary judgment against them.

I have already quoted the Registrar’s conclusion in respect of the suggested causes of action in paragraph 18 above. Although she concluded that there was a “triable issue”, in the context of the previous sentence that must mean “a serious issue to be investigated”. But that falls a long way short of a conclusion that the commencement of the proceedings would achieve the statutory objective of rescuing the Company as a going concern. All that can be said is that it is a necessary preliminary. This was realised by the Registrar in paragraph 58 of her judgment quoted in paragraph 4 above.

In the ordinary case the decision whether or not to institute proceedings in relation to property of the company is one for the office-holder, whether liquidator or administrator. In the event of substantial disagreement amongst the creditors the office-holder may, in the last resort, seek the directions of the court. But in this case both Davenham and the other secured creditor are protected by their securities and all, or substantially all, the unsecured creditors want the office-holder to institute the proceedings. Evidently these considerations were important elements in the Registrar’s decision.

Such consideration as had been given to the prospects of success of any such proceedings by the solicitors and counsel to whom I have referred was not encouraging; but, as the Registrar appreciated, the successful prosecution of the proceedings was the only prospect of rescuing the company as a going concern. The risk of failure would lie on the Guarantors.

I have rejected the first ground of appeal in each of the ways it is put as summarised in paragraph 5 above for the reasons given in paragraph 23 above. The considerations that the issues are only “triable” and the consequences of thereby rescuing the Company as a going concern less than reasonably practicable are relevant to the existence or otherwise of ‘good reason’ to remove the Administrators but are not themselves sufficient to preclude good or sufficient reason. It depends on all the facts of the case.

In relation to the second ground of appeal counsel for the Administrators submitted that the Registrar was wrong on one matter of fact and omitted to consider two others. The matter of fact arises from the passage in paragraph 50 of her judgment which I have quoted in paragraph 17 above in which she referred to the Guarantors “potentially facing financial ruin” if no proceedings are brought in respect of the default rate, or, having been brought, are unsuccessful. It was submitted that that was an overstatement in that any shortfall in respect of the Gowan Avenue property (the other secured creditor being repaid in full from its security), possibly £400,000, was less than half the sum, £950,000, lodged by the Guarantors with their solicitors. I was not shown any evidence demonstrating the financial consequences to the Guarantors of the proceedings not being brought or, having been brought, failing. It may be that the Registrar’s comment went further than the evidence justified. But that does not begin to show that the financial consequences to the Guarantors would not be serious or that the successful prosecution of the proceedings was not the only way of rescuing the Company as a going concern.

The suggested omissions were that the Registrar failed to take account of the facts that (1) the Guarantors might have raised the same issues in defence of any claim by Davenham under their guarantees and (2) the Registrar failed to take account of the effect of their removal on the professional reputations of the Administrators. So far as the first is concerned it is true that the Registrar makes no reference to that possibility but I see no reason why she should have done. The cause of action under s.244 is only available to an office-holder, hence the need to remove the administrators; it is not available to secondary debtors. In any event so to do could not achieve the object of rescuing the Company as a going concern. So far as the second is concerned the Registrar went out of her way to emphasise that misconduct was not a prerequisite of an order for the removal of the Administrators and to acquit them of any such misconduct, see paragraphs 36, 37, 47, 49, 50 and 57 of her judgment. In so doing she recognised the potential impact of her decision on the professional reputations of the Administrators. I do not accept this is a valid criticism of the decision of the Registrar. Equally it is to be noted that the Registrar considered that the Administrators should be regarded as “efficient, vigorous and unbiased” and and that they were “entitled to reach the conclusion that they are not prepared to bring the proceedings”.

Accordingly the issue is whether the facts on which the Registrar relied demonstrated a good or sufficient reason for removing the administrators, as counsel for the Guarantors submits, or whether the Registrar arrived at a conclusion which no reasonable Registrar properly directed as to the law and having regard to all relevant facts but no irrelevant ones could reach, as counsel for the Administrators maintains. I have been troubled throughout this appeal by (1) the lack of what might be described as a chain of prospective causation or link between the order made and the purpose of the administration as set out in paragraph 3 of Schedule B1 and (2) the existence of an alternative remedy for the problem the Registrar saw.

The removal of the Administrators opens the door to the appointment of others. Those others may or may not institute the proceedings under s.244 and for a penalty which the Guarantors wish. In that context I discount the suggestion made in the e-mail from Mr Coyle and the statement in the witness statement of Mr Finnerty (see paragraph 4 above) that the new administrator will bring such proceedings. It is the duty of any new administrator to investigate the facts for himself and consider, with the benefit of legal advice whether those facts give rise to a reasonable cause of action. But if the new administrator does commence those proceedings they may not succeed. Even if the proceedings are successful what relief will be granted? It does not follow that the relief will extend to all the default interest or to enough of it to enable the Company to be rescued as a going concern. In the absence of these further links the removal of the Administrators can have no effect on the achievement of the statutory purpose.

Moreover, the Administrators were entitled to seek the directions of the Court under paragraph 63 of Schedule B1 whether or not to institute the proceedings the Guarantors wished. Any such direction would have constituted a statutory obligation binding on the Administrator, his successors and the creditors (see paragraph 67(2) Schedule B1). Why the Administrators did not do so, or offer to do so, or why the Guarantors did not ask them to has not been explained. Nor did the Guarantors seek relief under paragraph 74(2) Schedule B1.

The Registrar recognised that this was an extreme case on the facts and was well aware of the limited efficacy of her order (see paragraphs 50 and 57). In paragraph 58 she concluded that the only effect of her order would be that “an independent mind will be brought to bear on the issue”. That issue was a ‘serious issue for investigation’. But she had already acquitted the Administrators of bias and concluded that they were entitled to reach the conclusion they did, namely that proceedings under s.244 and for a declaration that the provision for default interest was a penalty should not be commenced. She might have directed the Administrators to instruct solicitors and counsel to investigate the claims and to advise. This would have brought independent minds to bear without the expense and upheaval of removing one set of Administrators and appointing another.

It is true that an administrator may be removed without any criticism of him. But if an administrator is unbiased and entitled on the material before him to reach a relevant conclusion his decision should be respected unless and until the court concludes otherwise. That is the effect of the elaborate provisions of Schedule B1. The fact that another mind might reach a different conclusion may be a reason to challenge the administrator’s decision but, in my judgment, it cannot be a good reason to remove him altogether. I appreciate the Registrar’s concern at the consequences for the Guarantors of the Administrators’ decision but I do not accept that that was enough to justify the order she made.

For these reasons I would allow this appeal, set aside the order of the Registrar and dismiss the originating application.