Fruitless unsecured member claim in LLP administration insufficient to put administrators through examination

In Berntsen & Anor v Tait & Anor [2014] the administrators of Coniston Hotel (Kent) LLP (the “LLP”) sought an order that the Applicants’ proceedings be struck out and that the Applicants’ claim be dismissed.

The Applicants were the LLP’s members. The LLP’s hotel, the Coniston Hotel, at Sittingbourne needed further funds to enable it to complete works and to open for business. The LLP’s Bank, National Westminster Bank PLC, was not prepared to lend more without personal guarantees from one or both Members. The Members would not give them.

The Members put the LLP in Administration with the Respondents appointed as Administrators.

The Administrators sold the Hotel to West Register Limited, an associated company of the Bank.

The Claimants alleged that the Hotel was worth in excess of £7 million and had been sold for £4.25 million, which was an undervalue. They could not criticise anything specific in the marketing and sale process itself but said that the marketing process was a “sham” leading to a sale to a predetermined purchaser, which for non specific reasons, was part of a conspiracy to defraud by members of the Bank, the Valuer and the Administrators. Those who suffered from the alleged conspiracy were the LLP and, indirectly, therefore, the Members.

Rejecting the undervalue and conspiracy claims as “unviable”, and ordering the proceedings to be struck out, the court said the costs would have been significant and Members had evidenced an inability to pay the Respondents’ costs.

The final allegation, under paragraph 75 of Schedule B1 to the Insolvency Act 1986, was that the Administrators had handled the Administration badly. But their pleading had not identified any of that mishandling. However in order for the Members in this case to bring the claim, whether in the capacity of Members or as creditors, they had to show they had a “sufficient interest” in the remedy which was being sought. Here that remedy was that the Administrators pay compensation to the LLP, which might mean the Administrators remitting some or all of their fees (£130,000). However those fees could only be distributed, first to the secured creditors i.e. the Bank. As the Bank was owed over £1 million any such recovery by the LLP would be for the exclusive benefit of that secured creditor. Nothing would be paid to unsecured creditors. or the Members. So the Members did not have the necessary pecuniary interest in the remedy they were seeking. to qualify to make that claim. Their human interest in seeing the Administrators subjected to a trial did not give them standing to bring an examination claim. So the court dismissed that claim also.

This blog has been posted as a matter of general interest. It does not remove the need to get bespoke legal advice in individual cases.