Administration – Insolvent development company – Administrators terminating contract of applicant development manager – Para 74 of Schedule B1 to Insolvency Act 1986 – Application to remove and replace administrators on ground of wrongful termination of contract – Whether termination wrongful – Whether resulting in breach of duty to perform functions in interests of all creditors – Whether causing unfair harm to applicants – Application refused
The third respondent was a company incorporated as a special purpose vehicle to redevelop certain properties with the help of a £146.5m secured bank loan facility. The first applicant agreed to manage and co-ordinate the project under a contract concluded with the third respondent in 2007; it subsequently assigned the benefit of that contract to the second applicant associated company.
The project went over budget and fell behind schedule. The third respondent also defaulted on its loan facility. The applicants threatened winding-up proceedings against the third respondent if certain of their invoices were not paid. To avoid that possibility, the bank applied to a court order placing the third respondent in administration, to enable it to complete the development with a view to sell the redeveloped units. The first and second respondents were appointed as joint administrators. They concluded that the applicants were not competent to complete the redevelopment on time and on budget, and proceeded to terminate the 2007 management agreement, citing various matters that were alleged to constitute irremediable breaches of contract by the applicants.
The applicants applied to the court for relief under para 74 of Schedule B1 to the Insolvency Act 1986. They sought the replacement of the joint administrators on the ground that they had wrongfully terminated the 2007 agreement, thereby acting in breach of their duty to perform their functions in the interests of the third respondent’s creditors as a whole and causing unfair harm to the applicants’ interests. They further questioned the independence of the administrators’ judgment, in the light of the fact that their firm had advised the bank in respect of its security prior to the administration and that their advising solicitor had previously advised the bank.
Held: The application was refused.
(1) It was not possible in proceedings of the kind under consideration to reach a final decision as to whether the 2007 agreement had been wrongfully terminated. A trial in the Technology and Construction Court would be required, with disclosure and oral factual and expert evidence, in order to resolve the issues between the applicants and the third respondent. The evidence in the instant proceedings did not enable the court to conclude that the allegations of breach of contract were baseless. The applicants did not establish that the agreement had been wrongfully terminated.
(2) Further, a wrongful termination of the agreement would not necessarily be a breach of the administrators’ duty to perform their function in the interests of the creditors as a whole, nor would it necessarily constitute unfair harm to the applicant. The former duty was a form of class remedy that might not fall to be performed in an identical way in respect of each and every constituent of the class. It might be in the interests of the creditors as a whole that one particular contract with one particular creditor be terminated, even wrongfully. Where the administrators had concluded, not without foundation, that the applicants were doing a less satisfactory job than other members of the development team and that those other members lacked confidence in the applicants, their decision to terminate that relationship, as a matter of commercial judgment, had not breached the obligation to the creditors as a whole. Nor was it necessarily unfair to the applicants, even assuming that the termination was wrongful and was capable of constituting harm. Although the different treatment of one creditor would require an explanation, the administrators had made a commercial judgment and explained why they had made it. The court should not interfere with that decision unless it was based on an incorrect appreciation of the law or was conspicuously unfair to a particular creditor or contractor: Re CE King Ltd (in administration) [2000] 2 BCLC 297 applied. In any event, the interests of the applicants that were being harmed were their interests as contractors, not their interests as creditors. They continued to have the same rights as any unsecured creditor in respect of their outstanding invoices. Where an application could be made by a creditor, it had to be made in that capacity and that capacity alone: Re JE Cade & Son Ltd [1992] BCLC 213 and Sisu Capital Fund Ltd v Tucker [2005] EWHC 2170 (Ch); [2006] BCC 463 applied.
(3) It was not possible to infer that the administrators were acting as the bank’s puppets in terminating the applicants’ contract without exercising independent judgment. The nature of the decision did not itself suggest perversity or bad faith. Their views had merely coincided, deriving from a common analysis of the commercial realities: Re Edennote Ltd [196] 2 BCLC 389 and Clydesdale Financial Services v Smailes [2009] EWHC 1745 (Ch) distinguished.
(4) Further, the applicants’ application endeavoured to enforce the agreement, rather than concerning how the third respondent’s undertaking and assets should best be managed in the interests of its creditors as a whole during the administration. The applicants’ claim was for breach of contract, consisting of a money claim for unpaid fees and damages for other loss. That claim was subject to the statutory moratorium. As such, the court would not lift the moratorium and grant permission to commence an action during the administration: AES Barry Ltd v TXU Europe Energy Trading (in administration) [2004] EWHC 1757 (Ch); [2005] 2 BCLC 22 applied. The statutory scheme should not be subverted by ordering the removal of the administrators unless they paid the applicants in full.
Christopher Parker QC and Louise Hutton (instructed by Pinsent Masons LLP, of Leeds) appeared for the applicants; Matthew Collings QC and Marcus Haywood (instructed by Denton Wilde Sapte LLP) appeared for the respondents.
Sally Dobson, barrister