Kaupthing Capital Partners II Master LP Inc v Spicer & Shinners

The court held that the out-of-court appointment of joint administrators of Master was invalid because the appointing paperwork used the prescribed company form (Form 2.10B) rather than the partnership form (Form 1B) required by the Insolvent Partnerships Order 1994 as applied to Schedule B1 of the Insolvency Act 1986. The judge applied the COMI principles from Re Eurofood and Re Stanford and concluded that Master’s centre of main interests was in England because its functions were carried out in London and that fact was ascertainable by third parties.

The court rejected arguments that Master should be treated as a company for the purpose of the prescribed form despite being a Guernsey limited partnership with legal personality and rejected a remedial corrective approach to cure the procedural defect. Because the appointment was void, the court declined to make retrospective curative orders extending the administrators' term back to October 2008. The judge also refused to remove the administrators for misconduct on the alternative hypothesis that the appointment was valid, and declined to join certain investors. The court would not deprive creditors of statutory interest.

This was an application challenging the validity of the out-of-court appointment of joint administrators of a Guernsey-registered limited partnership known as Kaupthing Capital Partners II Master LP Inc ("Master"). The applicants were the principal creditors after restructuring and took issue with the administrators' appointment, remuneration and conduct.

Background and parties:

• Master, a Guernsey limited partnership with legal personality, held investments through an operator and delegated investment management to Kaupthing entities operating from London.
• The Bank entered insolvency in Iceland and related Kaupthing entities entered administration in October 2008. KCP (the general partner) purported to appoint joint administrators for Master on 9 October 2008.
• Applicants (creditors) challenged the appointment on grounds including COMI, invalidity of the out-of-court written resolution and use of the wrong prescribed form.

The nature of the applications:

• Declaration that the administrators' appointment was invalid (formal and essential defects).
• Consequential reliefs including removal of the administrators, questions about administrators' remuneration, joinder of certain investors, permission for interim distribution, and whether the court could make retrospective administration orders or correct defects in the appointment.

Issues framed:

• Whether Master’s COMI was in Guernsey or England for the purpose of the EC Insolvency Regulation and, alternatively, whether the English court had jurisdiction under section 117 Insolvency Act 1986.
• Whether the prescribed form for out-of-court appointment under Schedule B1/IPO 1994 was Form 1B (partnership) or Form 2.10B (company) and whether the use of Form 2.10B rendered the appointment invalid.
• Whether any defects could be waived, corrected or cured retrospectively by the court, including by making an administration order backdating the appointment.
• Whether, on the alternative hypothesis that the appointment was valid, the administrators should be removed for misconduct and whether investors should be joined.

Court’s reasoning:

• On COMI, the court applied the authoritative tests from Re Eurofood and Re Stanford: starting from the presumption that COMI follows the registered office in Guernsey, the presumption may be rebutted only by objective and ascertainable factors. The court found that, although Master was registered in Guernsey and that was publicly declared, it was a letterbox vehicle whose head-office functions were carried out in London by the operator and delegated managers. Those facts would have been apparent to third parties dealing with Master (including creditors and investors). The presumption was therefore rebutted and the English court had jurisdiction under the EC Regulation.
• On formality, the court analysed Schedule B1 and the modifications effected by the Insolvent Partnerships Order 1994 which prescribe Form 1B for partnerships. Although Master had legal personality, it was not a company under Guernsey law for the purpose of Schedule B1 and therefore the partnership form should have been used. The completed Form 2.10B also contained internal inconsistencies and an incorrectly headed resolution. The judge found that the use of the company form rather than the prescribed partnership form constituted a fundamental flaw rendering the appointment invalid.
• The court rejected submissions that the defect could be cured by judicial correction or that a retrospective administration order could be made back to October 2008 because statutory time limits and the lack of standing for the administrators to apply for such orders prevented a lawful cure.
• On alternative findings, the judge would not remove the administrators for misconduct: she accepted their explanation for refusing a particular sale offer and was satisfied they had acted in the interests of creditors as a whole. She declined to join investors whose liability to contribute was disputed or who showed only a speculative prospect of surplus. The court would not deprive the applicants of statutory interest.

Consequences noted: The appointment was declared invalid, with attendant draconian effects recognised by the court; the judge observed potential protections available to third parties dealing in good faith but left ancillary issues such as remuneration and costs for further hearing.

The court held that the out-of-court appointment of the joint administrators was invalid because the appointing documentation used the company prescribed form (Form 2.10B) rather than the partnership form (Form 1B) required by the Insolvent Partnerships Order 1994 as applied to Schedule B1 of the Insolvency Act 1986. The court also held that Master’s COMI was in England, so English jurisdiction under the EC Regulation was established. The judge refused to correct or retrospectively validate the appointment, would not make a retrospective administration order back to October 2008, declined to remove the administrators for misconduct on the alternative hypothesis that the appointment was valid, refused joinder of investors and would not deprive creditors of statutory interest. Further ancillary matters, including remuneration and costs, were adjourned for further hearing.