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In what circumstances can additional administrators be appointed?

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11/12/2018

According to a recent case, Zinc Hotels (Investment) Limited and others v Beveridge and others [2018] EWHC 1936 (Ch), the court does not have power to appoint additional administrators except within the constraints of paragraph 103 of Schedule B1 to the Insolvency Act 1986. Where administrators are appointed out of court by the holder of a qualifying floating charge, disaffected shareholders in the company had no standing to apply for the appointment of additional administrators to remedy a perceived conflict of interest.

Background

The starting point for this area of insolvency law is paragraph 7 of Schedule B1 to the Insolvency Act 1986 (Schedule B1 and IA 1986 respectively) which provides that an administrator cannot be appointed during an administration other than under paragraphs 90 to 97 of Schedule B1 (where there is a vacancy, for example, because of death or resignation) or paragraphs 100 to 103 of Schedule B1.

When a company is already in administration, paragraph 103 of Schedule B1 allows for the appointment of a person to act as an additional administrator in certain circumstances, and specifies the method by which any such appointment must be made. Where, for example, the company entered administration by the appointment of an administrator by a qualifying floating charge holder (QFCH), the additional appointment must be made either by the QFCH or by the court. Any such appointment can only be made with the consent of the incumbent administrator or administrators.

Facts of the case

The applicants were shareholders in Zinc Hotels Limited which operated ten Hilton Hotels. The hotels were put up for sale but when a buyer couldn’t be found, the company was placed into administration on an out-of-court appointment by the QFCH, which was a consortium of banks.

In other proceedings which were underway, the applicants were seeking the removal of the administrators under paragraph 88 of Schedule B1 and/or relief from unfair harm under paragraph 74 of Schedule B1. The applicants in this application were applying for interim relief pending the hearing of the main action and applied to the court asking it to appoint interim additional joint administrators and for an injunction restraining the administrators from distributing proceeds of sale.

The applicants argued that the administrators lacked independence due to their close relationship with the QFCH and that they (and their former solicitors) were conflicted because they had been heavily involved in advising the banks on contingency planning for some time prior to their appointment. They also argued that the court had inherent jurisdiction to appoint an additional administrator pending trial.

The administrators’ case was that the shareholders were seeking to delay the sale process to pressurise lenders to reduce the debt.

Decision of the court

The court dismissed the application from the shareholders and made the following points:

  • The court does NOT have any inherent jurisdiction to appoint an additional administrator.
  • Where the administration appointment has been made by a qualifying floating charge holder, only they (or the administrators on application to court) can appoint an additional administrator. The shareholders had no standing to seek the appointment of an additional administrator where the appointment had been made by the QFCH.
  • There was no conflict of interest on the part of the administrators. The existence of a prior relationship between an administrator and a creditor is not a bar to the former taking the appointment.

WM comment

In most insolvencies of any size and complexity, the administrator will have been engaged prior to his appointment to do the necessary preparatory work. It will therefore be welcomed that the court held that there was no conflict of interest on the part of the administrator. This should be contrasted with recent pre-pack cases, such as VE Vegas Investors IV LLC and others v Shinners and others [2018] in which it was alleged that the administrators had been involved in wrong doing and were conflicted because they could not investigate their own conduct. The judgment contains important guidance on the extent of the court’s power to appoint an additional administrator and the scope of any material conflict of interest.

Contacts