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
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.
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