This article was first published on Lexis®PSL Restructuring & Insolvency on 8 March 2018.
Restructuring & Insolvency analysis: Jamie Riley considers the practical implications of the judgment in Promontoria, which underlines the importance of consulting with secured creditors and the need to obtain reliable evidence of the value of the security assets in assessing whether control of the assets is necessary to achieve the purpose of the administration.
Promontoria (Chestnut) Ltd v Craig and another  EWHC 2405 (Ch)
What are the practical implications of this case?
The practical implications are primarily for administrators of insolvent companies, particularly those appointed by directors.
The decision in this case underlines the importance of consulting with secured creditors and the need to obtain reliable evidence of the value of the security assets in assessing whether control of the assets is necessary to achieve the purpose of the administration. The decision also reaffirms the need for administrators to maintain an independent and objective approach, and not allow their appointment to be used as a pawn in a dispute between the company and its creditors.
What was the background?
The applicant, Promontoria, had acquired the benefit of the rights and remedies of the bank pursuant to an assignment in respect of the bank’s entire property finance portfolio. The rights assigned included the facilities advanced to the Isaacs Partnership and the associated security, primarily mortgages over the partnership’s investment properties.
Promontoria subsequently made demand for repayment under the terms of the facilities and the mortgages following the partnership’s continuing default in providing accounting and valuation information for the property portfolio. When the partnership did not satisfy the demand for repayment, Promontoria appointed receivers over the properties.
In response, the partners appointed the respondent administrators on the basis of a valuation report that they had obtain indicating that there would be a significant surplus for unsecured creditors after satisfaction of the mortgages. Immediately on their appointment, the administrators requested the receivers to vacate office pursuant to paragraph 41(2) of Schedule B1 to the Insolvency Act 1986 (IA 1986). Pursuant to the rule in that paragraph, the receivers were required to step down once requested by the administrators to do so.
The administrators also appointed a property agency business operated by one of the partners to manage the portfolio and collect rental income, but for a percentage commission which was significantly in excess of the fees which the agents appointed by the receivers had charged. Before submitting their proposals to creditors, the administrators obtained their own, independent valuation of the property portfolio. However, this valuation indicated that the property portfolio was in negative equity, so that there would be no surplus available for creditors other than Promontoria.
Promontoria applied to court for relief on two grounds.
First, it sought to review and challenge the decision of the administrators to request the receivers to vacate office and to appoint the managing agent connected with the partners. Promontoria relied upon the court’s inherent jurisdiction over the administrators as officers of the court which was recognised in Re Mirror Group (Holdings) Ltd  BCLC 538 and Re MG Rover Espana SA  EWHC 3426 (Ch).
Secondly, and as an alternative to the court’s jurisdiction to overturn the administrators’ decision, Promontoria applied pursuant to IA 1986, Sch B1, para 43, for permission to enforce its security and reappoint receivers notwithstanding that the partnership was in administration. In answer to the application, the administrators argued that they should retain control of the properties. They contended that they had made a reasonable, commercial decision as to how best to proceed with the properties which should be respected even if Promontoria did not agree with it. They also maintained that the properties were required so that the partnership could be rescued as a going concern.
What did the court decide?
On the first issue regarding a review of the administrators’ decision, the court agreed with Promontoria’s submission that in cases involving essentially a competition between the interests of secured and unsecured creditors, the court will not simply defer to the commercial judgment of the administrator but will instead balance the competing interests. See Re Buckingham International plc (No 2)  Lexis Citation 2248,  All ER (D) 59, followed in Re Capitol Films Ltd  EWHC 3223 (Ch),  All ER (D) 175 (Dec).
Therefore, it was not sufficient for the administrators to say they had reached their decision exercising their commercial judgment in good faith. The judge found that on the facts of this case, the evidence strongly pointed to their being a shortfall in the value of the properties under the security and so the interests of Promontoria as the secured creditor were paramount. Accordingly, the decision of the administrators to request the receivers to vacate and to appoint more expensive property agents was unreasonable and improper.
On the second issue of whether Promontoria should be permitted to enforce its security, the court followed the guidance in Re UK Housing Alliance (North West) Ltd  BCC 752, that the interests of the secured and unsecured creditors need only be balanced if the relevant property is required for the purposes of the administration. Further, even if a balancing exercise were to be carried out, an underlying principle in the guidance given in Re Atlantic Computers  Ch 505,  1 All ER 476, was that an administration for the benefit of unsecured creditors should not be conducted at the expense of those seeking to exercise their security rights. In this case, in view of the valuation evidence and the fact that there was no continuing business of the partnership, the administrators had no material constituency to serve other than the Promontoria. Accordingly, Promontoria should be allowed to enforce it security at the time and in the manner of its choosing.
On the question of costs, the judge considered that the proceedings had been brought about by the unreasonable and peremptory decision of the administrators to require the receivers to stand down. Therefore, they were ordered to pay costs personally and not as an expense of the administration.
Jamie Riley is a busy and highly respected commercial litigator whose experience covers all types of commercial disputes. His practice encompasses contractual disputes, insolvency and corporate restructuring, fraud and asset tracing, company disputes involving claims against directors and between shareholders, banking and financial services. Jamie is regularly involved in cases that have international elements giving rise to jurisdictional issues. In Promontoria, Jamie appeared on behalf of the applicant.