Summary

The duty of administrators under the Insolvency Act 1986 Sch.B1 para.3(1)(b) to perform their functions in the interests of the creditors as a whole did not mean that the obligation had to be performed in an identical way in relation to each creditor, and unequal treatment of creditors was not necessarily unfair treatment where there were sound commercial reasons for treating the creditors differently.

Facts

The applicants (B) applied under the Insolvency Act 1986 Sch.B1 para.74 and Sch.B1 para.88 to remove the first and second respondents (M) as administrators in the administration of the third respondent (Z). Z was undertaking the redevelopment of a property, and had entered into an agreement for B to provide general management and co-ordination services. The redevelopment went over budget and fell behind schedule. Z was unable to pay certain invoices under the agreement, and was also in default of its loan agreement with the bank, which had a floating charge over the property. The bank successfully applied for an administration order and M were appointed as joint administrators under Sch.B1 para.3(1)(b). M sought legal advice and were advised that there was sufficient evidence of breaches by B entitling Z to terminate the agreement. Both M's firm and the legal adviser had previously advised the bank. M believed that there was overwhelming evidence from the contractors that B were not sufficiently competent to complete the redevelopment on time and to budget, and terminated the agreement on the grounds that it was in the best interests of all the creditors to do so. B applied to remove M as joint administrators on the ground that they had wrongfully terminated the agreement, thereby acting in breach of their duty to perform their functions in the interest of Z's creditors as a whole, or because they thereby caused unfair harm to B's interests.

Held

(1) M were to remain as administrators. It was impossible in the instant proceedings to decide whether the termination of the agreement was wrongful. The hearing was no substitute for a trial, and the evidence from B themselves made it impossible to say that the allegation that they had committed breaches of contract was baseless. In addition, B did not fundamentally challenge M's case that the principal contractors lacked confidence in their abilities, and there was nothing to suggest that the agreement was incapable of immediate lawful termination. (2) In any event, a wrongful termination of the agreement would not necessarily constitute a breach of M's duty to perform their function in the interests of the creditors as a whole nor would it necessarily constitute unfair harm to B. Administration was a form of class remedy and M's duty did not mean that the obligation fell to be performed in an identical way in relation to each constituent of the class. It could be in the interests of the creditors as a whole that one particular contract with one particular creditor was terminated. M's perception that B were doing a less than satisfactory job and that the contractors did not have confidence in them was not without foundation. Unequal or differential treatment was not necessarily unfair treatment. Where there were sound commercial reasons relating to the interests of the creditors as a whole for choosing some rather than all existing contractors to carry the project to completion, the treatment was not unfair. M had made a commercial judgment, and it was not for the court to interfere with such a decision unless it was based on a wrong appreciation of the law or was conspicuously unfair to a particular creditor or contractor, CE King Ltd (In Administration), Re (2000) 2 BCLC 297 Ch D (Companies Ct) applied. (3) B had rights as an unsecured creditor in respect of their outstanding invoices, but it was not B's interests as a creditor that were being harmed. It was clear that their true complaint was that their interests as a contractor had been treated less favourably than other contractors who had been kept on. Where an application was made as a creditor, it had to be made in that capacity and not in any other capacity, JE Cade & Son Ltd, Re (1991) BCC 360 Ch D (Companies Ct) and Sisu Capital Fund Ltd v Tucker (Costs) (2005) EWHC 2321 (Ch), (2006) 1 All ER 167 applied, Doorbar v Alltime Securities Ltd (Nos1 and 2) (1996) 1 WLR 456 CA (Civ Div) applied. However, the relief sought by B was to be restored as development manager until the conclusion of the development, which was not in their interests as a creditor. (4) M's decisions were the product of independent and objective consideration, and the fact that their firm had previously advised the bank or that a solicitor who had advised the bank had been retained by M did not of itself create a conflict of interest that disabled either adviser from acting. The nature of M's business decision did not suggest perversity or bad faith such as would justify the removal of an officeholder, Edennote Ltd, Re (1996) BCC 718 CA (Civ Div) considered. (5) The entire application was an endeavour to enforce the agreement, and was not really about how Z should be best managed during the administration. If B were right they had a money claim for breach of contract, but a court would not lift the statutory moratorium and grant permission to commence an action during administration, AES Barry Ltd v TXU Europe Energy Trading (In Administration) (2004) EWHC 1757 (Ch), (2005) 2 BCLC 22 applied. There was no reason to subvert the statutory scheme by ordering M's removal unless B was paid in full.

Application refused