Promontoria (Chestnut) Ltd v Craig & Anor

Neutral citation number: [2017] EWHC 2405 (Ch) IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION MANCHESTER DISTRICT REGISTRY D R A F T Case No. 2531 of 2017 IN THE MATTER OF THE PARTNERSHIP OF JONATHAN ROBSON ISAACS AND ZOE ANNE ISAACS (In Administration) A N D IN THE MATTER OF THE INSOLVENCY ACT 1986 A N D IN THE MATTER OF THE INSOLVENT PARTNERSHIP ORDER 1994 Manchester Civil Justice Centre 1 Bridge Street West Manchester Date: Wednesday 31 st August 2017 Before: HIS HONOUR JUDGE HODGE QC (Sitting as a Judge of the High Court) B E T W E E N : - - - - - - - - - - - - - - - - PROMONTORIA (CHESTNUT) LIMITED Applicant - and - (1) GORDON CRAIG (2) PETER HAROLD (Joint Administrators of the Partnership) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Respondents A P P E A R A N C E S MR JAMIE RILEY (instructed by Addleshaw Goddard LLP) appeared on behalf of the Applicant. MRS LISA WALMISLEY (instructed by Pannone Corporate LLP) appeared on behalf of the Respondents - - - - - - - - - - - - - - - - J U D G M E N T APPROVED (Approved on 2 October 2017) JUDGE HODGE QC: D R A F T This is my extemporary judgment on the substantive application by Promontoria (Chestnut) Limited against Mr Gordon Craig and Mr Peter Harold in their capacity as the joint administrators of the Jonathan Robson Isaac and Zoe Ann Isaac Partnership, case number 2531 of 2017. For the reasons that I gave in an extemporary ruling delivered this morning, I refused an application by the respondent joint administrators for an adjournment of this hearing. I now proceed to deliver this extemporary judgment on the substantive application. That application was issued on 16th June 2017. The primary relief sought is a declaration that the joint administrators unreasonably and/or improperly exercised their discretion under para.41(2) of Schedule B1 to the Insolvency Act 1986 (as amended) in requesting Sarah Helen Bell and Matthew Ingram to vacate office as receivers appointed over and in respect of over 30 properties pursuant to fixed legal charges in favour of the applicant, Promontoria (Chestnut) Limited. Consequent upon that declaration, an order is sought that the administrators’ request, in a letter dated 26th May 2017, for the receivers to vacate office should be revoked, rescinded or withdrawn. Alternatively, the applicant seeks relief pursuant to paragraph 43 of Schedule B1 to enforce its legal charges over the partnership properties by reappointing the receivers and taking possession of the properties and exercising the fixed legal charge holders’ rights of sale in accordance with the applicant’s security and proprietary rights. The evidence in support of the application is contained within the first witness statement of Mr Timothy Cooper, a partner and solicitor at Addleshaw Goddard LLP’s Edinburgh office. Addleshaw Goddard are the solicitors for the applicant; and Mr Cooper’s witness statement is dated 6th June 2017 and exhibits various documents as exhibit TC/1. D R A F T The application first came before Judge Pelling QC, sitting as a Judge of the High Court in Manchester, on 16th June 2017. He adjourned the application to today (31st August) before me, with an estimated hearing length of one day, and he gave various procedural case management directions. Paragraph 4 of the judge’s order provided that pending the hearing of the application, the respondents should pay to the applicant the rental income of the properties of the partnership secured by legal charges in favour of the applicant, and provide monthly accounts of such rental income. It is clear from para.5.3.2 of the joint administrators’ proposals dated 19th July 2017, and deemed to have been approved by creditors on 1st August 2017 pursuant to the deemed approval procedure, that in fact the gross rental income of the properties has not been paid to the applicant, but rather payment has been made of the rental income less management charges and other outgoings. In addition, there are complaints that not all of the rental income would appear to have been paid over. It may be that the intention underlying para.4 of the Order was that only net rental income should be paid over. However, paragraph 4 does not state that in terms. Pursuant to Judge Pelling’s order, evidence in answer to the application was served in the form of a witness statement dated 30th June 2017 from one of the joint administrators, Mr Gordon Craig. His witness statement exhibits various documents. In his witness statement Mr Craig explains that he was approached by the partners for insolvency advice regarding the partnership on or around 15th May 2017. Mr Craig says that he was informed by Mr Isaacs that the partnership had the benefit of loan facilities with the Clydesdale Bank (trading as Yorkshire Bank) secured against a number of properties owned by the partnership. Mr Isaacs is said to have informed Mr Craig that the partnership also owned other properties, or had a beneficial interest in a number of them. It would not appear that, some three months into the administration, the joint administrators have succeeded in OPUS 2 DIGITAL TRANSCRIPTION establishing the precise identity of these other properties or the nature of the partnership’s beneficial interest in them. Mr Craig was also told that the loan had been assigned to the applicant. D R A F T Mr Isaacs reported that he had received a notice of default and a demand - according to Mr Craig for £3.49 million - by a letter dated 20th March 2017. The letter of demand of that date is in evidence. It is quite clear that the demand was for a sum of money in the amount of just under £3.95 million. Clearly either Mr Craig incorrectly recorded what he was told and had not spotted the error, or he was incorrectly told the amount by Mr Isaacs and did not check by looking at the letter itself. There is, however, no issue before me but that the amount outstanding to the applicant is in the order of £3.95 million. Mr Isaacs informed Mr Craig that he had hoped to be able to negotiate with the applicant to enable Mr Isaacs to refinance and buy out the applicant’s interest under the security. Mr Isaacs told Mr Craig that he had attended a meeting with the applicant and, in an effort to strengthen his negotiating position, Mr Isaacs had under-estimated the value of the security to secure a better deal for refinancing purposes. Mr Cooper’s evidence is that at that meeting on 29th March Mr Isaacs had told the representatives of the applicant that the properties secured by the loan facility had been valued by the partnership at £2.7 million in 2012, and that they would not be worth that amount now. Mr Isaacs, having said that he had underestimated the value of the security to seek to secure a better deal for refinancing purposes, apparently also told Mr Craig that Mr Isaacs had not been convinced that this would work as he had expected the applicant to get its own valuations, but he had hoped to persuade it to release the security at the best commercial terms from the partnership’s point of view. It seems to me that that conduct on the part of Mr Isaacs demonstrates a lack of commercial integrity and probity on his part, and that one OPUS 2 DIGITAL TRANSCRIPTION D R A F T cannot necessarily accept at face value all that Mr Isaacs says. Mr Craig comments that it is his view that Mr and Mrs Isaacs “were simply trying to negotiate the best commercial deal on the basis that [the applicant] would have achieved a significantly discounted rate on acquiring the debt from Yorkshire Bank”. Mr Craig records that Promontoria appointed Mrs Bell and Mr Ingram as receivers of the properties pursuant to the applicant’s charge on 28th April 2017. Mr and Mrs Isaacs thereafter sought Mr Craig’s advice. Mr Isaacs apparently indicated that he wished to refinance the entirety of the property portfolio owned by the partnership and was prepared to use properties that fell outside the security held by the applicant in order to achieve this. He is said to have shown Mr Craig a valuation by Mr M E Wakefield of DWPS, a chartered surveyor, dated 12th May 2017, which had valued the properties the subject of the security in excess of £5 million. He also told Mr Craig that he had an indicative offer of funding from Murrayfield Capital at a sum sufficient to clear the applicant’s debt. This was said to mean that if the properties could be sold, there was a potential surplus available for unsecured creditors. Mr Craig records that it was agreed that the partnership would be placed into administration “with a purpose of a better realisation for the creditors as a whole than if the partnership had first been in liquidation”. It was agreed that this would best be achieved by securing all the assets of the partnership and selling or refinancing the entirety of the portfolio, either solely, subject to the security, or in conjunction with other properties in which the partnership had an interest, rather than breaking up the portfolio and selling the properties individually. It was agreed that the reduced costs and likely higher return was in the best interests of all the creditors, including the unsecured creditors. Taking into consideration the valuation evidence that Mr Craig said he had available to him, he, together with Mr Harold, decided OPUS 2 DIGITAL TRANSCRIPTION D R A F T upon their appointment to take steps to obtain control of the assets of the partnership as a whole. Although they believed the partnership had interests in properties not the subject matter of the applicant’s security, the latter’s portfolio of properties formed the vast majority of the property portfolio and this was therefore said to be essential to ensuring the proper conduct of the administration for the benefit of all the partnership’s creditors. Following the administrator’s request for the receivers to vacate office, Mr Craig instructed his own surveyors to provide a valuation of the properties; and, in the meantime, he wrote to the receivers and required them to vacate office. He says that while the receivers were in office, this would prevent the administration from being conducted at all as they were in control of the assets which were the subject matter of the security. Mr Craig says that he has since been provided with a valuation prepared by Allied Surveyors & Valuers, as instructed by his agents. The properties which are the subject of the applicant’s security are said to have been valued, on an estimated value of the freehold interest with full vacant possession for bankruptcy purposes, at approximately £3.805 million. That is said to be the forced sale value, which, it is said, still shows a surplus. In fact, that is not correct when one has regard to the true figure of £3.95 million. That suggests that there was no typographical error in Mr Craig’s statement that he had been told that the demand was for £3.49 million, and that he has simply not consulted the letter of demand itself. Mr Craig comments that the valuation of £3.805 million is the forced sale value which is said still to show a surplus; and that in a going concern scenario the realisations would be significantly in excess of that figure. He says that at that stage the joint administrators were in the process of finalising their proposals to creditors, which would be available before the matter was next before the court. OPUS 2 DIGITAL TRANSCRIPTION At para.12 Mr Craig says that it was the administrators’ view that control and sale of all of D R A F T the properties in the partnership was essential to the proper conduct of the administration. The removal of those properties by the appointment of the receivers, or by allowing the applicant to have control of the realisation of those assets, would impede the purposes of the administration from being achieved. There was said to be no good reason provided by the applicant why they, or their own appointed receivers, should be permitted to conduct a realisation of the partnership’s assets in administration rather than its duly appointed administrators. The applicant was said also to have failed to identify any prejudice to itself whatsoever if the administrators were to realise the sale of the properties subject to the applicant’s security. There was said to be no prejudice to the applicant’s position. At para.13 Mr Craig comments that the suggestion that the joint administrators have acted unreasonably in seeking to remove the receivers in circumstances where the information available to the joint administrators from a chartered surveyor was that the properties, the subject of the security, were worth significantly in excess of the amount said to be owed in the letter of demand shows that it was entirely proper that they, as administrators, should seek to secure the assets for the benefit of all the creditors generally, including the unsecured creditors. The suggestion by Mr Cooper in his witness statement that the decision was made to “suit the objectives of the partners”, and Mr Isaacs in particular, to “fight” the applicant is said to be completely wrong and without any evidential basis. Mr Craig concludes by stating that, as was clear, the reason for the decision to require the receivers to vacate office was as a result of valuation evidence available to the administrators that there would be a significant surplus from the sale or refinance of the property portfolio and in order to achieve the proposed purposes of the administration. OPUS 2 DIGITAL TRANSCRIPTION Since the date of Mr Craig’s witness statement, the administrators have produced their D R A F T proposals dated 19th July. At para.5.1 (headed “Purpose of the Administration”) it is said that the initial objective of the administration is to rescue the partnership as a going concern. Given that the properties owned by the partnership were the subject of LPA receivership at the time of the joint administrators’ appointment, it is said to have been essential that the joint administrators should take back control of the properties in order for the partnership to continue, to ensure the proper conduct of the administration for the benefit of all of the partnership’s creditors, and to achieve the purpose of the administration. At section 5.2 (headed “Asset Realisations”) reference is made to a valuation of the properties by DWPS Chartered Surveyors at £5.472 million for sale on a going concern basis as a whole or by refinancing the whole portfolio of properties. Reference is also made to the valuation of independent surveyors instructed by the joint administrators of £3.805 million on a forced sale basis which is said to be a likely recovery should the partnership be placed into liquidation or if the portfolio were broken up and sold separately. The joint administrators comment that in accordance with the above it can be seen that securing all the assets of the partnership and selling or refinancing the entire property portfolio, rather than breaking up the portfolio and selling the properties individually, would mean reduced costs and a likely higher return which is said to be in the best interests of all creditors, including the unsecured creditors. At section 5.2.3 (headed “Properties not Subject to security with Promontoria”) it is said that it is believed that the partnership owns other properties, or has a beneficial interest in a number of other properties, which are not subject to the applicant’s security. The joint administrators say that they understand that these properties are subject to charges with other lenders and there is varying amounts of equity in the properties. The section continues: “However the position is still being discussed with the partners as they OPUS 2 DIGITAL TRANSCRIPTION D R A F T personally have beneficial interest in some properties which are not owned by the partnership and the exact position is still being determined. The joint administrators are currently in the process of obtaining full details of these properties and will establish the extent of the equity available, should there be any, for the purposes of the administration.” In Appendix 2, which gives a summary of the estimated financial position of the partnership as at 25th May 2017, the property portfolio is said to be estimated to realise an uncertain amount. The liability to the applicant is quantified at £3,949,988; and the liabilities to unsecured creditors, trade and expense creditors are said to be £180,247. At section 5.3.2 the joint administrators state that they are currently accounting to the applicant on a monthly basis for rental payments received, less any management and running costs, on the properties pending a sale or refinance of the properties on which it is envisaged that they will be repaid in full. The joint administrators reiterate that the partnership may have a beneficial interest in a number of other properties which are subject to charges. The joint administrators are said to be currently in the process of obtaining full details of any such properties and that it is likely that the partnership will have further secured creditors. In section 5.3.3 (headed “Unsecured Creditors”) it is said that, based on current information, it is believed that funds will be sufficient to allow this class of creditor to be paid in full. However, this is said to be dependent upon the successful refinancing of the properties. The joint administrators’ proposals are set out at section 10. The first paragraph proposes that the joint administrators will continue to manage the affairs of the partnership in order to achieve the objective of the administration, which it is said has been outlined above. At section 11 (headed “Agreement of Proposals”) the joint administrators state that on the basis of current information, the partnership has sufficient property to enable it to pay its unsecured creditors in full. As a result, and in accordance with para.52(1)(a) of Schedule OPUS 2 DIGITAL TRANSCRIPTION D R A F T B1 to the 1986 Act, the joint administrators say that they are not required to seek a decision from the partnership’s unsecured creditors. They inform the reader that under Insolvency Rule 3.38, “the proposals are deemed approved if no creditors or a group of creditors representing at least 10 per cent of the total debt of the partnership request a decision be sought from the unsecured creditors as to whether to approve” the proposals. No such request was ever apparently forthcoming. The evidence in reply from the applicant takes the form of three witness statements. The first is from Mr Alan Hennessy, a manager in the Commercial Loan Servicing Division of Engage Commercial who act as portfolio property manager for the applicant. That witness statement is dated 28th July 2017 and exhibits documents as AH/1. There is a witness statement from one of the joint receivers, Mrs Sarah Helen Bell, dated 28th July 2017 exhibiting various documents as exhibit SHB/1. There is also a witness statement from a former police officer and private investigator, Mr Steven May, dated 27th July 2017 exhibiting various documents as exhibit SM/1 and addressing the apparent state of occupation of the various portfolio properties. The applicant is represented before me by Mr Jamie Riley (of counsel) who produced a skeleton argument in accordance with Judge Pelling’s directions dated 29th August 2017. The respondent administrators are represented by Mrs Lisa Walmisley (also of counsel) who produced a skeleton argument late. (It was received by the court just after 8.10 this morning.) In his written skeleton argument Mr Riley sets out an introduction to the present application and then describes the background to it. He addresses the various valuations of the properties that have been obtained. I need not go into them in any detail. It is quite clear that on the valuation evidence before the court, there is every likelihood that the portfolio of OPUS 2 DIGITAL TRANSCRIPTION properties will not realise sufficient to discharge the liability to the applicant in full and that there will be a shortfall in the sum available to the applicant. There will be nothing apparently for unsecured creditors. D R A F T Mr Riley addresses the prospect of any refinance at section D of his skeleton argument. That section has rather been overtaken by events. First, this morning a letter was produced to Mr Craig by a mortgage broker acting for the partners, Mr and Mrs Isaacs, regarding an application for a loan facility of £3.7 million from Shawbrook Bank. After I had heard the opening of Mr Riley and Mrs Walmisley’s response, and following the short adjournment, and during the course of Mr Riley’s reply, a facility letter from Shawbrook, dated today and addressed to Mr and Mrs Isaacs, was produced to the court. This facility letter indicates that, based on the information provided to Shawbrook, the Isaacs’ mortgage application is acceptable in principle and the letter constitutes and outlines an indicative mortgage offer which Shawbrook may be able to provide. The gross loan amount is £3.746 million, but after the arrangement fee, a sum of just under £3.7 million will constitute the net advance. That means a further quarter-of-a-million pounds will need to be found to redeem the applicant’s security over the portfolio of properties. The mortgage offer is said to be based on an estimated total value for the property portfolio of £4.947 million. According to Mrs Walmisley, that is based upon a desktop valuation prepared by the bank. The mortgage offer is subject to a commercial valuation which is to be commissioned by 14th September, and is also subject to evidence that the partnership is not insolvent prior to the valuation being instructed. Mr Riley indicates that satisfaction of that condition may present some problems on the evidence presently before the court. One of the conditions of the offer is also that up-to-date redemption figures should be made available, together with written confirmation that upon receipt of the redemption funds, the OPUS 2 DIGITAL TRANSCRIPTION existing lender will release its charge over the security. Again, given the level of indebtedness, that may present some problems. D R A F T Mr Riley addresses the joint administrators’ proposals at section E of his skeleton argument and makes a number of points in relation to the proposals at para.23. In summary, Mr Riley criticises the proposals as being prepared on a wholly unrealistic basis. They are founded on the premise, for which there is said to be no satisfactory justification, that the very disposal of the partnership assets will generate sufficient to repay not only the applicant in full, but also all of the unsecured creditors in addition. Mr Riley addresses the joint administrators’ request for the receivers to vacate at section F of his written skeleton argument. He points out that under para.42 of Schedule B1 to the 1986 Act, the joint administrators have a discretion to request the receivers to vacate. Paragraph 41(2) provides that where a company is in administration, any receiver of part of the company’s property shall vacate office if the administrator requires him to. Mr Riley submits that it is well-established in cases such as the present, involving the competing interests of fixed charge holders and the interests of other creditors, that the court will not simply defer to the commercial judgment of the administrator, but will instead balance the competing interests. In that regard, Mr Riley took me to observations of Mr Richard Snowden QC, sitting as a Deputy Judge of the High Court, in Re Capitol Films Limited [2010] EWHC 3223 (Ch) at paras 83-85. Mr Riley submits that the decision of the joint administrators to request the receivers to vacate office was flawed for a number of reasons: First, the joint administrators immediately and unquestioningly accepted the DWPS valuation despite it being heavily qualified and unreliable. They obtained their own report in the form of the Allied Valuation, OPUS 2 DIGITAL TRANSCRIPTION D R A F T but no explanation has been given by the joint administrators as to why they rushed into asking the receivers to vacate office before obtaining the Allied Valuation. Had they waited until after they had consulted with the receivers and/or obtained the Allied Valuation, they would have discovered that the properties were not worth £5.4 million, but the lower figure range of £3.38 million to £3.8 million, which would not have yielded a surplus sufficient to repay the applicant in full. Second, it is said that the joint administrators’ sole consideration appears to have been to get control of the properties and sell or refinance them. No account appears to have been taken of the applicant’s rights as secured creditor. Mr Riley points out that the joint administrators knew, or ought to have appreciated, that they could only deal with the properties with the consent of the applicant or the court’s permission pursuant to para.71 of Schedule B1. No consideration had been given as to what provision should be made in respect of any shortfall. Third, the joint administrators are said not to have set out the basis for their prediction that the sale of the properties on a portfolio basis was likely to yield a higher return than a sale of the properties individually. That is said not to be borne out by the valuation evidence obtained by the applicant from Sanderson Weatherall. Fourth, although the reduced costs of the administration were relied upon as a reason for asking the receivers to vacate, at no point did the joint administrators contact the receivers to learn of the level of costs and expenses which they were likely to incur. Had they done so, it is said that they would have learned that the agents engaged by the receivers, who are Braemar Estates, would charge a fee equivalent to 5 per cent of rental income, compared with the 15% being charged by Robson Estates, controlled by Mr Isaacs and appointed by the joint administrators to continue to manage the properties. It is said that the joint OPUS 2 DIGITAL TRANSCRIPTION administrators would also have discovered that Braemar’s overall fees would be capped at between 1-1.5 per cent of overall realisations. D R A F T Fifth, it is said that by forcing the receivers to vacate and appointing Robson Estates, the joint administrators have needlessly exposed the administration to significantly higher charges. Robson Estates is an entity owned and/or operated by the partners and is a tenant of one of the portfolio properties. As such, Robson Estates is said to be operating under a clear conflict of interest. In her oral submissions, Mrs Walmisley accepted that it could not be disputed that Robson Estates were a connected party. Mr Isaacs, who is behind Robson Estates is, for the reasons I have already indicated, a person who is lacking in commercial integrity and probity. It is, therefore, surprising that the joint administrators should have seen fit to continue his management of the portfolio of properties. Sixth, although the original strategy was based in part on the possibility of the refinance of the secured debt, the joint administrators, without any investigation or supporting evidence, accepted Mr Isaacs’s statement that he had an offer in principle from Murrayfield Capital. The evidence is that a company of that name was dissolved as long ago as 2011. Seventh, there is said to be no evidence of any offers of refinance at all, let alone in an amount which would discharge the debt owed to the applicant in full. Therefore, any justification for requesting the receivers to vacate on the grounds of refinancing the secured debt is said to be illusory. That position has now changed with the materialisation of the Shawbrook offer; but Mr Riley points out that that is an offer only in principle and it also requires at least a further quarter of a million pounds on top of the amount so offered to secure the discharge of the applicant’s security. Eighth, Mr Craig is said to provide no account of what, if any, assessment the joint administrators made of the unsecured creditors before requesting the receivers to vacate. OPUS 2 DIGITAL TRANSCRIPTION Even if the position of unsecured creditors had been taken into account, the joint administrators would have been aware that the total sum owed to unsecured creditors was relatively small when compared with the amount owed to the applicant. D R A F T Ninth, the joint administrators’ approach is said to be baffling. They were aware that the applicant was the sole or by far the largest single and secured creditor. The joint administrators’ conduct towards the receivers should have reflected the fact that the applicant was their main, if not sole, constituency in the administration. Instead, the joint administrators seem to have simply ignored the applicant’s security rights as fixed charge holder. Tenth, the request for the receivers to vacate is said to be perverse. There is a strong sense that the partners have appointed the joint administrators in an attempt to block the applicant from enforcing its security. Without obtaining a full appraisal of the situation, the joint administrators have acted in a way which precipitously implements that strategy. In the circumstances, it is said that the joint administrators have acted in breach of their duties to act reasonably, efficiently, robustly and with due care in the interests of the creditors as a whole. Weighing the interests of the applicant and the unsecured creditors, the court should revoke the joint administrators’ request for the receivers to vacate. In his oral submissions, Mr Riley relied upon an inherent jurisdiction in the court to control the conduct of administrators as the court’s officers. He took me to observations of Sir Donald Nicholls VC in Re Mirror Group (Holdings) Limited [1993] BCLC 538 to the effect that the court may exercise control over the administrators as officers of the court and may give directions to that end. Those observations have been relied upon by Jacob J in Re Mark One (Oxford Street) Plc (In Administration) [1999] 1 WLR 1445 at 1448 A-C where it was OPUS 2 DIGITAL TRANSCRIPTION D R A F T said that the court has an inherent control over administrators by virtue of their office. Mr Justice Jacob therefore held that the court had power, by virtue of its inherent control over the administrators, to direct or authorise them to pay to, or in trust for, creditors who would have qualified as preferential creditors in the event of a compulsory winding-up the sums to which they would have been entitled in that event. Those authorities both pre-dated the amendments to the Insolvency Act made by the Enterprise Act 2002. However, the third authority relied upon by Mr Riley post-dates those amendments. It is the decision of His Honour Judge Norris QC (as he then was) in Re MG Rover Espana SA [2006] BCC 599. At para. 18, Judge Norris observed that over and above the statutory powers, the English court had authority to confer additional specific powers on the administrators in defined circumstances which were brought before the court. Reference was made to the overriding inherent jurisdiction of the court over administrators as its officers. Mr Riley submitted that the court could intervene to direct the administrators to withdraw their decision to remove the receivers or to overrule them. He submitted that if administrators were shown to have acted improperly, or otherwise than in good faith in the discharge of their duties as administrators, then the court should be able to intervene. Here he submits that the joint administrators acted unreasonably, improperly, perversely and irrationally. He submits that rationality is not the appropriate control test; rather, the court should consider the competing interests of those involved in a decision and then decide whose interests should prevail. In support of that proposition, he referred me to the observations of Mr Richard Snowden QC in Capitol Films Limited (previously cited). Where the court is required to determine whether it is appropriate to prevent the holder of a fixed charge from enforcing his security rights, the court is required to balance the competing rights of the interests of the holder of the fixed charge with the rights and OPUS 2 DIGITAL TRANSCRIPTION D R A F T interests of the other creditors. On that type of issue, the court will not simply defer to the administrators’ business judgment merely because it is rational; rather, the court will decide for itself how to resolve the competing interests of the creditors. In the present case there is said to be a genuine issue between the holder of the fixed charge and the administrators who act in the interests of the other creditors. The court should decide whose interests should prevail. Mr Riley submitted that the competing interests weighed in favour of the applicant because the unsecured creditors stand to receive nothing in the administration. Moreover, the managing agents proposed to be appointed by the receivers (Braemar Estates) will charge less than the managing agents retained by the joint administrators (Robson Estates), who are in any event conflicted. Moreover, there is uncertainty about the extent to which all the rents are presently being collected. There are said to be huge concerns that all the rental income is not being properly collected and accounted for. The administrators have appointed, as managing agents charged with collection of the rent, a man who is lacking in commercial integrity and probity. There are concerns about the reconciliation of the various figures. Nothing is said to commend the joint administrators’ decision to ask the receivers to vacate office. The unsecured creditors will not receive any dividend, and the costs of the secured creditor of the managing agents and of rent collection will result in an increase in the shortfall which will be suffered by the secured creditor. Mr Riley also referred me to observations at para.12-38 of Lightman and Moss on the Law of Administrators and Receivers of Companies to the effect that where there are competing inter-creditor interests in an administration, the court will not simply defer to the administrators’ commercial judgment, provided it is exercised rationally, but instead will decide for itself how to balance the competing interests. Even if the test is rationality, Mr Riley submitted that the joint OPUS 2 DIGITAL TRANSCRIPTION administrators’ decision to remove the receivers was irrational. No reasonable office- holder, properly directing himself, would have acted in that way. D R A F T Mrs Walmisley submits that the application to reverse the joint administrators’ removal of the receivers is predicated on the assumption that the administrators’ decision to request that the receivers vacate office was unreasonable. She submits that it is for the applicant to establish that no properly directed administrator, given the circumstances, could properly or reasonably have made the decision to ask the receivers to vacate their appointment. It is said not to be good enough that another appointee might have made another decision; rather, the decision has to fall outside a reasonable range of decisions available to the administrator. Given the information available to the administrators at the time the request was made, that assertion is said to be unsustainable. First, the administrators have been validly appointed and it was their duty to collect in and manage the assets of the partnership for the benefit of creditors as a whole. Secondly, the partnership owned, or had a beneficial interest in, properties other than those that were the subject of the applicant’s charges. Thirdly, the existence of a valuation from a chartered surveyor dated 12th May 2017 indicated that the properties the subject of the charge might be worth in excess of £5 million and therefore there would be a surplus available to other creditors. In the circumstances that existed on appointment, the usual course of requiring the receivers to vacate office was said to be appropriate and reasonable. Mrs. Walmisley submits that the administrators considered all relevant matters before taking the decision to require the receivers to vacate office. Mrs Walmisley submits that the rationality of the joint administrators’ decision has to be judged by reference to the time at which, and the circumstances in which, it came to be OPUS 2 DIGITAL TRANSCRIPTION D R A F T taken. The court is required to look at the decision that the administrators actually made. She points to para.43 of Schedule B1 pursuant to which the applicant is entitled to apply to the court for its permission to take steps to enforce its security over the company’s property. That power is said to militate against the existence of any inherent jurisdiction in the court to challenge the joint administrators’ decision to remove the receivers, or to affect the way any such jurisdiction should be exercised. Mrs. Walmisley also relies upon the express power conferred upon the court by para.68 of Schedule B1 to give directions to the administrators of a company in connection with any aspect of his management of the company’s affairs, business or property. She points to the express restriction contained within para.68(3) that such directions may only be given by the court if either no proposals have been approved under paragraph 53; or the directions are consistent with any such proposals; or the court thinks that the directions are required in order to reflect a change in circumstance since the approval of the proposals; or the court thinks that the directions are desirable because of a misunderstanding about proposals approved under para.53. Mrs Walmisley submits that these proposals were approved under the deemed consent procedure and constitute proposals approved under para.53. Mr Riley disputes that but I am satisfied that on this point Mrs Walmisley is correct. Insolvency Rule 3.38(4) provides that: “Where the administrator has made a statement under paragraph 52(1) of Schedule B1 and has not sought a decision on approval from creditors, the proposal will be deemed to have been approved unless a decision has been requested under 52(2) of Schedule B1.” That is the situation in the present case. There has been a deemed approval. Mrs Walmisley points to the fact that para.51(3)(a) refers to a decision using the deemed consent procedure. She submits that on a true reading of para.51, a decision under the deemed consent procedure is a decision of the company’s creditors and should be treated as such for the purposes of para.53 of Schedule B1. It seems to me that OPUS 2 DIGITAL TRANSCRIPTION that is correct. A deemed consent is to be treated as a consent under para.53. Therefore, the court should not give directions which are inconsistent with the approved proposals of the joint administrators. D R A F T I am satisfied that any direction which would have the effect of reinstating the receivers would be inconsistent with the approved proposal at para.1 of section 10 that the joint administrators will continue to manage the affairs of the partnership in order to achieve the objective of the administration outlined earlier, which is that of rescuing the partnership as a going concern, including the joint administrators taking back control of the properties in order for the partnership to continue for the benefit of all the partnership’s creditors. It does seem to me that the proposals, on the facts as they appear in evidence before the court, are unrealistic; but there has been no change in circumstances since the approval of the proposals, and it does not seem to me that it can be said that there is any misunderstanding about the proposals. Thus, the court’s power to give directions under para.68 is not engaged because of the restrictions in para.68(3). Should the court, then, exercise its inherent jurisdiction to require the administrators to withdraw their decision to remove the receivers? I am satisfied, for the reasons that Mr Riley has given, that the joint administrators’ decision to remove the receivers was irrational at the time it was taken. I accept Mr Riley’s submission that the proper course should have been to have obtained a valuation of the property before deciding whether to remove the receivers. The proper course should have been to have consulted with the receivers and to have inquired as to the basis upon which they proposed to manage the properties and collect the rent, and the terms upon which they proposed to do so, including the costs that would have been incurred. OPUS 2 DIGITAL TRANSCRIPTION I cannot see why the joint administrators should have considered it to be in the interests of D R A F T the secured creditor, which even on their perception was the main constituency in the administration, to interfere with the appointment that that secured creditor had itself made, and which reflected its wishes with regard to the enforcement of its security. I also fail to see how it could have been considered, in the interests of the unsecured creditors, for the joint administrators to assume to themselves the costs of rental collection when this could be done at the expense of the secured creditor through the rents from the properties, particularly when the agents instructed by the joint administrators were charging rather more than the agents proposed to be appointed by the receivers. The joint administrators should have established the situation correctly before taking the decision that they did. The clear impression I have from the evidence is that the joint administrators regarded a refinancing of the facility as something desired by the two partners who had appointed them; and that they adopted a blinkered approach of adopting that course, without considering the interests of the secured creditor. However, even though I am satisfied that the decision of the joint administrators to remove the receivers was irrational, it does not seem to me that it is a decision with which the court should interfere. Rather, the appropriate course is for the applicant to pursue the application which it has brought in the alternative under para.43(2)(b) for permission to take steps to enforce the applicant’s security. That, it seems to me, is the appropriate statutory mechanism for challenging what I am satisfied is an irrational removal of the receivers. Mrs Walmisley opposes the application for permission to take steps to enforce the applicant’s security. She submits that such an application is unusual in circumstances where the administrators have only just been appointed and the properties form the significant part of the assets of the administration. Both parties acknowledge that the leading case on the OPUS 2 DIGITAL TRANSCRIPTION D R A F T grant of permission is Re Atlantic Computer Systems Plc [1992] Ch. 505. The guidance is to be found in the judgment of the Court of Appeal, delivered by Nicholls LJ, at 542B-544C. Mr Riley accepts that it is for the applicant who seeks leave to make out a case to be given such leave. Mrs Walmisley submits that the permission of the court is discretionary and the matters identified by Nicholls LJ are only some of the matters which the court can take into consideration in the exercise of its discretion. She submits that there is not an exhaustive list of matters to be taken into account. Lord Justice Nicholls also does not evaluate the respective weights to be attached to particular competing considerations. She submits that no case has been made out by the applicant other than that it is a secured creditor and wishes to have control. She says that the rents collected by the administrators are being paid to the applicant. By appointing the agents who had previously been collecting the rents, continuity was preserved and delay in collecting the rents was prevented because rent collection systems were in place and full details of the various properties and tenants were well known to the appointee. There is, and can be, no suggestion, Mrs Walmisley says, that the administrators are doing anything different to that which the receivers would do. She submits that granting leave to the applicant to exercise its proprietary rights under its security would be likely to impede the achievement of the purpose of the administration, and that leave should, therefore, not be given. If leave is given, the statutory purpose of rescuing the partnership as a going concern and securing a return to the unsecured creditors may not be achieved. It is clear that the partners are seeking funding to refinance the partnership. If the applicant is given permission to enforce its security, those efforts to refinance will be frustrated and come to nought. In so far as a purchase of the partnership assets is proposed as a result of the refinancing, it is said that any delay will result in a worse realisation for the applicant itself as interest will continue to accrue, and any shortfall will OPUS 2 DIGITAL TRANSCRIPTION D R A F T increase. Miss Walmisley points to the fact that these are still early days in the administration and therefore the ascertainment of other properties, not subject to the applicant’s charge, has not yet proceeded very far. It is in the best interests of creditors generally that the entire portfolio, including the non-charged assets, should be sold together rather than by way of individual marketing and sale of the numerous properties and varied interests. Giving possession of the properties to the applicant or its receivers would impede the proper progress of the administration. In the course of oral argument, Mrs Walmisley indicated that the administrators will abide by the management charges of the managing agents proposed by the receivers. They do not accept that the charges levied by Robson Estates are excessive; but they wish to allay any concerns that have been raised by the applicant. If the managing agent appointed by the joint administrators is not collecting in all of the rents, that is said to be a matter that the administrators can take up in due course. The joint administrators should be allowed to implement the proposals which have been approved. There is no suggestion that the administrators are doing anything other than the receivers themselves would do. She submitted that if the properties charged to the applicant are hived off from the partnership, there would be little prospect of everyone owed money by the partnership being paid because it will be only a rump of as yet unascertained assets. Moreover, the cost of the receivers will increase the shortfall being suffered by the applicant, whereas if the administrators are to incur the costs of management of the properties and collection of the rent, then that additional cost will not fall upon the applicant. There is no suggestion that the administrators are seeking to deal with the security in a way contrary to the secured creditors’ interests. No losses to the applicant have been identified which cannot be addressed. Mrs Walmisley also indicated that if receivers are appointed, OPUS 2 DIGITAL TRANSCRIPTION there is a risk of a delay in the recovery of rents because of the attitude of Mr and Mrs Isaacs and/or Robson estates. D R A F T Mr Riley submits that permission should be granted because the appointment of the receivers is unlikely to impede the achievement of the purpose of the administration. The purpose stated in the proposals simply cannot be achieved on the figures and evidence before the court. If, however, granting permission would be likely to impede the achievement of the purpose of the administration, then the court must weigh the private interests of the applicant against the collective interests of the general body of creditors. In performing that exercise, great weight should be given to proprietary interests; and, where administration is a substitute for liquidation, it should not be used to benefit the unsecured creditors at the expense of those with proprietary rights. If a significant loss is likely to be caused to the applicant by the continued suspension of his rights, then permission should be granted unless substantially greater loss would be caused to the general body of creditors by the grant of permission. Mr Riley referred me to observations of Mr Martin Mann QC, sitting as a Deputy Judge of the High Court, in Re UK Housing Alliance (North West) Limited [2013] EWHC 2553 (Ch), [2013] BCC 752. At para.75 Mr Mann said that the court is required, when considering whether or not to exercise its jurisdiction to grant permission to enforce securities under para.43 of Schedule B1, to balance the interests of the secured and unsecured creditors only if the relevant property is required for the purposes of the administration. In that instance, however, no such case was advanced; and, in any event, normally permission would be given if significant loss would be caused by a refusal. Mr Riley submits that in the present case the secured creditor (the applicant) is the only person likely to receive any sums from the sale of any of the secured properties. There is no evidence that any payment to unsecured creditors is likely to happen. The third in the hierarchy of statutory purposes of OPUS 2 DIGITAL TRANSCRIPTION D R A F T administration is now the only real and true purpose of the administration, namely achieving a better return for the secured creditor. However, there is no reason to think that a better return is likely to be achieved by the administrators than by the receivers; and, in any event, they are the preferred choice of the only interested party, the secured creditor. Therefore, the balancing exercise does not arise because the applicant is the only constituency in this administration. As Nicholls J observed in the second of his statements of principle, if granting leave to the secured creditor to exercise his proprietary rights and repossess his security is unlikely to impede the achievement of the purpose of the administration, then leave should normally be given. If, however, it is necessary to carry out the balancing exercise, then the administration procedure should not be used to prejudice a secured creditor when an administration order is made in lieu of a winding up order. The underlying principle is that an administration for the benefit of unsecured creditors should not be conducted at the expense of those who have security rights which they are seeking to exercise, save to the extent that this may be unavoidable; and even then, that will only usually be acceptable to a strictly limited extent. On the evidence of all the valuations, there is going to be a shortfall on the secured debt and nothing for the unsecured creditors. No argument has been advanced that the secured properties are required for the purposes of administration. This is not a trading administration where the properties are required to enable the trade to continue. The administration involves either pursuing a sale of the properties or their refinance. In either event, the secured debt will not be paid in full, and the unsecured creditors will not benefit from the administration. OPUS 2 DIGITAL TRANSCRIPTION What interest, Mr Riley asks rhetorically, do any of the other creditors have in a general sale D R A F T of the secured properties? The administrators themselves have no automatic right or authority to deal with fixed charge assets. In his reply, Mr Riley took me to what was said by Mr Snowden in Capitol Films at paras.35-37. When considering an application by an administrator who seeks an order under para.71 for the sale of a fixed charge security, a court is required to balance the prejudice that would be felt by the secured creditor if the order was made against the prejudice that would be felt by those interested in the promotion of the purposes specified in the administration if it was not. Mr Riley places particular reliance upon what is said at para.37: where the sole purpose of the administration is to achieve a return to secured creditors, where the administrators take the view that all of the assets to be sold are covered by fixed charges and that those secured creditors would not be repaid in full, and where the company has no continuing business as such, the reality is that in seeking to sell the company’s rights in respect of the secured assets, the administrators have no material constituency to serve other than the secured creditor. That, Mr Riley says, is the position in the present case. The decision to remove the receivers is allied to any sale of the fixed charge properties; and if the secured creditor is the only, or principal, constituent involved in the administration, it is incumbent upon the administrators to consider the interests of the secured creditor and not to override his wishes. The administrators should not be allowed to override the secured creditors’ decision to enforce its security in a manner and at a time of its own choosing. Mr Riley pointed to the fact that at p.543D-E of his judgment in Atlantic Computers Nicholls LJ referred to the conduct of the parties as a material consideration to be taken into account. Here there is said to be no evidence that the administrators have undertaken any attempt to market the properties. The only evidence of any dealing by the administrators is with Mr and Mrs Isaacs. They seem to be perceived as “the only show in town”. The joint OPUS 2 DIGITAL TRANSCRIPTION D R A F T administrators have focused upon the people who appointed them rather than looking around more widely. The receivers, by contrast, will seek to market the secured properties more widely, seeking for a fair and true market value. The joint administrators have accepted unquestioningly what they have been told by Mr Isaacs who appointed them. They have allowed him to continue the management and collection of rent for the secured properties. The joint administrators cannot explain what is happening with all of the rent. That, Mr Riley submitted, is hardly a satisfactory state of affairs. Mr Riley pointed out that there will be nothing, even if the receivers are re-appointed, to prevent the Isaacs seeking to redeem the mortgage with the assistance of the loan facility for which they are presently negotiating. In the meantime, he said, the receivers should be in place. I accept Mr Riley’s submissions. I am satisfied that no case has been advanced by the joint administrators that the properties the subject of the security are required for the purposes of the administration, or that the appointment of receivers, and any sale by them, is likely to impede the achievement of the purpose of the administration. There is no suggestion that the properties are needed as trading premises whilst the business is rescued as a going concern. The prospect of the secured debt being refinanced at a level sufficient to take out the applicant’s debt is entirely speculative. Even if it is a possibility, it will not be frustrated by the appointment of the receivers. The applicant will no doubt welcome receiving anything above the present market value of the properties. On the evidence, that is less than the amount presently owed to the applicant. I see no reason why the administration should prevent the applicant from realising its security. On the evidence, it is the only constituency to which the administrators should properly be having regard, given that on the evidence there is no likelihood that the OPUS 2 DIGITAL TRANSCRIPTION D R A F T unsecured creditors will stand to receive anything in the receivership. In the past, the applicant has been exposed to increased costs charged by Robson Estates, which is a connected and conflicted entity run by an individual who has displayed a lack of commercial integrity and probity. The receiver’s proposed agents, Braemar Estates, will charge a substantially lower fee of five per cent compared with the 15 per cent being charged by Robson Estates. I regard the proposal put forward by Mrs Walmisley that Robson Estates should charge only the substantially lower fee charged by Braemar Estates as late, and also as unrealistic, given that Robson Estates have presumably been charging what they consider to be an appropriate percentage. There are also uncertainties over the rents being collected by Robson Estates. There can be no guarantee that a proper level of rental income is being maintained or increased. There is at the moment an apparent breach of the terms of Judge Pelling’s order. If they come to sell the properties, the receivers will be subject to a duty to obtain the fair or true market value for the properties, and there is no suggestion that the receivers are likely to breach that duty. Indeed, the valuation evidence indicates that they are likely to be guided by a valuation which is the same, or perhaps even slightly higher, than that obtained by the joint administrators. So, for all of those reasons, it seems to me that the appropriate course in the present case is to declare that the decision by the joint administrators to remove the receivers was unreasonable; and, pursuant to para.43(2)(b), to give the applicant permission to take steps to enforce its security over the company’s property by appointing receivers and, if appropriate, selling the mortgaged properties. LATER: OPUS 2 DIGITAL TRANSCRIPTION Having dealt with the substantive application, I now have to address the issue of costs. Mrs D R A F T Walmisley rightly refers me to Insolvency Rule 12.47 in support of the proposition that the normal rule is that an administrator is not personally liable for the costs of an insolvency application unless the court otherwise directs. Mrs Walmisley is right that I have to be satisfied that there should be a departure from that normal rule. In the present case, I am satisfied that there is good reason for that departure. I am satisfied, for the reasons I have given in my substantive extemporary judgment, that the whole of these proceedings have been necessitated by the unreasonable and peremptory decision by the joint administrators, only the day after their appointment, to require the receivers appointed by the applicant, as secured fixed charge holder, to stand down. That has been the cause of this litigation. I have found that that decision was unreasonable. I did not consider it appropriate by way of remedy to rescind that decision. It seemed to me that the appropriate remedy was to proceed to consider whether the receivers should be reinstated by way of an application under para.43(2) of Schedule B1. I was satisfied that the court should give permission for the receivers to be re-appointed. The fact that the insolvency office holders have been successful in resisting one head of relief does not alter the fact that, on the substance of the matter, they have been unsuccessful; and their lack of success is because of their unreasonable decision, at the outset of this administration, to remove the receivers appointed by the fixed charge holder. In those circumstances, it seems to me that justice requires the court, in the exercise of its discretion as to costs, to depart from the normal rule and to require the insolvency office- holders - the administrators and respondents - to bear the costs of this application personally, and otherwise than as an expense in the administration. So, I will order the respondents to pay the costs; and those costs will not be allowed as an expense of the administration. OPUS 2 DIGITAL TRANSCRIPTION ___________ D R A F T __________ Transcribed by Opus 2 International Ltd. (Incorporating Beverley F. Nunnery & Co.) Official Court Reporters and Audio Transcribers 5 New Street Square, London EC4A 3BF Tel: 020 7831 5627 Fax: 020 7831 7737 civil@opus2.digital __________ (This transcript is subject to Judge’s approval) OPUS 2 DIGITAL TRANSCRIPTION