Finnerty v Clark

The Court of Appeal considered when it is appropriate to remove administrators under paragraph 88 of Schedule B1 to the Insolvency Act 1986 and the standard for disturbing a Registrar's discretionary decision on appeal. The Registrar had removed the administrators because the majority unsecured creditors (the appellants) advanced a triable issue under s.244 of the 1986 Act (extortionate credit transactions), had offered to fund proceedings and had deposited funds with solicitors, and the Registrar considered a fresh mind should investigate the Default Rate. The Chancellor set that order aside, holding that no good or sufficient ground had been proved: the administrators were unbiased, had taken independent legal advice and had made a proper commercial decision not to bring s.244 proceedings. The Court of Appeal dismissed the appellants' appeal, endorsing the Chancellor's view that the mere possibility that a replacement administrator might reach a different view about litigation was not a sufficient ground for removal.

Background and parties: The dispute concerned St George's Property Services (London) Limited, whose administrators (the respondents) were appointed by a secured creditor. The two appellants were the company's shareholders and substantial unsecured creditors. They alleged the loan agreements contained a Default Rate that could be challenged under s.244 of the Insolvency Act 1986 and sought removal of the existing administrators and appointment of a replacement willing to bring proceedings.

Procedural posture: The Registrar granted the appellants' originating application under paragraph 88 of Schedule B1 to remove the administrators and appoint a replacement. That order was stayed and on first appeal the Chancellor set aside the Registrar's order and dismissed the application ([2010] EWHC 2538 (Ch)). Permission was given to pursue a second appeal to the Court of Appeal, which heard the matter and delivered this judgment.

Nature of the claim/application: The appellants applied for removal of the administrators and appointment of a replacement under paragraph 88 of Schedule B1 to the Insolvency Act 1986 so that a fresh administrator might pursue s.244 proceedings (extortionate credit transactions) or other challenges to the Default Rate in the Davenham loan facilities. They offered to fund the litigation and provided a solicitor's costs undertaking and a deposit to cover repayment at the Basic Rate.

Issues framed by the court: (i) What constitutes good and sufficient grounds to remove administrators under paragraph 88? (ii) In what circumstances should an appellate court disturb a Registrar's discretionary removal order?

Court's reasoning: The Court held that although the Registrar's discretion under paragraph 88 is wide and removal need not be founded on misconduct, there must nevertheless be evidence of a good or sufficient ground to justify removal. The appellants' case relied principally on the prospect that a replacement administrator might bring s.244 proceedings and that successful litigation would produce favourable consequences. The court found (a) the respondents had properly and independently considered the matter, obtained specialist advice and had a rational, unbiased commercial judgment not to institute s.244 proceedings; (b) the benefits relied upon by the appellants were entirely contingent on litigation being brought and on its success; and (c) there was no solid evidence that a replacement administrator would be likely to act differently. Accordingly the Chancellor was entitled to set aside the Registrar's order as plainly wrong on the evidence. The court also noted alternative remedies such as asking the administrators for directions were available.

Subsidiary findings: The Registrar had found the administrators to be efficient, vigorous and unbiased, and the appellants to be the de facto majority of unsecured creditors who had demonstrated good faith and offered funding. The Chancellor and the Court of Appeal nonetheless concluded those combined factors did not constitute a good or sufficient ground for removal.

Appeal dismissed. The Court of Appeal held that the Registrar's removal order was unsupportable on the evidential material: no good or sufficient ground was proved to remove administrators who had acted independently and reasonably in deciding not to commence s.244 proceedings. The mere possibility that a replacement administrator might take a different view was insufficient.

Registrar Derrett granted the appellants' application to remove the administrators and appoint a replacement on 30 July 2010. Permission to appeal was initially refused by the Registrar but granted by Newey J on 4 August 2010, who stayed the Registrar's order. On 14 October 2010 the Chancellor allowed the appeal from the Registrar, set aside the Registrar's order and dismissed the originating application ([2010] EWHC 2538 (Ch)). Jacob LJ granted permission for a second appeal to the Court of Appeal on 10 November 2010. The Court of Appeal heard the appeal and delivered judgment on 21 July 2011 ([2011] EWCA Civ 858).