Rhino Enterprises Properties Ltd & Anor, Re

The court considered an application for retrospective permission under paragraph 75 of Schedule B1 to the Insolvency Act 1986 to permit two contributories to pursue claims against former joint administrators for breaches of fiduciary and other duties and/or misfeasance. Central to the application was whether a company voluntary arrangement (CVA) is a "contract" for the purposes of the Contract (Rights of Third Parties) Act 1999 and therefore whether a release clause (cl.24.1) in the approved CVA could be enforced by the administrators as third parties.

The judge held that the threshold for permission under paragraph 75(6) requires a reasonably meritorious cause of action and a reasonable prospect of benefit to the company estates. Applying those criteria, the court found the proposed misfeasance claim to be reasonably meritorious and likely to benefit the estates, and therefore permission should be granted.

The court reached a provisional but clear view on the CRTPA point: a CVA is a statutory creature operating under a "statutory hypothesis" or "hypothetical agreement" and is not, in all respects, a contract for the purposes of the 1999 Act. On that provisional view, third-party enforcement of the CVA under the 1999 Act is unlikely and the release in cl.24.1 was unlikely to provide the administrators with a complete defence. The court also held that the contributories were not precluded from applying under paragraph 75 by virtue of having voted for the CVA in other capacities.

Background and parties

• The applicants are two related individuals/companies who are contributories of Askwith Investments Limited and Rhino Enterprises Properties Limited. They seek retrospective permission under paragraph 75 Schedule B1 IA 1986 to bring claims against two former joint administrators (partners of Deloitte LLP) alleging breaches of fiduciary duty and misfeasance arising from the administrators' handling of swap claims and property sales during an administration which ended in a CVA.
• The respondents are the former joint administrators who obtained their statutory discharge under paragraph 98 Sch.B1. The CVA approved for the companies contained a broad release clause at cl.24.1 purporting to release the administrators from liability for acts or omissions as administrators and for matters relating to the CVA.

Procedural posture and relief sought

• The applicants seek permission under paragraph 75(6) Sch.B1 to pursue the misfeasance/derivative-style claims against the former administrators. Permission is required because the administrators were discharged.

Issues for determination

1. Whether the court should determine the legal question under the Contract (Rights of Third Parties) Act 1999 (the "CRTPA issue") or confine the application to whether the applicants have a real prospect of showing at trial that cl.24.1 does not defeat a misfeasance claim.
2. Whether a CVA is a "contract" for the purposes of the 1999 Act and therefore whether third parties (the administrators) can enforce cl.24.1 directly.
3. Whether the applicants are precluded from applying as contributories because they voted in favour of the CVA as members and/or creditors.
4. Whether cl.24.1 is ineffective in equity as a provision inserted by fiduciaries for their personal benefit contrary to the proper purpose rule.
5. Whether the applicants are estopped from denying the binding effect of cl.24.1.

Court’s reasoning and outcome

The court reviewed the law on paragraph 75(6) (permission requiring a reasonably meritorious cause of action and a reasonable prospect of benefit to the estate) and comparable summary judgment principles. It concluded that the merits threshold for permission was met: the applicants’ pleaded case that the administrators failed properly to investigate or pursue valuable claims against Barclays was coherent, reasonably meritorious and likely to benefit the companies’ estates if successful.

On the CRTPA issue the judge gave a detailed provisional assessment. The court considered authorities describing CVAs as operating "as if" they were contracts by statutory hypothesis, but concluded (provisionally) that a CVA is a statutory construct distinct from an ordinary contract and that many contractual doctrines (and the operation of the 1999 Act) do not automatically follow. It was therefore unlikely that the 1999 Act applied so as to permit the administrators, as non-parties, to enforce cl.24.1. That provisional conclusion reduced the administrators’ protection under the release clause.

The judge also held that the applicants were not barred from applying under paragraph 75 despite having voted for the CVA in other capacities; the contributories retain the separate statutory procedural right to seek redress for misfeasance for the benefit of the company estates.

Finally the court accepted the applicants’ remaining argument that permitting officeholders to achieve personal exoneration by including such releases in a CVA could conflict with the proper purpose and fiduciary duties of administrators; the court considered that relief by way of permission should be granted to allow full investigation at trial.

The court therefore granted retrospective permission under paragraph 75(6) Sch.B1 to the applicants to pursue their claims against the former administrators.

Permission under paragraph 75(6) of Schedule B1 to the Insolvency Act 1986 is granted. The court held that the applicants have a reasonably meritorious cause of action and that pursuing it is reasonably likely to benefit the companies' estates. The court reached a provisional view that a CVA is a statutory construct treated "as if" contractual but not a contract for the purposes of the Contract (Rights of Third Parties) Act 1999, so the administrators are unlikely to be able to rely on cl.24.1 as an absolute third‑party defence; contributories who voted for the CVA are not precluded from applying under paragraph 75, and fiduciary/proper‑purpose considerations support permitting the claim to proceed for fuller determination at trial.