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Introduction
In Sports Direct.com Retail Ltd [2023] CSOH 79, the court ordered the removal and replacement of an administrator at the request of a creditor (referred to as the noter) on the basis that there had been sufficient grounds to do so despite the fact that there had been no questions raised in relation to the original administrators’ conduct or integrity. The incumbent administrators took a neutral stance in response to the application.
The proceedings were commenced in Scotland where, like England and Wales, the administration process is governed by Schedule B1 of the Insolvency Act 1986 (“IA 1986“).
Background
Sportsdirect.com Retail Limited, trading as Goals Soccer Centres PLC, (the “Company“) runs 5-a-side football centres across the UK and USA. In October 2019 the Company’s directors filed a notice to appoint administrators after an investigation into financial irregularities revealed mis-declaration of VAT and alleged improper behaviour.
Following the completion of a pre-packaged sale in administration, the Company’s creditors disagreed with the conclusion that because the purpose of the administration had been achieved, then the administration should be brought to an end and the Company dissolved.
The Applicant, a creditor with a claim of around £2.4 million (more than 10% of the outstanding debt to creditors) argued that investigations into the conduct of the Company’s directors were necessary. The Applicant maintained that it was appropriate for such investigations to be carried out for the potential benefit of creditors and that this could be best achieved by the Company moving from administration to compulsory liquidation. Further the Applicant was prepared to provide the funds for the investigations.
Issues
The court can remove an administrator from office but must have good and sufficient grounds to make the order. The issues before the court were whether, based on the facts, there were good enough grounds to make such an order.
The removal of an administrator falls under paragraph 88 of Schedule B1 which provides that “[t]he court may by order remove an administrator from office”. The Judge noted the terms were wide and that there were no Scottish authorities concerning the removal of an administrator to rely on.
The Judge was guided by case law derived from the courts of England and Wales. In particular, the Judge referred to a summary of cases in Re Fox Street Village Ltd where it was confirmed that “the court must have good grounds for making such and order” and that “good and sufficient” should be determined based on the purpose of office and the facts of the case.
In some cases, this will involve failure by the office holders to adhere to their statutory functions and duties, but it may also arise in cases of conflict of interest or duty.
As the typical case for removal arises from the administrators’ conduct, the issue before the court was how to approach the question where there had been no allegations of wrongdoing on the part of the administrators.
With regard to the test for “good and sufficient” under paragraph 88
senior counsel for the Applicant outlined the principles in Re Fox Street in relation to the facts of the case, arguing that:
- Paragraph 88 is not ‘unqualified’, meaning good grounds must be established;
- In determining what are “good and sufficient” grounds the court must refer to the intention of the office holders and the facts of the case;
- As a general rule, the grounds for removal will arise from the conduct of the administrator; and
- Although such grounds did not exist in this case, the incumbent administrators did not object to being replaced.
It was emphasised that there had been no criticism in relation to the conduct of the administrators but a disagreement on the preferred exit route and how to finance that route, which subsequently led to the application.
The court considered whether the Applicant’s proposal would benefit the creditors by leading to a substantial recovery of funds more so than the administrator’s dissolution proposal and whether this application would encourage an influx of applications requesting the removal of administrators.
Decision
The court applied the “good and sufficient” test to make the order but approached this with caution so as to not encourage a “flurry of applications” requesting office holders’ removal. The Court specifically considered that the following submissions made by the Applicant’s counsel were relevant:
- The Company and the Applicant’s parent Company (Frasers Group) are both public limited companies;
- Substantial sums had been invested into the Company by the Applicant based on healthy financial reports published by the Company – there had been no indication the Company was struggling;
- The Applicant faced a significant shortfall on its investment;
- It had subsequently been alleged that the directors may have been responsible for financial irregularities and improper conduct;
- It seemed likely that it was appropriate for the Company to move from administration to compulsory liquidation so that an investigation into the conduct of the directors could be carried out;
- Claims of financial misconduct could be more easily investigated by an office holder, who would have access to books and records, than by the creditors themselves;
- The Applicant was willing to bear the costs of funding an investigation by a replacement administrator (who would presumably subsequently become liquidator) and all creditors would potentially benefit from the replacement;
- Should the Company be dissolved, any potential claims would be lost; and
- Finally, due to the unusual circumstances, a decision to allow the removal and replacement of the administrators was unlikely to open the floodgates to more of these types of applications.
Additionally, the court was satisfied that the Applicant was only interested in uncovering the alleged wrongdoing that led to the downfall of the Company and there was no hidden agenda or an attempt to delay matters.
In light of this, the court granted the order sought, removing the administrators and appointing a replacement.
Conclusion
Whilst this case was decided before the courts of Scotland, the reliance on English case law makes it a useful illustration of the court’s likely approach to a similar question if it arose before the courts of England and Wales.
The revelation of the Company’s financial irregularities to the creditors, even though the Company had been making positive representations about its performance, was enough to warrant further investigations with the aim to recover more funds for the creditors and make up their losses. For this reason the court found it would be difficult to argue that the Applicant’s request for a replacement administrator was ‘unreasonable’.
The Applicant’s losses were considerable and warranted investigation, but the issue shared by the parties were the costs involved in carrying this out. As the applicant provided a replacement administrator and an agreement to fund their enquiry the parties had solved the issue themselves without the court’s interference.
This was a sufficient reason for the court to decide the application in favour of the Applicant, in particular, because it appeared to propose an exit route which would be most beneficial to the creditors. It was clear that further investigations were required to ascertain how the Company reached its collapse, and whether the directors were liable, and that this investigation could lead to more money being returned to the creditors.
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