Insolvency administrator’s burden

The role of an administrator was brought into sharp focus recently in the case of Cytonn High Yield Solutions LLP (in Administration) v Official Receiver [2023] KEHC 16 (KLR), which involved the administration of a limited liability partnership that was unable to repay certain investments that had matured. An administrator may be appointed by, among others, the company (this is defined in the Insolvency Act of 2015 to include a limited liability partnership) or its directors, and the appointers file the notice of the administrator’s appointment together with other prescribed documents with the High Court for the appointment to be effective. The documents to be filed include a statement that confirms that the administrator consents to the appointment and that in the administrator’s opinion the objective of the administration is reasonably likely to be achieved.

12 Apr 2023 2 min read Business Rescue, Restructuring & Insolvency Newsletter Article

At a glance

An administrator may be appointed by a company or its directors, and their appointment must be filed with the High Court along with other required documents. The administrator's consent and belief that the objective of the administration can be achieved are necessary for the appointment to be effective.
The administrator has duties and powers granted by the Insolvency Act, including the ability to remove and appoint directors and perform management functions. They must act in the interest of the company's creditors, with the primary objectives of maintaining the company as a going concern or liquidating it if necessary, while realizing property for distribution to secured or preferential creditors.
If a creditor is dissatisfied with the administrator, they can apply to the court for removal based on allegations of improper motive. The court in the Cytonn case found that administration can be considered to have an improper motive if it fails to achieve its purpose or shows complacency in meeting the objectives within the prescribed 12-month period. The ruling highlights the increased pressure on administrators to conclude the administration process within the designated timeframe.

The administrator must give prior consent to their appointment and it will invariably be the case that the person appointing the administrator will inform the administrator about the state of the company and their proposed appointment before it occurs. In the Cytonn case, although the nature of the administrator’s alleged dealings with the company were not elaborated upon, the ruling suggests that extra care must be taken to disclose to the court engagements leading to the appointment to avoid imputation of bias.

The Insolvency Act, 2015 grants an administrator numerus duties and powers, including the administrator’s ability to remove and appoint directors or to consent to the performance of management functions by directors. In performing their work, the administrator must do so in the interests of the company’s creditors as a whole while remembering their primary objectives (i) to maintain the company as a going concern; (ii) to liquidate the company if such maintenance is not possible and if it achieves a better outcome for the company’s creditors as a whole; and (iii) to realise the property in order to make a distribution to the secured or preferential creditors if the first two objectives cannot be achieved.

A creditor who is unhappy with the administrator can apply to court for the removal of the administrator on an allegation of improper motive. Improper motive should only be alleged on the part of the person who appointed the administrator or, in the case of an administrator appointed by the court, on the part of the applicant for the order.

The ruling in the Cytonn case indicated that the administrator was appointed by the company and not by the court, but, this notwithstanding, the allegations of improper motive were successfully made against the administrator with the court finding that “improper motive” is achieved when administration is carried out in a way that defeats the purpose of the administration. In the court’s view, the purpose of administration is defeated when it reaches the conclusion that nothing substantial has been done or there is perceived complacency in achieving the objectives of administration within the 12 months prescribed for administration.

Despite the shortcomings that arise from the ruling in the Cytonn case, it points to an increased demand and burden on an administrator to resolve and conclude the administration processes within the prescribed 12-month period, or to demonstrate that they have done all that could be done to warrant an extension of the administration. It is likely that an appeal will be made against the ruling given the thorny path that was followed to order the liquidation of the company following expiry of the administration.

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