DLA Piper advises joint administrators of Aartee Bright Bar Limited

DLA Piper has acted for the joint administrators of Aartee Bright Bar Limited (in administration) (Company) (one of the UK’s largest distributors of engineering bar products, offering a range of niche steel products) in relation to an application brought by a creditor of the Company, Speciality Steel UK Limited, pursuant to paragraph 81 of Schedule B1 to the Insolvency Act 1986.

 

Application

Under paragraph 81, a creditor may apply for an order that, amongst other things, the appointment of administrators shall cease to have effect. In order to make an application under paragraph 81, the applicant creditor must allege an improper motive on the part of the appointer in making the appointment.

Richard Fleming, Michael Magnay and Gemma Quinn of Alvarez & Marsal Europe LLP, were appointed as joint administrators of the Company on 6 February 2023 by FGI Worldwide LLC (a US asset based lender and the holder of a qualifying floating charge), pursuant to paragraph 14 of Schedule B1 to the Insolvency Act 1986.

The applicant alleged that it was effectively inevitable that, at the time of the appointment, FGI would be fully repaid, within a very short period, via the discharge of receivables assigned by the Company and now owned by FGI. Given the alleged inevitably of such repayment, the applicant argued that, in the absence of evidence to the contrary, FGI must have had another motive, besides a desire to secure repayment, for the appointment of administrators - the applicant alleging instead that reputational reasons were behind FGI’s decision to appoint administrators. The applicant contended that the only “proper” motive to appoint administrators pursuant to rights under a debenture was to ensure repayment of the sums secured by that debenture and, therefore, any motive which was not to secure repayment must be considered “improper”.

The administrators were neutral in respect of the application. However, to assist the Court, lengthy and detailed evidence was produced by the administrators on pertinent issues including the financial position of the Company, the conduct of the administration, the purpose of the administration (and the administrators’ proposals to achieve the same), and their observations as to the Company’s ability to exit administration and trade solvently.

 

Points of Law

Applications brought pursuant to paragraph 81 are novel, with limited case law on the subject. This case therefore helpfully clarified the law in this area.

In particular, the Court considered three questions of law:

1. Threshold: Whether, as a gateway requirement to opening up the Court’s jurisdiction to end an administration (or otherwise exercise its discretion) under paragraph 81, it is sufficient for an applicant to have alleged honestly and on reasonable grounds that there was an improper motive, or whether instead an applicant must satisfy the Court, on the balance of probabilities, that the appointer did act with an improper motive;
2. Improper motive: What constitutes an “improper motive” for the purpose of a paragraph 81 application; and
3. Court’s discretion: in what circumstances the Court should exercise its discretion to bring an administration to an end.

 

Judgement

In respect of each of the three questions, HHJ Stephen Davies found as follows:

1. Threshold: There is no threshold pre-condition to making an order pursuant to paragraph 81 that requires the applicant to satisfy the Court, at the substantive hearing, on the balance of probabilities, that the appointer was motivated by an improper motive when appointing the administrators. It is instead sufficient that the allegation of improper motive is made, and that it is made honestly and on reasonable grounds (following the reasoning of HHJ Halliwell in Koon v Bowes). However, wherever possible, the Court should seek to make a positive finding one way or another on the issue of improper motive, by reference to the evidence and submissions made before them. Whether the allegation of improper motive is made out is a matter of great weight to be placed into the balance when the judge is considering whether or not to make an order. If the judge concluded that the allegation of an improper motive was not made out then that would, in most if not all cases, militate very strongly against the making of an order.
2. Improper motive: Previous authorities in this area emphasise that what is required is conduct by the appointer which amounts to an improper use or abuse of the administration procedure for some purpose which is inconsistent with, or not in harmony with, the statutory purpose of administration. It is not improper for the appointer to be motivated, in whole or in part, by the belief that the appointment of administrators is likely to achieve the statutory purpose, even if the appointer would not necessarily receive payment at the conclusion of the administration. There is no reason why the appointer cannot be motivated by what it considered, in good faith, was a desire to improve the position of the general body of creditors or to enable independent office holders to take control of the company’s assets or to investigate alleged misconduct on the part of those in control of the company. The Court did not accept that the only “proper” motive an appointer should have in appointing administrators is a desire to be repaid.
   On the evidence, FGI had not acted with an improper motive in appointing the administrators. FGI held several justified concerns which were relevant to its decision to appoint and its decision was not inconsistent with the statutory purpose of administration. It did not establish an improper motive that, for example, other finance companies might have allowed more time to receive in due course payment from the receivables.

3. Court’s discretion: Whilst the finding that there was no improper motive was a powerful reason to refuse to make an Order, in light of HHJ Davies’s finding above regarding the threshold requirement, the Court turned to consider whether the Court ought to exercise its discretion to cease the appointment of administrators notwithstanding the lack of an improper motive. HHJ Davies reiterated that it is unlikely that an order would be made pursuant to paragraph 81 if the evidence was that the statutory purpose of the administration was likely to be achieved. However, there may be cases where it would still be justified.
   In this case, though, on the detailed evidence provided, the purpose of administration was capable of achievement and the applicant could not persuade the Court that the administrators’ strategy was inconsistent with the proper performance of their obligations to achieve the statutory purpose of administration. Their strategy was undertaken in a careful and considered manner. It was not for the Court to second-guess or manage the exercise by the administrators of their professional duties.

 

Consequences and implications

If the applicant had successfully persuaded the Court that the only proper purpose for which a qualifying floating charge holder could appoint an administrator was for the purpose in good faith of obtaining repayment of what was due to it, it would have detracted from many of the obvious wider benefits derived from administration as a class remedy (and indeed a rescue mechanism). It would also have been concerning for the asset based lending community and especially invoice discounters who, in many cases, do not ultimately need to rely on fixed and floating charge distributions from administrators because debtor collections eventually realise (or ought to realise) sufficient amounts to repay all outstanding liabilities post-appointment.

This judgment helpfully clarifies the law and negates the need for qualifying floating charge holders to undertake, at the point of appointment, deliberations about future (and unknown) outcomes as to their ultimate economic interest in an administration. Instead, they can focus solely on their contractual entitlement to enforce their security by appointing administrators out of Court at the relevant time. The judgment will also be welcomed by the insolvency practitioner community who can have greater confidence that future spurious and unmerited paragraph 81 applications will not be encouraged in circumstances where appointed office-holders are confident that a purpose of the administration is capable of achievement, for the benefit of creditors.

A copy of the full judgement can be accessed here.

Chris Roberts, Rob Lyons and Aimee Harper of DLA Piper and Daniel Bayfield KC of South Square acted for the joint administrators in relation to the application.