The Appointment of Administrators and "Improper motives"

There are provisions within the Insolvency Act [1] which provide that an application can be made to the Court to end an administrator’s appointment as at a certain time.  The basis of such an application has to be the person who appointed the administrator did so for an “improper motive”.  The recent case of Thomas & Another -v- Frogmore Real Estate Partners GP Limited & Others is a very useful and rare example of how (the English) Courts will apply those relevant provisions.

The case went into some detail on whether the relevant companies had their centres of main interests (“COMI”) within England and Wales.  However, what jumped out at me was the arguments raised by the directors of the companies with regards the improper motives of the party that had appointed the administrators in the first place.

The background to the case is that the Nationwide Building Society had loaned significant sums to 3 companies who on the face of it were based in Jersey.  The arguments on COMI are not relevant for this blog, but suffice to say that Nationwide then sold that debt on to a third party, Promontoria (Carlisle) Limited.  Issues had arisen insofar as the transfer from Nationwide to Promontoria were concerned, and the companies in fact raised proceedings in the High Court seeking to invoke what the companies said was a pre-emption right relating to that transfer.  However, the Nationwide appointed administrators to the companies before the case got to a full hearing.  The directors went to Court saying that the appointment of the administrators was an improper motive as the appointment(s) were geared simply at frustrating those legal proceedings.

The Court heard detailed evidence in relation to the directors’ allegations.  The Court’s conclusion was that there had in fact been no improper motive on the part of the Nationwide (who had effected the appointment having deferred to the views and requests of Promontoria).  However, Deputy Judge Marshall QC went further and said that even if he had concluded that there had been any improper motive, he would not have terminated the administration appointment unless he was also satisfied that the statutory purposes of the administration were not likely to be achieved.

The take away points from this are as follows:

• Where a significant investment is taking place, particularly if borrowings are involved, the location of the vehicle in which that investment is to be made needs to be given detailed consideration,
• Care needs to be taken with every loan facility document that is entered into, this case suggests that if the terms of the agreement are wide enough to enable an appointment then that could happen no matter what the background motive,
•  It appears that even if there is an improper motive on the part of the party appointing the administrator, that that will not mean the appointment of the administrator will be ended by the Court –here it is easy to see a significant tactical advantage to the debt purchasing party in exercising the powers that they inherited from the initial finance provider,

We are acting for more and more clients who are the subject of very aggressive tactics from debt purchasing entities such as Promontoria (in its various auspices).  Please get in touch with us if you find yourself in that position.  As always, getting good advice early is crucial.