BLV Realty Organization Ltd & Anor v Batten & Ors

An administrator’s allegedly wrongful termination of a creditor’s contract does not, without more, establish a breach of the duty to act in the interests of creditors as a whole or unfair harm under paragraph 74 of Schedule B1 to the Insolvency Act 1986. The interests of the creditor body may justify different treatment of individual creditors. Differential treatment is not unfair where supported by a cogent rational commercial explanation. The court should not interfere with an administrator’s commercial judgment unless it rests on a wrong appreciation of the law or is conspicuously unfair. A paragraph 74 application cannot be used to obtain, indirectly, enforcement of a contractual claim subject to the statutory moratorium.

Zegna III Holdings Inc entered administration after defaulting on substantial bank financing for a property redevelopment. Its administrators terminated an agreement under which BLV Realty Organization Limited provided development management and co-ordination services. BLV applied under paragraph 74 of Schedule B1 to the Insolvency Act 1986 for directions requiring payment of its invoices and restoration of the agreement, or for removal and replacement of the administrators.

BLV alleged that termination was wrongful, breached the administrators’ duty to act in the interests of creditors as a whole, and unfairly harmed BLV. The central issues were whether the court could determine the alleged contractual wrong summarily, whether the termination amounted to unfair harm, and whether the administrators had acted independently.

1. Application dismissed. BLV had not established on a summary application that termination of the management agreement was wrongful. Determining that question would require a trial with disclosure and factual and expert evidence. The administrators were not required to establish conclusively that termination was lawful.
2. A wrongful termination would not necessarily breach the duty to perform functions in the interests of creditors as a whole. Administration is a class remedy. The interests of the class may justify terminating one creditor’s contract while retaining other contracts, including where the administrators consider that another contractor can perform the work more cheaply or effectively.
3. Unequal treatment is not necessarily unfair treatment. A creditor may be treated differently where there are sound commercial reasons connected with maximising recoveries for the creditor body. A cogent rational explanation normally suffices. The court should not interfere with the administrators’ commercial judgment unless it is based on a wrong appreciation of the law or is conspicuously unfair to the particular creditor or contractor. The approach in Re C E King Ltd [2000] 2 BCLC 297 was applied.
4. BLV’s relevant interests were its interests as contractor, rather than its interests as a creditor. Its unpaid invoices gave it the same unsecured creditor rights as other unsecured creditors. The authorities concerning applications made by a creditor, including J E Cade & Son Limited [1992] BCLC 213, Sisu Capital Fund Limited v Tucker [2006] BCC 463 and Doorbar v All Time Securities Limited [1995] BCC 1149, supported confining the application to interests held in the capacity of creditor.
5. The administrators’ previous professional relationship with the Bank, and their instruction of a solicitor who had previously advised the Bank, did not of themselves establish disabling conflict, lack of independence or grounds for removal. The circumstances were materially different from those in Clydesdale Finance v Smailes [2009] EWHC 1745 (Ch). The court applied the removal threshold discussed in Re Edennote Ltd [1996] 2 BCLC 389.
6. The application was in substance an attempt to enforce the agreement and obtain payment of contractual claims. Such claims were subject to the statutory moratorium under paragraph 43 of Schedule B1. Consistently with AES Barry v TXU Europe [2005] 2 BCLC 22, the court would not permit the statutory scheme to be circumvented by removing administrators unless BLV was paid in full. The same conclusions applied to the alternative paragraph 88 application.