Rhino Enterprises Properties Ltd & Anor, Re

Permission to bring misfeasance proceedings under paragraph 75 of Schedule B1 to the Insolvency Act 1986 requires a reasonably meritorious cause of action and a reasonable likelihood of benefit to the company’s estate. A court may decide a short legal issue at the permission stage where the answer is clear, but should leave a developing or fact-sensitive issue to trial.

A company voluntary arrangement is, at least provisionally, a statutory arrangement rather than an actual contract. Contract (Rights of Third Parties) Act 1999 rights therefore do not necessarily arise, and an administrator cannot readily enforce a release as an outsider. Administrators must exercise their powers for proper purposes and cannot use a CVA to obtain personal protection from statutory misfeasance liability.

The applicants, a shareholder and the holding company, sought retrospective permission under paragraph 75(6) of Schedule B1 to the Insolvency Act 1986 to pursue former administrators of three companies for alleged breaches of duty and misfeasance.

The administrators relied on a CVA release clause which released them from liabilities connected with their administration and purported to prevent claims. The central issues were whether a CVA was a contract for the purposes of the Contract (Rights of Third Parties) Act 1999, whether the administrators could enforce the clause, whether the applicants retained standing as contributories, and whether the clause was invalid as an improper exercise of fiduciary powers.

1. Permission threshold. The court held that paragraph 75(6) of Schedule B1 requires a reasonably meritorious cause of action and a reasonable likelihood that pursuit of the claim will benefit the company’s estate. These criteria are important but not exhaustive. The jurisdiction is similar to, but distinct from, summary judgment, and the court should not conduct a mini-trial.
2. Determination of the CRTPA issue. A court should decide a short, properly argued point of law where the answer is unanswerable. However, a developing or fact-sensitive issue should ordinarily be left to trial where a reasonable litigant would pursue the claim. The court treated the status of CVAs as at least realistically arguable and therefore did not make an irreversible final determination.
3. Status and effect of a CVA. The judge provisionally considered that a CVA is not an actual contract. It is created by compliance with the statutory procedure and takes effect under section 5(2) as if made by the company and as if relevant persons were parties. The contractual language used in the authorities describes the CVA’s operation, rather than classifying it as an ordinary contract. Accordingly, it was at least as likely as not that the 1999 Act did not apply, that the administrators were outsiders to the statutory arrangement, and that the release clause was ineffective and unenforceable by them.
4. Standing as contributories. The applicants were not disqualified from applying under paragraph 75 merely because they had voted for the CVAs in other capacities. Their rights as contributories were distinct, and any recovery would benefit the companies’ estates rather than the applicants personally.
5. Proper purpose and fiduciary duty. Administrators proposing a CVA must maintain an independent stance, act in good faith and avoid using the statutory machinery for personal benefit. A release intended to protect administrators from misfeasance claims engages a separate proper-purpose and fiduciary-duty issue; it is not merely a challenge for unfair prejudice under section 6.
6. The claims were coherent and reasonably meritorious, and were reasonably likely to benefit the companies’ estates. Permission was granted retrospectively under paragraph 75(6).