Paragraph 81 challenge—improper motive ends administration (Re C A & T Developments Ltd)

Paragraph 81 challenge—improper motive ends administration (Re C A & T Developments Ltd)

In Re C A & T Developments Ltd, the court found that the appointment of administrators had been motivated by an improper purpose and the purpose of the administration could not be achieved. In an application under Paragraph 81 of Schedule B1 to the Insolvency Act 1986 (IA 1986), the court therefore ordered the administration to end and the company to be wound up compulsorily. Consequently, it is clear that a mere statement by an administrator that in their opinion the purpose of administration is likely to be achieved, is not sufficient defence to a paragraph 81 challenge.

Written by Andrew Mace, barrister at 9 Stone Buildings, Lincoln’s Inn.

Re C A & T Developments Ltd [2019] EWHC 3455 (Ch)

What are the practical implications of this case?

While administrators might not be expected to be aware of any improper motive on behalf of their appointor, they are under a duty to carry out a certain level of due diligence prior to accepting an appointment.

Notwithstanding the administrator’s statement under para 18 of Sch B1 of IA 1986, the court will not be bound by the assertions or ipse dixit of the proposed administrator.

Administrators are obliged to discharge their duty of enquiry or, rather, ensure they have ‘sufficiency of information and knowledge’ (per McCloskey J in Curistan v Keenan [2011] NICh 23) to ensure that they have a sound basis for making the statement. This is especially true when a proposed appointment is being made against a background of known issues.

In this matter, solicitors to the applicant, had written to the company and its director on 31 July 2019, prior to any appointment and (at [28]):

‘…deprecated “the attempt to divest [the applicant] of his interest through the grant of a purported fixed and floating charge”… They also threatened to wind the Company up, warning [the applicant] would seek to ensure the liquidator investigated the conduct of the directors and bring such claims as appropriate, including claims for fraudulent trading under Section 213 of the IA 1986 and a transaction to defraud creditors under Section 423. They challenged the enforceability of the Debenture and warned that, if it was validly entered into, the liquidator would be expected to take action to set it aside’.

The court found, at [60], that ‘…the most likely explanation for the director’s conduct is that he entered into the Debenture as a device to enable him to appoint his own nominees as administrators and thus improve his prospects of influencing the insolvency process…. Ultimately, Messrs Bowes and Rosler were appointed as administrators as part of the same strategy’ and (at [62]):

‘[the director] can also be seen to have acted in order to obtain a collateral advantage over [his fellow director] and put himself in a better position than otherwise so as to influence the insolvency procedure and course of the administration…in the sense originally envisaged, this advantage was achieved.’

It is clear that a mere statement by an administrator ‘that in his opinion the purpose of administration is likely to be achieved’ is not sufficient defence to a para 81 challenge.

What was the background?

The applicant had lent £309,976.24 to the company to enable it to purchase and develop land. There was an agreement that after the costs of development were repaid any profit would be split 60:20:20 between the applicant and the two directors of the company. The applicant and one of the directors were resident in Singapore, and so only one of the directors had day to day control of the company and its bank account.

When the planning permission had been allowed to lapse and no development had taken place, the applicant sought return of its loan or a transfer of the land. The first director (P) arranged for a 90% shareholding in the company to be issued to him following the untimely death of his fellow director (K). P then arranged for a debenture to be provided to him by the company in respect of funds he advanced to the company which were, at least in part, used for his benefit and not for the company’s benefit. The debenture was in respect of all funds advanced both post-debenture and historic.

After engineering the provision of the debenture, P appointed his own administrators in full knowledge that the legality of the debenture had been challenged in correspondence from solicitors to the applicant. The applicant had presented a winding up petition (the petition) on 5 August 2019 and served it on the company.

The administrators were appointed ten days after the petition and were aware of the challenge.

The applicant was also the sole, or at least the majority creditor of the company.

The sole asset of the company was a plot of land that had been purchased with planning permission which had now lapsed. The company was not a trading entity in the ordinary sense, and there was no goodwill or business to be preserved in an administration.

The only way the administration could achieve a better return to creditors would be if the costs of the administration would be less than the costs of a compulsory liquidation. That was unlikely from the outset given:

  • the debenture appointing the administrators was known to be challenged from the outset and this would have to be addressed, at cost, at some time in the future  
  • the applicant had petitioned for the winding up of the company and it was clear he was the sole or, at least, majority creditor in the amount of at least 75%  
  • on that basis any proposals would have to be approved by the applicant and, if they were not, as in this case, an application under para 55, would have to be made at an additional cost

At the hearing evidence was adduced to show that these additional costs would never be incurred in a winding up and would only arise in the current administration.

What did the court decide?

The court found that P (who was a de facto director) entered into a debenture as a device to enable him to appoint his own nominees as administrators and thus improve his prospects of influencing the insolvency process. Had the company entered liquidation, then any vote P had as a creditor would be vastly outweighed by the value of the creditor claim of K who was the applicant in these proceedings.

The administrators had ‘relied heavily on information provided by P’ [36] and it was:

‘not self-evident that administration will achieve a better result for the creditors than liquidation if the Property is simply to be disposed of at a proper price’ [62].

The proposals had been rejected and the administrators had not made an application for directions under para 55 of Sch B1.

There was an acknowledgment (at [66]) that:

‘There seems little prospect of K approving the Administrators’ proposals and, while it would be open to the [Administrators] to return to the Court for relief under Paragraph 55(1) of Schedule B1, the administration is at an impasse.’

Accordingly the court found that the appointment had been motivated by an improper purpose, the purpose of the administration could not be achieved and ordered the administration to end and the company to be wound up compulsorily.

Case details

  • Court: Chancery Division 
  • Judge: Judge Halliwell (sitting as a High Court judge)  
  • Date of judgment: 11 December 2019

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

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About the author:

Zahra started working as a paralegal at Lexis Nexis in Banking and Insolvency teams in April 2019. Zahra graduated with a 2.1 honours in a BA French and Spanish, completed the GDL at BPP University and is seeking some experience before commencing the LPC. She has undertaken voluntary work for law firms in London, Argentina and Colombia.