Can shareholders seek the appointment of an interim administrator? (Zinc Hotels (Investment) Ltd v Beveridge and others)

This case is the latest in an interesting run of authorities during 2018 concerning administrations, including Davey v Money and another, and Re Ve Interactive Ltd (in administration). This case is a welcome decision that brings greater clarity to the rights of contributories and others to involve themselves in administrations and the standard to be applied to an administrator’s decision-making. Written by Joseph Curl, barrister, of 9 Stone Buildings.

Zinc Hotels (Investment) Ltd v Beveridge and others [2018] EWHC 1936 (Ch), [2018] All ER (D) 172 (Jul)

Zinc Hotels (Investment) Ltd v Beveridge and others [2018] EWHC 2118 (Ch) (consequential matters)

What are the practical implications of this case?

The practical implications of this case may be summarised as follows:

  • the court does not have power to appoint a provisional administrator before a company has been placed into administration
  • once a company has been placed in administration, the court has power to appoint an additional administrator under paragraph 103 of Schedule B1 to the Insolvency Act 1986 (IA 1986)
  • the court has power to grant an interim order to appoint an additional administrator under IA 1986, Sch B1, para 74(3)(d)
  • the scheme of IA 1986, Sch B1 is that where there is a qualifying floating charge holder, they get to decide who the administrator should be
  • the court does not have power to appoint an additional administrator (whether on an interim or final basis) unless the conditions of IA 1986, Sch B1, para 103 are complied with
  • where an initial appointment has been made under IA 1986, Sch B1, para 14 by a qualifying floating charge holder, the appointment of any additional administrator may only be made either by:
    • the floating charge holder, or
    • the court on the application of the existing administrators
  • a shareholder does not have standing to apply for the appointment of an additional administrator where administrators have been appointed under IA 1986, Sch B1, para 14

Moreover, the case provides a useful summary of most of the important legal points in Davey v Money [2018] EWHC 766 (Ch), [2018] All ER (D) 40 (Apr) in a concise form. It also makes clear that the reasoning in the recent decision in Re Ve Interactive Ltd (in administration) [2018] EWHC 186 (Ch), [2018] All ER (D) 34 (Mar)—where administrators were removed on the ground of conflict of interest—is limited to pre-pack administrations.

What was the background?

The Zinc group of companies owned a number of hotels, including the flagship Kensington Hilton. Twenty-five companies in the Zinc group had been placed into administration under IA 1986, Sch B1, para 14 by the qualifying floating chargeholder, which was the security agent for a syndicate of lenders. Repayment had not been made on the due date (10 July 2017) and, after some months of forbearance and attempts by the companies to sell the hotels, administrators were appointed on 9 January 2018. During the period of forbearance, the insolvency practitioners who would ultimately be appointed as administrators had been engaged in a contingency planning exercise, including planning for an appointment, with the lenders. At the date of appointment, the Zinc companies owed about £519m of secured liabilities.

By an application dated 12 April 2018, the shareholders of the Zinc companies made an application under IA 1986, Sch B1, paras 74, 75 and 88. They alleged that unfair harm had been, or would be, caused to them by the administrators and sought their replacement. It was further alleged that the administrators lacked independence by reason of their previous relationship with the lenders. Some of the particulars of the allegations against the administrators and various other parties were extreme.

At a first directions hearing, an expedited hearing was ordered to deal with two interim points. Firstly, that additional concurrent administrators be appointed to represent the interests of the shareholders to hold the ring pending the trial of the application to remove them. Secondly, an order restraining the administrators from distributing the proceeds of any assets realised pending the resolution of various claims that the shareholders had identified. The matter had become urgent because the administrators had made clear that they intended to press on with realising the estate.

Those interim matters matter came before Henry Carr J in July 2018. The main battle-lines concerned whether or not there was jurisdiction to appoint ‘interim’ administrators and, if there was, whether it should be exercised.

What did the court decide?

The judgment was an unmitigated failure for the shareholders. Their argument did not get off the ground because there was no jurisdiction to do what they sought to do. The shareholders had submitted that the court had an inherent supervisory jurisdiction to control its officers and, as such, an additional administrator could be appointed on an interim basis. Henry Carr J held that the court did have the power to appoint an additional administrator, but that this power did not emanate from its inherent jurisdiction, but rather from IA 1986, Sch B1, para 7. This power was, however, expressly subject to other provisions in IA 1986, Sch B1.

IA 1986, Sch B1, para 7 provides that:

A person may not be appointed as administrator of a company which is in administration subject to the provisions of paragraphs 90 to 97 and 100 to 103 about replacement and additional administrators.

There was nothing in IA 1986, Sch B1 to suggest that such an appointment could not be made on an interim basis. But, crucially, the appointment of an additional administrator was subject to the other paragraphs of IA 1986, Sch B1 referred to in IA 1986, Sch B1, para 7 including, in particular, IA 1986, Sch B1, para 103 which provides as follows:

(1) Where a company is in administration, a person may be appointed to act as administrator jointly or concurrently with the person or persons acting as the administrator of the company.

(3) Where a company entered administration by virtue of an appointment under paragraph 14, an appointment under sub-paragraph (1) must be made by –

(a) the holder of the floating charge by virtue of which the appointment was made, or

(b) the court on the application of the person or persons acting as the administrator of the company.

(6) An appointment under sub-paragraph (1) may be made only with the consent of the person or persons acting as the administrator of the company. (emphasis added)

The judge noted that the general approach in IA 1986, Sch B1 was that ‘the floating charge-holder has the right to decide who the administrator should be’. Accordingly, where administrators are appointed under IA 1986, Sch B1, para 14 by a qualifying floating charge holder, an additional administrator can only be appointed (whether on an interim or final basis) either by the floating charge holder or by the court on the application of the existing administrators. On that basis, the shareholders had no standing even to apply.

Henry Carr J went on to consider what his decision would be if, contrary to the foregoing, he was wrong on the jurisdiction point.

The judge held that, if the power existed, it would be necessary to apply the three-stage test in American Cynamid v Ethicon (No 1) [1975] AC 396. That was because to exercise it against the wishes of the existing administrators would cause a stalemate situation and might prevent the realisation of the assets of the companies in administration. As to the first stage, there was no serious issue to be tried. The administrators’ prior engagement did not give rise to a conflict of interest. Henry Carr J accepted the evidence of the administrators that in most insolvencies of any size or complexity, the proposed officeholders would be engaged prior to the commencement of the proceedings.

Likewise, there was no serious issue to be tried arising from the administrators’ failure to pursue the first objective in IA 1986, Sch B1, para 3, namely that the administrator must perform their functions with the objective of rescuing the company as a going concern. Henry Carr J rejected that argument on the basis that there was simply no possibility of the debt being paid without the realisation of the assets. This meant that the first objective was impossible to achieve. As Snowden J had held in Davey v Money, rescue as a going concern did not mean paying creditors in full or making a distribution to shareholders from realisations. It meant that the company was restored to financial health for the benefit of its shareholders without its assets being sold.

Moreover, Snowden J had held in Davey v Money that a decision of an administrator as to which objective to pursue is only capable of challenge on grounds of a lack of good faith or irrationality. That is a very high hurdle, which could not be met in the present case.

There was, however, a difference in the standard of review to be applied to the decision of an administrator as to which objective to pursue (lack of good faith or irrationality) and the methods chosen by the administrator to pursue that objective. As to the methods, Snowden J had held in Davey v Money that an administrator owed the following duties:

  • fiduciary duties of agents to act in good faith, loyally and for proper purposes
  • a duty to exercise reasonable skill and care, and
  • when selling the company’s property, a duty to take reasonable care to obtain the best price reasonably obtainable, including as to the choice of time to sell

Having noted these duties, Henry Carr J followed Snowden J’s approach and held that where the matter involved a commercial decision taken by administrators, then the court would not interfere with that judgment unless it was based on a wrong appreciation of the law or was conspicuously unfair to a particular creditor or counterparty. Again, there was no chance of showing a serious issue to be tried on that test.

In the subsequent judgment dealing with consequential matters, Henry Carr J made the following decisions:

  • permission to appeal was refused
  • costs were awarded on an indemnity basis in light of a number of unsubstantiated allegations made against various parties of dishonesty or unethical conduct which the judge held should never have been made
  • largely as a consequence of the allegations made, it was appropriate for the three respondent lenders to have separate legal representation, rather than instructing a single legal team
  • a payment on account of 65% of the respondents’ costs is to be made

Case details

Court: High Court of Justice, Business and Property Courts of England and Wales, Insolvency and Companies List (ChD)

Judge: Henry Carr J

Date of judgment: 20 July 2018 (1 August 2018—consequential matters)

Interviewed by Stephen Leslie.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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Challenges to administrators—action for unfair harm (subscriber access only)

Removal and replacement of an administrator (subscriber access only)

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