When does motive matter in the appointment of administrators?

When it is improper.

The Applicant was introduced to the Respondent by an acquaintance to discuss going into business in property development. A company was set up with the acquaintance and the Respondent as directors and shareholders. The Applicant lent money to the company to enable it to buy a property and was majority creditor.

The Respondent, over time, claimed that he was owed money for work he did for the company. He also sold his shares to his elderly father who purportedly replaced him as a director.

The acquaintance then died leaving the Respondent’s father as sole director. The Respondent then claimed that he was owed over £100K by the company. The company purportedly took advice and granted an all monies debenture to the Respondent to secure the alleged debt. The Respondent also became vast majority shareholder through the issue of new shares.

On receiving notice of these events, the Applicant presented a winding up petition against the company, following which the Respondent appointed administrators out of court pursuant to the debenture.

The Applicant then applied to court for relief under paragraph 81 of Schedule B1 to the Insolvency Act 1986 to either terminate the administration or replace the administrators on the ground that the administrators were appointed with “improper motive”. By this stage, the administration had ground to a halt as the Applicant, as majority creditor, had refused to approve the administrators’ proposals.

The Judge agreed with the Applicant that, on the facts, the administrators had been appointed with improper motive and ordered that their appointment cease to have effect. He found that the Respondent had caused the company, as de facto director, to enter into the debenture in an attempt to obtain a collateral advantage over the Applicant as unsecured majority creditor, not for the benefit of creditors as a whole.

In addition, the administrators were conflicted as there was doubt about the validity of the debenture pursuant to which they were appointed and the administration had reached an impasse in any event.

This case again exposes the importance of insolvency practitioners acting independently and impartially and satisfying themselves of the validity of their appointment.

Moon v Bowes and others [2019] EWHC 3455 (Ch)

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