Appointment of interim receivers over deceased insolvent estates: Eternity Sky Investments Ltd v Zhang Zhenxin (deceased) [2023]

Introduction

In this case the court considered the test for appointing an interim receiver over a deceased insolvent estate. The court found that it would be appropriate to appoint an interim receiver in circumstances where: (1) it is likely that an administrator will be appointed; (2) proportionate security for costs has been provided; (3) the appointment is necessary to protect the deceased’s property; and (4) it is right in the circumstances for the court to exercise its discretion to appoint an interim receiver.

Background

Mr Zhang Zhenxin, (the “Deceased“) died on 18 September 2019. Following his death, the Deceased’s estate remained unrepresented. There were dealings with assets within the Deceased’s estate following his death. Details of the Deceased’s estate and the dealings with it were unclear.

Eternity Sky Investments Limited (“Eternity Sky“) claimed to be owed debts in excess of £50,000,000 arising from obligations under a personal guarantee entered into by the Deceased. On 22 December 2022, Eternity Sky presented a petition pursuant to the Administration of Insolvent Estates of Deceased Persons Order 1986 seeking an administration order.

On 4 October 2023, Eternity Sky brought an application seeking the appointment of interim receivers over the Deceased’s estate. Eternity Sky offered an undertaking in the usual form. Under s286 of the Insolvency Act 1986 (“IA 1986“), the court can appoint an interim receiver. The conditions for appointing a receiver are:

1. A petition has been presented but no final order made; and
2. It has been demonstrated to the satisfaction of the court that:
   1. The debtor’s estate needs protection; and
   2. In order to protect the estate it is necessary to appoint a receiver.

The Deceased’s wife (“Mrs Zhang“) opposed the application on the following grounds:

1. the relevant rules had not been followed (although this was not argued before the court);
2. Eternity Sky could not show that it’s application for an administration order would succeed;
3. it was not necessary to appoint receivers;
4. there was no urgency; and
5. appointing receivers would cause significant prejudice to the estate.

The evidence presented to the court showed that it was likely that the Deceased’s estate was insolvent, although the full extent of his assets and liabilities was not known.

Issue

The issue before the court was whether it should appoint an interim receiver over the Deceased’s estate before an administration order had been made.

Decision

The judge considered the provisions of IA 1986 and the Insolvency Rules 2016 (IR 2016). In particular, the court had regard to s286 IA 1986 and rules 10.49-10.56 IR 2016. The judge also considered whether the test governing the exercise of the court’s discretion set out in American Cyanamid applied and held that it did not, on the basis that the legislation provided its own rules.

On this basis, the judge held that when determining whether to appoint an interim receiver over a deceased estate, the court must be satisfied that:

1. the debtor is unable to pay their debts, leading to the conclusion that the appointment of a trustee in bankruptcy or insolvency administrator is likely;
2. proportionate security in respect of the costs and remuneration of the interim receiver has been or will be provided;
3. the appointment is necessary for the protection of the debtor’s property; and
4. the exercise of discretion favours an appointment, i.e. it is right in the circumstances to appoint an interim receiver.

The judge then considered each of the different criteria, with reference to the evidence before the court.

On this basis, the judge considered that the estate was balance sheet and cash flow insolvent.

In addition, Eternity Sky had provided a suitable cross undertaking in damages. The undertaking was in the usual form and the judge did not consider it material that it had only been provided late in the day.

The judge further concluded that an interim receiver was necessary to protect the estate because:

1. there was a lack of visibility in relation to the extent and value of the estate;
2. Mrs Zhang had not provided information or undertakings when asked;
3. there had been dealings with assets of the estate following the death of the Deceased; and
4. Mrs Zhang had expressed an intention to continue dealing with the assets without reference to all stakeholders.

In relation to whether it was appropriate to exercise the court’s discretion, the judge considered the potential disruption to the estate and found there was no risk of this. The judge also considered whether the costs associated with the appointment of interim receivers should justify not appointing them. Here the judge was satisfied that as the court has control over their remuneration, this was not a bar.

Conclusion

This case confirms the approach that the court will take when asked to appoint a receiver over a deceased insolvent estate and highlights the factors the court will consider when conducting its assessment.

Where there is a risk that the value of an insolvent deceased estate will fall in the interim period before an appointment is made, the possibility of appointing an interim receiver should be considered, although the benefits of such must be weighed against the costs (in particular the need to give a cross-undertaking in damages).