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Can Creditors Stand Up to Administrators?

Monday, 12 August 2013

The economic crisis has resulted in vast numbers of companies going into administration which in turn has placed the spotlight of scrutiny on administrators. As stipulated in the Insolvency Act 1986, administrators are required to act in the interests of creditors as a whole.

Aggrieved creditors have two principal means within Schedule B1 of the Insolvency Act, Paragraphs 74 and 88, to stand up to the actions of administrators. However, the courts are generally reluctant to interfere in the affairs of administrators.

What Help do Paragraphs 74 and 88 of Schedule B1 Offer Aggrieved Creditors?

Under Paragraph 74, the administrator must be shown to be acting or proposing to act in a way that would unfairly harm the interest of the creditor(s) that made the application. If the court upholds this claim it can take a variety of actions set out in Paragraph 74(4).

For example, the court can require the administrator to act in a specific way, regulate the administrator’s power or make consequential provisions. However, there has never been a successful application under Paragraph 74, which suggests the courts are extremely hesitant to infringe on the role of administrators.

Paragraph 88 provides that a court has the power where it sees fit to remove an administrator. This is much less restrictive wording than Paragraph 74 and has been relied on successfully in the past. However, to evoke the powers in Paragraph 74 or 88 an applicant needs clear evidence demonstrating why the relief against an administrator should be granted.

What Constitutes Unfair Harm?

The phrase ‘unfair harm’ is of paramount importance in establishing a successful claim based on Paragraph 74. Generally there is a high burden of proof on claimants to show evidence of improper behaviour such as breach of trust.

This means for example that failing to provide further information requested by creditors is unlikely to be sufficient to harm their interests, Four Private Investments Funds v Lomas and others [2008]. Blackburne J held that it could not be expected that an administrator would be at the beck and call of every creditor.

Meanwhile the 2009 case of BLV Realty Organization v Mark Batten & Colin Haig dealt with the wider point of whether creditors must receive identical treatment or that the creditors must be dealt with as a homogenous group. The case concerned the termination of a contract BLV had with the company in administration. The court ruled that different treatment is not tantamount to unfair treatment. A weak creditor may be treated differently and as long as the administrator’s action is grounded in sound commercial reasoning this will not amount to unfair harm.

Comment

If you are facing financial difficulty or have customers that may be facing financial difficulty, it is important to seek legal advice as soon as possible to protect your interests. For more information please contact us on 0207 611 4848.

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