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In Capital Partners II Master LP Inc, Re Pillar Securitisation Sarl v Spicer and Shinners [2010] EWHC 836 (Ch) the court was faced with an application to remove administrators of a Guernsey limited partnership.  The decision is notable mainly for two reasons.  First, the court revisited the Centre of Main Interests ("COMI") test.  Second, it re-emphasised the procedural requirements for appointing of an out of court administrator.  However, the case as a whole is perhaps an interesting illustration of how a dissatisfied creditor should be careful what it wishes for - lest that wish be granted.

Background

Kaupthing Capital Partner II Master LP ("Master") was a limited partnership established in Guernsey, and with its registered office in Guernsey.  It was a special purpose vehicle, used in connection with an investment fund known as Kaupthing Capital Partners II.  The general partner of Master was KCP II (GP) Limited ("KCP"), an English registered limited partnership.  It had four limited partners which acted as feeder funds for different types of investor.  The fund had been set up to allow employees and other involved in the Kaupthing group of companies to invest alongside the ultimate parent of the group, the Icelandic bank, Kaupthing Bank hf.  Unconnected third parties were also able to invest through the feeder fund known as the Main Fund.

Under the Limited Partnerships (Guernsey) Law 1995 (the "1995 Law"), a Guernsey limited partnership is able to elect to become a legal personality in its own right.  Master had made such an election.

Master was financed by Kaupthing Bank Luxembourg SA ("BankLux").  On 7 October 2008, Kaupthing Bank hf entered into formal insolvency proceedings in Iceland, triggering a wave of further formal insolvencies across the group  On 8 October 2008 BankLux made demand on Master for repayment of its £67 million credit facility.  Master was unable to meet this demand.  On 9 October 2008 KCP, the general partner, accordingly appointed English law administrators to Master, using the out- of-court procedure in Schedule B1 of the Insolvency Act 1986, on the basis that it was unable to pay its debts as they fell due.  On the same day they were also appointed administrators of KCP.

BankLux was also placed into insolvency proceedings in Luxembourg on 9 October 2008, and was subsequently restructured.  Pillar Securitisation S.a.r.l was created as a result of this restructuring, and took over Pillar's debt to BankLux, representing 99.4 per cent of its total unsecured indebtedness.  Another 0.4 per cent was owed to two other creditors, Candesic Limited and Redgrave Partners LLP.

The Application

Towards the end of the administration, a difference of views emerged between the administrators and these creditors as to the considerations which the administrators should take into account when selling one of Master's remaining two assets, a debt owed to it by Kaupthing Singer & Friedlander Limited ("KSF").  This resulted in the creditors applying to court for the administrators to be removed from office.  However, they seem to have taken the view (correctly as it transpired) the application for removal might not succeed, and that an attack on the administrators' original appointment might therefore prove more fruitful.  

A slightly strange application therefore emerged.  Some 18 months into the administration, a group of creditors who had previously voted to extend the administration at the end of its initial year now sought to argue that the entire administration had been invalid from the outset (as well as arguing, in the alternative, that the even if the appointment had been valid, the administrators ought to be removed).

The creditors argued that the appointment was invalid on two separate grounds, which can be described, for convenience, as the "COMI arguments" and the "procedural arguments".

The COMI arguments

Under the EC Council Regulation on Insolvency Proceedings (1346/2000/EC) (the "EC Regulation"), the English Court has jurisdiction to open administration proceedings in respect of a foreign-registered debtor provided its COMI is within the United Kingdom.  The creditors asserted, however, that Master's COMI was in Guernsey and that therefore the Court had had no such jurisdiction.

For these purposes, it is immaterial whether the administration application is made to a judge or whether, as here, the out-of-court procedure is used.  Indeed Annex A of the EC Regulation specifically provides that administration includes appointments made by filing prescribed documents with the Court.  Similarly, it has been well-established that the application of the EC Regulation is not restricted to debtors registered in other EU Member States.

The test to be applied for establishing COMI was clarified by the European Court of Justice in Eurofood IFSC Limited [2007] BCLC 150, and more recently explained by the English Court of Appeal in Re Stanford International Bank Limited [2010] EWCA Civ 137.  The judge observed that it was common ground that the principles to be applied were as follows:

• There is a presumption that the debtor's COMI is in the state where its registered office is located.
• This presumption can be rebutted only by factors which are both objective and ascertainable by third parties.  Thus the court is to have regard to factors already in the public domain, or which would be apparent to a typical third party doing business with the debtor, excluding such matters as might only be ascertained on inquiry.
• Accordingly, the place where the body's head office functions are carried out is only relevant if so ascertainable by third parties.
• Each body or individual has its own COMI; there is no COMI constituted by an aggregation of bodies or individuals.

In this instance, the court thought it was clear that, although Master was registered in Guernsey, all of its functions were carried out in London on its behalf by the other Kaupthing entities to which it had delegated both administrative and investment management functions.

The important question for these purposes, however, was whether this would have been apparent to third parties doing business with Master.  This begged the further question as to who were the relevant third parties.  The court accepted that Master's investors would know that all of its business functions were undertaken in London, but held that they were not the sort of third parties who were relevant and that the ECJ in Eurofood or Court of Appeal in Stanford had in mind.  They were "insiders" within the partnership, akin to shareholders of a company, rather than persons doing business with the partnership.

The court took the view, however, that Master's creditors were a very important class of third party.  It was clear from copy invoices shown to the court that the creditors, making the present application, communicated with the English operating companies at their London offices.  The court held that it must have been apparent to the creditors that, whilst their debtor was Master, all of its functions were begin carried out on its behalf in England.

The registered office presumption of COMI was duly rebutted, and Master's COMI was in fact in the United Kingdom.  As such, the English court had jurisdiction to open administration proceedings under the EU Regulation.

The procedural arguments

In appointing the administrators, KCP had used Form 2.10B.  This was the form prescribed by Rule 2.23(1) of the Insolvency Rules for an out-of-court appointment in respect of a company by the company itself or its directors.  The creditors contended, however, the Master was a partnership so should have used a different form, Form 1B.  They argued that because the wrong form had been used, the appointment was invalid.

The court emphasised paragraph 29 of Schedule B1 to the Insolvency Act 1986, which provides that on an out-of-court appointment, the notice of appointment and any document accompanying it must be in the prescribed form.

The court also noted that the Insolvent Partnerships Order 1994 applied the provisions of Schedule B1, with appropriate modifications, to insolvent partnerships.  Crucially, the modified version of paragraph 29 provided that the notice of appointment of an administrator to a partnership must be in Form B1.

The administrators argued that Master was capable of being a company under the relevant definition for these purposes, which is contained in Paragraph 111 (1A) of Schedule B1.  This provision makes it clear that a "company" included a company not incorporated in an EEA State but having its COMI in an EU Member State other than Denmark.  The word "company" is not further defined for this purpose.  On the evidence, the court was prepared to accept that Master was a body corporate, but was not prepared to accept that it was a company.

The administrators also argued that that, as Master was a body corporate with its own legal personality, it was a hybrid between a company and a partnership, and the court ought to apply beneficial construction to the rules on forms in these circumstances.  However, the court was not prepared to accept that there was any such thing as a hybrid for these purposes.

The court therefore held that it would be more appropriate to use the form prescribed for partnerships by the Insolvent Partnership's Order 1994, irrespective of the fact that KCP itself has considered this question before making the appointment and concluded the Form 2.10B was a better 'fit'.

Since use of the correct form was mandatory, the appointment was invalid.  The court also stressed that it had no power to correct a fundamental flaw in the appointment itself.  It only had the power to grant correct errors once insolvency proceedings had begun, which could not have occurred where there was an invalid appointment.

What happened next?

The court was conscious that a finding that the appointment was invalid would have draconian effects, although Counsel for the creditors did observe that third parties who had dealt with the administrators were likely to be able to rely upon a defence of bona fide purchaser without notice of the invalidity.  This meant that third parties who had dealt with the administrators ought to be unaffected.

Whilst it was within the jurisdiction of the court to make an administration order dating back to October 2008, the time of the original appointment, this would be of little practical use.  The appointment of an administrator automatically ceases to have effect at the end of one year, so would already now have terminated.  Whilst the court had the power to extend an administration order, it had no power to extend retrospectively.

A possible alternative was to make an administration order dating back only 364 days.  However, this would not assist the administrators, since they had no standing of their own to seek such an order.  KCP would have the standing to do so, and the administrators of Master were also currently the liquidators of KCP.  However, the court was unprepared to consider such an application at that time since there was no evidence before the court that such an order would be in the interest of KCP, rather than in the interests of the administrators personally.

The court suggested that any fresh application should be left over for "mature consideration" and further argument on a different day.  

Analysis

In the event matters took an interesting course.  It is understood that the original administrator have now been appointed afresh by the same creditors who sought their removal, because it proved impossible in practice to complete the realisation of Master's assets by any other means.

The Court's decision that the administration was invalid hinged on a choice between two forms which are almost identical in substance.  However, it might also be seen as a cautionary tale.  Where the circumstances of the appointment are complicated, whether because the entity concerned is difficult to pigeonhole or otherwise, a court appointment may be the only safe alternative.  Note to author - might not the decision be criticised as a triumph of form over substance.  Would the Court of Appeal necessarily take such a narrow approach?  Could not the Court have [pragmatically] construed the partnership as equivalent to a limited liability partnership which is treated as a company for the purposes of Schedule B1 so that Form 2.10B could have been used?  Perhaps you could comment on this.

The case is a helpful one in respect of COMI issues in that it examines in some detail the question of who constitutes the relevant "third parties".  The court's conclusion that creditors, rather than investor or shareholders, are the key third parties to consider here is logical, and confirms practitioners' expectations.

The eventual outcome, with the original administrator being appointed, perhaps also serve as a cautionary tale for creditors seeking to attack the appointment of an administrator.

Simon Beale is a solicitor in Macfarlane's Banking and Finance Department and is the author of "The Insolvency and Restructuring Manual", published in 2009.

Source:

"Appointing out-of-court administrators to an overseas entity".  Page 14, Number 3, Volume 3 (i.e. 2010) of "Bankers' Law".