Administrators are statutorily entitled to require a receiver to vacate office (paragraph 41 Schedule B1 Insolvency Act 1986 (“Schedule B1”)). In Promontoria (Chestnut) Ltd v Craig and another  EWHC 2405 (Ch) they did just that, taking steps to remove existing receivers not long after their appointment, claiming the action to be in the interests of all the creditors. On the facts, that decision was not only unreasonable but costs were also awarded personally against the administrators.
Brief facts and arguments
Promontoria (Chestnut) Ltd (“Promontoria”), a secured creditor over partnership assets, had appointed the receivers pursuant to fixed legal charges over 30 properties. Promontoria was secured for £3.95 million. It sought a declaration (based on the court’s inherent jurisdiction) that joint administrators of a partnership had exercised their discretion unreasonably by requiring receivers to vacate office or in the alternative, that Promontoria be allowed to enforce its security itself.
The partners told the administrators that the properties were worth in excess of Promontoria’s debt and produced a heavily caveated valuation suggesting the charged properties could be worth circa £5m. The intention was to refinance the property portfolio, pay out all creditors in full and rescue the partnership as a going concern. They believed taking control of all the properties and selling as a package would produce better overall realisations for creditors. At the point that the receivers were asked to vacate office, the administrators had commissioned but not obtained their own valuation. It was submitted for Promontoria that, had the administrators waited for the results of their own valuation or properly engaged with the receivers, they would have realised that the partners’ valuation was actually wrong and that the unsecured creditors (who had claims totaling less than £200,000) were unlikely to see a return. The administrators did not set out the basis of why a portfolio sale was actually going to make a higher return and did not appear to have proper regard for the fact that Promontoria was not only by far the largest creditor but also that the vast majority of the partnership debt was due to Promontoria. Additionally, the administrators’ rental collection agents were charging a lot more than the receivers’ agents.
The administrators submitted that the application to reverse the removal of the receivers assumed that the administrators’ decision to do so was unreasonable to the extent that no properly directed administrator, given the circumstances, could properly or reasonably have made the decision to ask the receivers to vacate office. The administrators had been validly appointed and it was their duty to collect in and manage the assets of the partnership for the benefit of creditors as a whole. The partnership owned, or had a beneficial interest in, properties other than those that were subject to Promontoria’s charges and that there was a valuation from a chartered surveyor which had indicated that the charged properties might be worth in excess of £5 million – therefore, there would be a surplus available to other creditors. In those circumstances, the administrators argued the removal of the receivers should not be reversed.
The court first considered whether it could direct the administrators to withdraw their decision to remove the receivers under paragraph 68 of Schedule B1. It concluded it could not. The administrators had issued proposals which were deemed approved by reference to Rule 3.38 Insolvency Rules 2016 and there had not been any change in circumstances since the approval. The court declined to use its inherent jurisdiction to interfere with the administrators’ decision as it could be in conflict with approved proposals. However, the court did find the decision to remove the receivers was irrational at the time it was taken and it considered that the appropriate course was for Promontoria to pursue its alternative application under paragraph 43(2)(b) Schedule B1 for permission to take steps to enforce its security.
The court struggled to understand why the secured creditor had not been properly considered: it was the largest creditor and had chosen to make an appointment of receivers. Allowing Promontoria to exercise its rights was unlikely to impede the achievement of the administration and the charged properties were not required to be retained for the purpose of the administration (e.g. there would be no trading to increase realisations). A return to unsecured creditors was unlikely and so there was no reason why the administrators should seek to block Promontoria from realising its security and a high regard should have been given to Promontoria’s wishes. The judge also questioned why the administrators thought it would be in the interests of the unsecured creditors to assume the costs of rental collection when it could have been done at the secured creditor’s expense, particularly in circumstances where the administrators’ agents were charging more. His views are neatly summed up in this excerpt of his judgment:
“The joint administrators should have established the situation correctly before taking the decision that they did. The clear impression I have from the evidence is that the joint administrators regarded a refinancing of the facility as something desired by the two partners who had appointed them; and that they adopted a blinkered approach of adopting that course, without considering the interests of the secured creditor”.
Promontoria was granted permission to take steps to enforce its security over the properties by appointing receivers and, if appropriate, selling the properties. Costs were awarded against the administrators personally- even though successful in some of their arguments, the whole case stemmed from their unreasonable actions.
It should not come as any surprise that the secured creditor should have been properly consulted with at the outset. A hasty and “blinkered” decision was made without all the facts. The case is important as it shows that whilst the administrators have a statutory right to remove a receiver, that right should be exercised in a measured and objective manner- and one which can reasonably and sensibly justified to the secured creditor.