High Court held Administrators' decision to remove fixed charge receivers was irrational
The case of Promontoria (Chestnut) Limited v Craig and Another  EWHC 2405 (Ch) involved a partnership, with a significant portfolio of…
The case of Promontoria (Chestnut) Limited v Craig and Another  EWHC 2405 (Ch) involved a partnership, with a significant portfolio of properties, which defaulted on repayment of a secured loan facility as a result of which the charge holder appointed fixed charge receivers to sell the properties. A month later, the partners put the partnership into Administration, incorrectly telling the incoming Administrators that the value of the partnership’s properties exceeded the amount owed to the charge holder (£3.95 million), and that the partners considered that they could either sell the secured properties to repay the secured loan, or even refinance the loan, leaving a surplus for unsecured creditors.
The Administrators asked the receivers to vacate office the day after they were appointed, to allow them to take control of the properties to sell them or to enable the partnership to refinance. The Administrators retained the managing agents controlled by the partners to continue the management of the property portfolio and then prepared proposals to conduct the Administration in order to rescue the partnership as a going concern.
The charge holder sought a declaration that the Administrators unreasonably and/or improperly exercised their discretion to ask the receivers to vacate office and asked the court to reverse that decision. Alternatively, the charge holder sought permission to enforce its security, despite the administration moratorium pursuant to paragraph 43(2)(b) of Schedule B1 to the Insolvency Act 1986 by reappointing the receivers to sell the properties.
The Court’s decision
In what is a first case on the issue, the Court held that the Administrators had acted unreasonably in requiring the receivers to vacate office.
The Court did not consider that it had the power under paragraph 68 of Schedule B1 to the Act to give directions to reinstate the receivers since paragraph 68(3) is clear that this power is only engaged where it is consistent with the Administrators' proposals, or where circumstances have changed since the proposals were approved, or there is a misunderstanding about those proposals.
The Court also did not consider that it could exercise its inherent jurisdiction in order to reverse the Administrators' decision to remove the receivers because that decision related to the enforcement of security and the proper route to review it was pursuant to the application to enforce security despite the administration moratorium, under paragraph 43(2)(b) of Schedule B1 to the Act. Accordingly, the court granted permission to the charge holder to enforce its security by reappointing the receivers to sell the properties.
The Court was influenced by the fact that there was no evidence that there would be any realisations for the unsecured creditors, the properties were not required for the partnership to trade from and there was evidence that the current managing agents were not maintaining or optimising the income from them.
The Court considered that the Administrators had acted unreasonably in asking the receivers to vacate as they had just adopted the preferred course of the partners who had appointed them without considering the interests of the secured creditor or the unsecured creditors.
It is worth noting that the Court ordered the Administrators to bear the costs of the application personally, and not as an expense of the administration because the proceedings had been required as a result of the Administrators' unreasonable and peremptory decision to require the receivers to vacate after just a day in office.
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