Closegate case - Can a director challenge an administration appointment and was the bank estopped from taking action?

Did the directors of a company in administration have standing to challenge the validity of the appointment of administrators? As a result of the bank’s conduct in the lead up to the appointment of the administrators, was the bank estopped from making a demand for the monies owing and appointing the administrators?

Original news

Closegate Hotel Development (Durham) Ltd and another v McLean [2013] EWHC 3237 (Ch), [2013] All ER (D) 308 (Oct)

How did the issue arise in this case?

The case concerned two construction companies that had been involved in the development of a hotel in Durham. The original financing by Barclays Bank plc had been lengthy and there was a refinancing in 2007/08, which led to complaints being made by the companies against Barclays. The companies issued proceedings against Barclays in the Companies Court on 2 November 2011.

In parallel with the pursuit of the claim, in early 2012, the companies made overtures to Barclays with a view to settling the debt owed to Barclays and the claim. On 26 June 2012, Barclays responded favourably, indicating that it was ‘willing to take part in discussions with the aim of reaching a solution to the current issues’. The parties agreed to a stay of the litigation while settlement discussions were ongoing. The companies proposed settling Barclays’ debt and the claim for a capital sum using funds raised from the Co-operative Bank and discussions continued between the parties into 2013, during which time the stay of the litigation was extended until 30 April 2013.

On 4 September 2013, the companies notified Barclays that the Co-operative Bank was unlikely to be able to do the deal with the companies as originally notified. Following this, the companies obtained two indicative offers of finance from potential funders but there was no communication between the companies and Barclays between 4 September 2013 and 11 October 2013.

On 11 October 2013, Barclays emailed the companies to notify them that it intended to make demand for repayment. Demand for repayment was served that day and, in the absence of any payment, Barclays appointed administrators later on 11 October 2013.

What was the case about?

The companies applied to court challenging the validity of the appointment of the administrators on the basis that IA 1986, Sch B1, para 16 prohibits the appointment of an administrator while a floating charge is not enforceable. The companies argued that as at 11 October 2013 the floating charges were not enforceable because Barclays was estopped from making an immediate demand for repayment of the moneys owing to it or from exercising any of the rights under its security.

The case deals with two points:

  • Did the directors of the company in administration have standing to bring the claim on behalf of the companies?
  • Was Barclays, as a result of its conduct, estopped from making an immediate demand for repayment of the moneys owing to it or from exercising any of the rights under its security?

Did the directors of the company in administration have standing to bring the claim on behalf of the companies?

The court had to deal with the preliminary question of whether the appointment of the administrators deprived the directors of the authority to cause the companies to challenge the appointment of the administrators.

Barclays argued the directors did not have standing as a result of IA 1986, Sch B1, para 64, which provides that an officer of a company in administration may not exercise a management power without the consent of the administrator. Barclays argued that causing the companies to challenge the appointment of the administrators necessarily interfered with the exercise of the administrator’s powers.

This argument was not accepted by the court. Richard Snowden QC (sitting as deputy judge of the High Court) considered that the concept of management power as defined in para 64 was primarily intended to catch power that, if exercised by the director, could impede the exercise of similar powers by the administrators. He did not consider that para 64 was intended to catch a power on the part of the directors to cause the company to make an application challenging the ‘logically prior question of whether the administrators have any power to exercise at all’.

The court also drew analogies with the situation where a provisional liquidator is appointed and the directors retain a residuary power to instruct lawyers to challenge the appointment of the provisional liquidator, to oppose the petition and, if a winding up order is made, to appeal against the making of that order (see Re Union Accident Insurance Co Ltd [1972] 1 All ER 1105).

The court also confirmed that the standing of the directors bringing a claim on behalf of a company to challenge the validity of the appointment of administrators did not depend on the provision by them of an indemnity for costs.

Was Barclays estopped from making demand or appointing the administrators?

The essence of promissory estoppel is the identification of a clear and unequivocal statement made by one party to the other upon which the latter relies to his detriment. It is inherent in that formulation that the party asserting the estoppel must know of the terms of the statement made to him and how he understood it.

Counsel for the companies argued that the companies reasonably understood the communications from Barclays and the course of conduct between them to be a representation that neither side should take any action while negotiations between them were continuing. He further submitted that the representation was that this state of affairs would continue until either it was apparent the negotiations had terminated, or Barclays gave reasonable notice to terminate the negotiations.

The current case did not involve a clear and unequivocal statement in any single document or statement of Barclays. Rather, the companies understanding is derived by inference from a combination of phrases used in various letters from Barclays, the facts and conduct of negotiations between the parties, and some words uttered at a meeting.

Ultimately the judge did not consider the actions of Barclays during the course of negotiations met the high threshold required to constitute an estoppel. Barclays indicated a willingness to participate in discussions and did participate in discussions but did not do so on the basis (nor give any clear message to the effect) that it was agreeing to a suspension of its rights against the companies. Statements from Barclays that it would treat an offer from the companies ‘seriously’ and hold discussions in ‘good faith’ were consistent with the ordinary conduct of negotiations and said nothing about Barclays’s ability to exercise its legal rights. None of this amounted to a clear and unequivocal representation that Barclays would not exercise its legal right to require immediate repayment of the debts or its right to take enforcement action.

Why is the issue important to restructuring professionals?

Banks will routinely enter into negotiations with creditors seeking to find an alternative solution to enforcement action and this case will provide them, and their advisors, with comfort that pre-enforcement negotiations together with any written communications will generally not amount to an estoppel preventing them from taking action. Banks should however take care to ensure that any written communication or oral assurances are carefully worded and reviewed by their lawyers so as not to make a binding representation which may prevent them from taking action in the future.

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