Clydesdale Financial Services Ltd & Ors v Smailes & Ors

The court may remove an administrator under paragraph 88 of Schedule B1 to the Insolvency Act 1986 where there is a proper ground, even without misconduct or personal unfitness. A conflict arising from close involvement in an earlier transaction may justify removal because the administrator cannot independently investigate that transaction. The wishes of creditors are relevant but are not determinative. The court may dispense with defective service where the creditors’ views are sufficiently known and the defect could not affect the outcome. Claims belonging to a company in administration must be brought by the company, whereas creditors may pursue claims under paragraph 75 of Schedule B1.

The applications arose from the administration of a solicitors’ limited liability partnership and a pre-pack sale of its work in progress, retainers and disbursement rights to a newly formed practice. Clydesdale Financial Services Limited sought removal of the joint administrators and appointment of a replacement, alleging undervalue, inadequate creditor consultation and conflicts arising from the sale negotiations. Focus Insurance Company Limited sought inspection of client files. The administrators and others sought strike-out or summary judgment concerning claims relating to the sale. The issues included the scope of the court’s removal jurisdiction, defective service, standing to pursue claims under Schedule B1, and enforcement of insurance-related inspection rights.

1. Removal of administrators. Paragraph 88 of Schedule B1 to the Insolvency Act 1986 confers a broad jurisdiction. Removal requires a proper ground, but the ground need not involve misconduct or personal unfitness. The court may have regard to the wishes of the majority of creditors, without being bound by them.

2. The circumstances and terms of the sale raised a serious issue requiring investigation. The existing administrators had been closely involved in negotiating the sale and could not reasonably be expected to conduct an independent review of it. That conflict, together with the reasonably held views of a substantial majority of creditors, provided proper grounds for removal. No finding of dishonesty or impropriety was required.

3. Paragraph 74 provides a more limited jurisdiction concerning unfair harm to an applicant’s interests. Paragraph 74(3) nevertheless permits the court to remove an administrator and appoint a replacement. An order under paragraph 74(4)(d) would bring the administration itself to an end.

4. The court rejected the allegations that the administrators’ conduct in withholding information, notifying creditors late or failing fully to comply with Statement of Insolvency Practice 16 independently justified removal. The proposed alternative of proceeding to a creditors’ voluntary winding-up was inappropriate because investigation of the sale should not be delayed and the majority of creditors favoured a change of administrators.

5. The defective service of the removal application was dispensed with under rule 7.55 and CPR 6.28, incorporated by rule 12.11. The majority creditors’ views were known, further creditor submissions could not have altered the assessment, and the administrators themselves could have notified creditors. The existing administrators were removed and Stephen Hunt was appointed in their place.

6. Inspection of files was refused. The evidence and submissions were inadequate for mandatory orders, particularly where the proposed rights arose under insurance policies whose enforceability was affected by sections 19, 27 and 327(3) of the Financial Services and Markets Act 2000. The refusal did not prevent a properly formulated future application.

7. Claims for equitable compensation or damages for duties owed to the LLP vested in the LLP and could not be maintained by the claimants. Applying Pickthall v Hill Dickinson LLP 2009 EWCA Civ 543, those claims were struck out. Creditors had standing under paragraph 75 of Schedule B1, but JCL was not a creditor of the LLP. CFS’s paragraph 75 claim was not struck out because the facts concerning acts before appointment were insufficiently clear. The applications concerning permission to continue proceedings were adjourned for consideration by the new administrators.

First-instance judgment. No appellate history is stated in the judgment.