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UK court rules there were no grounds to remove liquidator

Out-Law Legal Update | 10 Apr 2018 | 11:05 am | 3 min. read

LEGAL UPDATE: The High Court has ruled that the application by a director and shareholder of Jamaica Tavern Limited (In Liquidation) to remove its liquidators from office did not provide adequate cause. This case provides examples of the type of demands and criticisms a liquidator may receive in the course of their appointment and the pragmatic approach of the court in dealing with these claims.

The High Court has dismissed an application brought by a shareholder to have the liquidators of Jamaica Tavern Limited removed.

Jamaica Tavern was incorporated in 1992, and was involved in the owning and letting of real estate. Hina Memon had been a director since 1994 and held 50% of its authorised share capital. The remaining 50% was held by another director, who was the son of her late husband.

Jamaica Tavern was the proprietor of a Grade II listed property known as Dockmaster House.

On 19 May 2014, Mihaj Investments Limited served a statutory demand on Jamaica Tavern and then applied to the court for an administration order. Memon opposed the making of the administration order as she disputed that monies were owed to Mihaj, however, the court disagreed with her and the company was placed into administration on 23 July 2014. At the time that the administrators were appointed the control of Jamaica Tavern was deadlocked as a result of a long-running family dispute.

Following appointment the administrators took the "highly effective commercial decision" to place the property for sale on the open market. The administrators considered that the sale of the property would mean that it was likely that there would be a distribution to the unsecured creditors of Jamaica Tavern and the administrators moved from administration to liquidation to carry out the distribution process. After adjudicating claims received, a dividend of 100 pence in the pound was paid on admitted claims. Following payment of creditors, a significant surplus remained for Ms Memon and the other shareholder.

It was after this exercise that Memon instructed solicitors to raise a series of demands of the former administrators, and now liquidators, in respect of the manner in which they had conducted the administration and subsequent liquidation. Over a year passed with limited correspondence between the parties before Memon applied for the liquidators' removal under sections 108(2) and 171(2) of the Insolvency Act 1986 (IA86).

Under IA86 the burden is on the applicant to show a good cause for removal of a liquidator, but the statutory provisions offer a wide discretion to the court which is not dependent on the proof of particular breaches of duty by the liquidator.

The main question for the England and Wales High Court was to determine if the grounds relied upon by Memon would justify the removal of the liquidators from their office.

Memon's case continued to change, however, by the time the matter reached court she argued that the liquidators should be removed from office due to, amongst other reasons: their 'relaxed and complacent attitude in accepting for over a year the proof of a creditor (Mihaj) who had appointed them as administrators'; that they had failed to take proper care to establish value of the property and that they had 'adopted a hostile attitude' towards her.

The liquidators argued that the court should regard the best interests of the liquidation as foremost when deciding whether to remove a liquidator.

In considering previous case law and the specific circumstances of the case, the High Court said that Memon had not shown cause for the removal of the liquidators from office as liquidators of Jamaica Tavern. "No justifiable criticisms of the [liquidator's] conduct of the administration and liquidation of the company have been raised. Quite the contrary, on the evidence before me, the [liquidators] have acted highly effectively, impartially and professionally throughout."

The High Court also said that: 

  • the course taken by the administrators/liquidators in respect of the adjudication of claims was an entirely reasonable and sensible one to adopt;
  • the administrators/liquidators provided sufficient financial analysis in their adjudication of claims, and in any event the appropriate course for challenging the proofs would have been by way of an appeal against admission of proofs under the insolvency rules;
  • the complaint regarding taking proper care when establishing the value of the property was completely without foundation – the independent valuations ranged between £1.1 million and £3m and the property sold for £6m;
  • the fact that the claim of Mihaj was eventually rejected did not invalidate the appointment of administrators; the administrators were appointed by a court order not by Mihaj;
  • the decision to move from administration to liquidation was an entirely reasonable and appropriate decision, based on the specific circumstances and it appearing that there would be sufficient funds to pay a dividend to creditors of 100p in the pound;
  • the administrators/liquidators and their solicitors displayed exemplary patience and professionalism in dealing with Memon and her solicitors, even when faced with false allegations of fabrications of evidence; and
  • Memon had not demonstrated on the evidence any need for the liquidators to be replaced to "do the job properly and consider whether steps should be taken to set aside the acceptance of the proofs of the related entities and whether proceedings should be brought against [Cork Gully]".

While the scope of the relevant provisions of IA86 offer a wide discretion to the court, the High Court held that even by applying the "lowest bar in the range", they were not persuaded that any cause was shown for the liquidators' removal in this case.

This decision is a favourable one for insolvency practitioners, who in the course of their appointment, may be subject to spurious claims and criticisms of their conduct – even when it appears that they are acting in the best interests of the liquidation.

Kevin Mulligan is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com