Promontoria (Chestnut) Ltd v Craig & Anor

An administrator’s decision to require fixed-charge receivers to vacate office must be taken rationally and with proper regard to the secured creditor’s proprietary interests. Relevant matters include reliable valuation evidence, consultation with the receivers, likely management costs and the interests actually served by the administration.

Where the statutory purpose of the administration does not require the charged property, and enforcement is unlikely to impede that purpose, permission under paragraph 43(2)(b) of Schedule B1 to the Insolvency Act 1986 should ordinarily be granted. An administration should not be used to prejudice a secured creditor for the benefit of unsecured creditors where the evidence shows that unsecured creditors will receive nothing.

Promontoria, the holder of fixed legal charges over partnership properties, applied for declarations and consequential relief after the joint administrators required its appointed receivers to vacate office shortly after the partnership entered administration.

The administrators contended that control of the properties was required to rescue the partnership as a going concern, realise the portfolio as a whole and produce a return for creditors. Promontoria argued that the valuation evidence showed a shortfall on its secured debt, that the administration’s proposed realisation strategy was unrealistic, and that the administrators had failed to consider its security rights, the receivers’ costs and the conflicts surrounding the proposed managing agents.

The central issues were whether the administrators’ decision was unreasonable or irrational, whether the court could intervene directly, and whether permission should be granted under paragraph 43(2)(b) of Schedule B1 to the Insolvency Act 1986.

1. The administrators’ decision. The decision to require the receivers to vacate office was irrational when made. The administrators should first have obtained reliable valuation evidence, consulted the receivers about their proposed management and sale arrangements, and assessed the comparative costs. They also failed properly to consider that Promontoria was the principal constituency in the administration and that the proposed managing agent was connected with the partners and charged materially higher fees.
2. Directions under paragraph 68. The creditors’ approval of the proposals through the deemed-consent procedure constituted approval for the purposes of paragraphs 51 and 53 of Schedule B1. A direction reinstating the receivers would have been inconsistent with the approved proposals. Since there had been no relevant change of circumstances and no misunderstanding about the proposals, paragraph 68(3) prevented the court from giving such a direction.
3. Permission to enforce security. The principles in Re Atlantic Computer Systems Plc [1992] Ch 505 applied. If enforcement is unlikely to impede the administration’s purpose, permission should normally be given. If a balancing exercise is required, the court must weigh the secured creditor’s proprietary interests against the prejudice to the administration and other creditors, while recognising that an administration should not ordinarily benefit unsecured creditors at the expense of security rights.
4. The charged properties were not required for trading or rescue purposes. The proposed refinancing was speculative, the secured debt would not be paid in full, and the unsecured creditors were unlikely to receive anything. The appointment of receivers therefore would not impede the administration. Permission was granted under paragraph 43(2)(b) to appoint receivers and, if appropriate, sell the mortgaged properties.
5. The respondents were ordered to pay the applicant’s costs personally, outside the administration, because the proceedings had been caused by their unreasonable and peremptory decision.

First-instance decision. No prior appellate decision is stated in the judgment.