Summary

The rule in Foss v Harbottle (1843) 2 Hare 461 did not prevent the members of a limited liability partnership challenging the validity of the appointment of administrative receivers of the partnership. A power for a financier to appoint an administrative receiver did not amount to "step-in rights" within the Insolvency Act 1986 Sch.2A para.6.

Facts

The appellant (C) appealed against the decision ((2005) EWHC 349 (Ch) , (2005) 1 WLR 2576) that C's appointment of administrative receivers of a limited liability partnership was prohibited by the Insolvency Act 1986 s.72A, and thus invalid, because in the circumstances the exception in s.72E of the 1986 Act to the general prohibition did not apply. C had carried on the business of generating revenue from advertising in taxicabs. It had developed a computer software system for the display of information and advertising in the passenger compartment of the cab. The partnership had been incorporated under the Limited Liability Partnerships Act 2000 as a vehicle for raising finance for the business. The respondents (F) were three of the founder members of the partnership and members of its board. The partnership had raised sums by subscription and by bank borrowing under a facility agreement and had entered into a licence agreement with C to allow it to exploit C's software. C had given an indemnity in respect of the bank borrowing and the partnership in turn had given an indemnity to C secured by a debenture. C purported to appoint administrative receivers under a power contained in the debenture on the basis that an "insolvency event" as defined in the debenture had occurred. F's action challenged the validity of that appointment and sought a declaration that it was invalid and F had obtained summary judgment. C submitted that (1) the rule in Foss v Harbottle (1843) 2 Hare 461 applied to the limited liability partnership so that the proper claimant in respect of a wrong done to it was the partnership and F lacked standing to sue; (2) the judge had wrongly construed s.72E(2)(a) of the 1986 Act in holding that the project was not a "financed project"; (3) the judge should have found that the power to appoint an administrative receiver granted by the debenture amounted to "step-in rights" within Sch.2A para.6 to the 1986 Act.

Held

(1) The rule in Foss v Harbottle did not apply and the partnership was not the only proper claimant, Foss considered. F were not prosecuting a cause of action that was vested in the partnership and were not seeking to obtain relief in respect of an injury suffered by the partnership. Rather they were concerned to know whether in their personal capacities as designated members they were obliged to comply with the receivers' requests. Accordingly, no question arose of a derivative action. Nor should declaratory relief be refused on the footing that F were seeking declaratory relief as to the effect of a contract to which they were not parties. The power to appoint a receiver under the debenture was more than a mere contractual power since it had important statutory consequences under the 1986 Act. Accordingly, F were not just interested in the validity of the appointment but affected by it, and they had the necessary standing to bring the proceedings. Gouriet v Attorney-General (1977) 121 SJ 543 and Meadows Indemnity Co Ltd v Insurance Corporation of Ireland Ltd (1989) 2 Lloyd's Rep 298 applied, Re S (1995) 3 WLR 78, Secretary of State for Trade & Industry v Jabble sub nom IN RE McIvor Spirits Ltd & IN RE Company Directors Disqualification Act 1986 [1998] B.C.C. 39 and Re Kaytech International Plc (1999) 2 BCLC 351 considered. (2) As a matter of construction, s.72E(2)(a) applied to an agreement "under" or by virtue of which a project company incurred a debt of at least £50 million or, when the agreement was entered into, was expected to incur such a debt. The words "expected to incur" related merely to the expected quantum of the obligation that was assumed by the project company under the relevant agreement. On that construction the judge had been right that the relevant agreement had been the facility agreement and not the licence agreement and that the date for determining whether the requisite expectation existed was the date when the facility agreement was entered into. (3) A power for a financier to appoint an administrative receiver did not amount to step-in rights within Sch.2A para.6 to the 1986 Act. (4) Since the project did not include step-in rights it did not fall within the exception in s.72E. It followed that the general prohibition on the appointment of administrative receivers in s.72A applied and the receivers' appointment was invalid.

Appeal dismissed.