The recent Court of Appeal case Finnerty and another v Clark
and another has provided welcome guidance on what constitutes
good grounds to remove an administrator from office, under
paragraph 88 of Schedule B1 to the Insolvency Act 1986 ("IA
1986").
It is already well established that the court should not order the
removal of an administrator from office unless there is good cause
to do so. Misconduct on the part of the administrator is not a
prerequisite for such a removal, but, in order for an application
to be successful, some 'serious issue' relating to the
administrator's conduct of the administration must be
shown.
The facts of the Finnerty case may help shed light on what
constitutes a 'serious issue' in this regard. F was a
director and shareholder of G Ltd, which had entered
administration. Appointment of administrators to G Ltd had caused
the company to become liable to pay default interest as part of the
terms of its existing loan agreement with its lender. F,
considering that the default interest rate amounted to an
extortionate credit transaction, requested of the administrators
that they bring proceedings to challenge the default interest rate.
However, considering that the likelihood of bringing a successful
claim was not enough to merit the costs involved, the
administrators decided against this course of action.
Although F succeeded at the first instance in his application to
have the administrators removed from office, the order was
subsequently overturned at the High Court, which ruled that the
administrators had taken a legitimate commercial decision. F
appealed, arguing that the High Court had no grounds on which to
overturn the original decision, since the discretion granted to the
court under paragraph 88 of Schedule B1 to the IA 1986 was a wide
one. F also argued that the High Court had given insufficient
weight to his proposal to meet any costs of challenging the default
interest rate, thus removing the administrators would have no
adverse effect on the return to the creditors.
Dismissing the appeal, the Court of Appeal held that, although a
different administrator may have chosen an alternative course of
action, the court should respect the administrators' decision
provided it reached a conclusion which was justified in the
circumstances and was without bias. Furthermore, the Court
concluded that there was no direct benefit to the creditors in the
removal of the administrators - as it could not be guaranteed that
the new administrator would bring proceedings to challenge the
default interest rate at all, let alone be successful in such an
action.
Thus, it may be inferred that the courts will be reluctant to
challenge an individual decision by an administrator provided that
the decision is legitimate, unbiased and one which he is entitled
to reach based on the facts placed before him. The case reinforces
the principle that removal of an administrator must further the
purpose of the administration. The fact that removal of an
administrator is not detrimental to creditors is an insufficient
argument; there should be a direct benefit arising from such a
removal before the court is likely to grant it. Overall, the
Finnerty case may bring relief to insolvency practitioners
by appearing to suggest restrictive criteria for a successful
petition to remove administrators from office – in an
insolvency scenario, where decisions are often taken which aggrieve
one side or another, such a restrictive approach to removal is to
be greatly welcomed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.