Everything must go?

Posted: 30th August 2011

If a creditor of an insolvent business believes that their position could be improved by the administrator of the business taking legal action but the administrator refuses to do so, relations between the administrator and the parties affected by the inaction are likely to be strained.

In a recent case, this is exactly what happened and, because the administrator refused to take proceedings, creditors sought the removal of the administrator and replacement by another. The Insolvency Act 1986 permits this where there is ‘good or sufficient reason’ for doing so. This does not mean that the administrator is unfit to act or is guilty of misconduct, but that the removal of the administrator is in the interests of the majority of the creditors.
In the case in point, the purpose of the legal action was to reduce the creditors liability under personal guarantees.
An initial application to remove the administrator was refused and there was an appeal to the Court of Appeal. The Court ruled that if the administrator was unbiased and had reached a decision based on the material before him, then the fact that a different administrator might reach a different conclusion might be a ground to challenge the decision, but not for removal of the administrator altogether.
The courts are reluctant Sale Signto overturn decisions where a professional person has been shown to act impartially and taken a decision which is within the reasonable range of decisions based on the information available.
The essential lesson to learn is that the time to pursue arguments of this nature is early in the process. Persuading the administrator to take action is more likely to be successful than a subsequent legal challenge after the administrator has decided not to do so.