Validity of an out-of-court appointment of administrators

22/04/2010

Kaupthing Capital Partners II Master LP Inc (Master) was a limited partnership established in Guernsey. Master was a special purpose vehicle that, alongside other group companies and its ultimate parent company (together, the Group), formed part of an investment fund administrated by an English registered limited partnership.

Master was managed by an English registered investment bank (which was also a Group company) and was extended a £67 million credit facility by Kaupthing Bank Luxembourg SA (Banklux), another entity within the Group.

On 8 October 2008, BankLux made a demand against Master for repayment of the said credit facility and as Master was unable to comply with the demand, it was insolvent on the basis that it could not pay its debts as they fell due.

Three of Master's largest creditors (the Applicants) brought an action challenging, inter alia, the validity of the appointments of the English law administrators. In addressing this question, the High Court had to determine, amongst other points, two major issues: (1) the location of Master's centre of main interest (COMI); and (2) whether the out-of-court appointment of the administrators was rendered invalid by reason of the appointer using the incorrect form.

(1) Centre of Main Interest

The Court noted that the principles of establishing COMI under the EC regulation were authoritatively stated by the European Courts of Justice in Re Eurofood IFSC Limited [2007] BCLC 150 and further explained and analysed by the Court of Appeal in Re Stanford International Bank Limited [2010] EWCA Civ 137.

The presumption is that an entity's COMI is in the state where its registered office is located. This presumption may be rebutted only by factors which are both objective and ascertainable by third parties. The factors to be relied upon include those already within the public domain, or that which would have been apparent to a third party doing business with such entity. Such factors do not include matters that can only be determined on inquiry.

The Court found that as Master's registered office was located in Guernsey, there was a presumption that its COMI was also in Guernsey. However, applying the principles in Stanford to the factual matrix, the Court held that it was satisfied that the presumption had been rebutted. It would have been apparent to Master's creditors that all of Master's functions and activities were conducted by an operator on its behalf in the UK and Master was no more than a 'letterbox' entity. A point worth noting here is that the Court also accepted the Applicant's submission that the investors of the fund were not considered 'third parties' in this case as the Court stated that the investors were "insiders within the partnership, equivalent to the shareholder or contributories of the company, rather than persons doing business with the partnership" (Proudman J.) . As such, it was held that the UK court had jurisdiction and Masters could undergo an English administration.

(2) Formal and essential validity of appointment

The Court went on to decide if the appointment itself was formally and essentially invalid as the Applicants proposed that the wrong form was used. KCP purported to appoint the administrators with a prescribed form for companies, rather than a partnership. Counsel for the administrators submitted, inter alia, that Master was a form of hybrid between a company and a partnership and that the court should apply a beneficent construction to the rules about prescribed forms in these circumstances. The Court was not prepared to accept Counsel's submission and held that the prescribed form for partnerships ought to have been used. Consequently, the Court found that the appointment of the administrators was invalid and could not be cured.

As commented by Proudman J., herein lies 'the risk that an appointer and proposed administrator take if they use the out-of-court procedure in a difficult case'. Out-of-court procedures may be useful in situations especially when there are no reservations about the validity of an administrator's appointment. However, it is always sensible to seek a court administration order if possible to avoid an appointment from being contested subsequently.

Contact: xiaohanguo@city-law.net

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