Likelihood of achieving purpose of administration trumps bad motive for the appointment
March 7, 2017
Notwithstanding its presence on the statute book for well over a decade, it was not until January this year that the Companies Court was called on to consider the circumstances in which it might bring an administration to an end under paragraph 81 of Schedule B1 to the Insolvency Act.
In In the matter of FREP (Knowle) Limited and others  EWHC 25 (Ch) the Court was faced with an application made by a creditor (which was also the sole shareholder) of three operating companies in the same group for an order that the appointment of administrators cease to have effect. The administrators had been appointed in October 2016 by Nationwide Building Society pursuant to its rights as a floating charge holder under Schedule B1 of the Insolvency Act, following the companies’ default of their repayment obligations.
Paragraph 81 of Schedule B1 provides that the court may provide for the appointment of an administrator to cease to have effect, but the grounds of the application under that paragraph must allege an improper motive on (in this case) the part of the person appointing the administrator. The creditor contended that Nationwide’s motive had been improper: its principal reason for appointing administrators was to stifle litigation which the companies had commenced against Nationwide following Nationwide’s decision to enter into a funded participation agreement with a third party in circumstances which the creditor contended breached the companies’ pre-emption rights under the original loan agreements.
Although it found as a fact that Nationwide did not have an improper motive when it appointed the administrators, at para 47 of the judgment the court made some important observations about the scope of paragraph 81 and the factors to be taken into account when asked to exercise the power contained in it. First, establishing an improper motive is not in and of itself sufficient to obtain an order requiring the administration to cease: it is a jurisdictional threshold. The court is given a wide discretion as to the orders it may make once an improper motive is established. Secondly, it is sufficient to establish an improper motive to show that it is one which is not in harmony with the purpose of administration which is causative of the decision to make the appointment. Even if the motive is not the achievement of the statutory purpose of administration, it will be difficult for the court to find that the motive is improper if it is not in disharmony with the statutory purpose. Third, even if it is established that the appointor had an improper motive, the achievement of the statutory purpose “would normally be the main touchstone for the court”. If the statutory purpose is likely to be achieved, then the appointor’s motive “may become of relevant insignificance in such circumstances…” These considerations led the court to conclude (at para 49) that,
“[W]here paragraph 81 of Schedule B1 is invoked it is unlikely to lead to an order that the administration cease where the statutory purposes could properly be achieved irrespective of the appointor’s motivation.”
Given the breadth of the statutory purposes of administration set out in Schedule B1 to the Insolvency Act, even if the motive in appointing the administrator is held to be improper it is only likely to result in the termination of the administration in the most extreme case.