Intercontinental Hotels Group’s Exit: Receiver/Manager’s Analysis of Discretion to Repudiate Pre-Receivership Contracts

“THE FINANCIAL WOES OF MILAN CAME INTO LIMELIGHT IN MAY, 2017, WHEN A FEDERAL HIGH COURT ORDERED THE TAKEOVER OF THE HOTEL BY A RECEIVER/MANAGER APPOINTED BY SKYE BANK PLC”

Dr. Kubi Udofia, discusses the matter of Intercontinental Lagos Hotel now rebranded Lagos Continental Hotel, which was taken over by a Receiver/Manager in May 2017 by virtue of an order of the Federal High Court. He looks at the Insolvency Procedure, examines the Receiver/ Manager’s power to repudiate contracts, and the remedies which may be available to prereceivership counter parties when contracts are terminated Introduction

Intercontinental Lagos Hotel has been rechristened “Lagos Continental Hotel”. The renaming of the 358-room five-star hotel, followed the termination of a six-year Hotel Management Agreement (“HMA”) between the hotel owners, Milan Industries Ltd (Milan) and Multinational Hotels Company, Intercontinental Hotels Group (“IHG”). On 3 January, 2018, IHG issued a notice of termination of the HMA with effect from 18 January, 2018. IHG alleged non-cooperation by Milan’s Receiver/Manager, in ensuring that the hotel avoided a material breach of the HMA and maintained its operating licence. IHG further alleged Milan owed IHG NGN995,223,818 in fees.

The financial woes of Milan came into limelight in May, 2017, when a Federal High Court ordered the takeover of the hotel by a Receiver/Manager appointed by Skye Bank Plc. Court processes showed that Skye Bank granted Milan loan facilities of US$29.8million and NGN3.8billion and an overdraft facility of NGN500million. The facilities were to finance the construction of the hotel. The loans were secured by a deed of legal mortgage which covered the hotel. Milan reportedly defaulted, resulting in the appointment of the Receiver/ Manager.

Mechanics of Hotel Management Agreements

From my experience in providing legal services in two different HMA deals involving one of the world’s biggest hotel brands; there is often an instinctual tension between owners and managers. This may be attributed to divergent interests. While owners seek to minimise operational costs, managers often prioritise maintaining brand standards, notwithstanding the costs. Further, managers often insist on payment of their fees, irrespective of the hotel’s financial state. This scenario played out in the IHG/Milan case. Whilst IHG alleged that Milan owed NGN995,223,818 in fees, the Receiver/Manager claimed that NGN170million had been paid to IHG in six months, and the hotel could not sustain IHG’s monthly charges of NGN40million. Also, while owners are often keen to retain some control over the hotel’s operations, managers often resist such interferences.

Leading hotel brands have template HMAs, which hotel owners are pressured to accept with minor alterations. A typical HMA, obligates the manager to manage the hotel in accordance with its brand standards and agreed budget. The manager receives management fees and licence fees, for the use of its intellectual property.

Commencement of an insolvency procedure usually constitutes a material breach, entitling a counter party to terminate the HMA. IHG had claimed that clause 16.1 of the HMA gave IHG a right of termination on the appointment of a Receiver over the assets of Milan. IHG was therefore, entitled to terminate the HMA on 11 November, 2016 when the Receiver/Manager was reportedly appointed by Skye Bank. Instructively, HMAs often provide that delay in exercising a right, does not constitute a waiver of such right. Once terminated, a manager will withdraw its services and parties would embark on de-flagging or de-identification i.e. removal of all marks of the manager from the hotel’s properties. The rechristening of “Intercontinental Lagos Hotel” to “Lagos Continental Hotel” is part of this process.

Receiver-Manager’s Power to Repudiate Contracts

A Receiver’s appointment, does not automatically terminate a company’s contracts: George Barker Ltd v Eynon (1974) 1 WLR 462 at 471, Babington-Ashaye v EMAG (2011) 10 NWLR (Pt 1256) 479 at 519H. However, a contract may make such appointment a material breach, giving the counter party a right to terminate. In the IHG/Milan case, clause 1.6 of the HMA reportedly entitled IHG to terminate the HMA upon the appointment of a Receiver over the assets of Milan.

Under common law, a Receiver is not obligated to honour all pre-receivership contractual obligations: Land Rover Group Ltd v UPF (UK) Ltd (2003) 2 BCLC 222 at 236[55]. As an agent of the company, the Receiver may (just as the company would have done) repudiate a contract: George Barker Ltd v Eynon (supra) at 471. Indeed, a Receiver may use the threat of repudiation as a bargaining chip for extracting favourable terms from a counter party. In Re TransTec Automotive Ltd (2001) BCC 403, a company which made and supplied 50% of Ford’s cylinder heads went into receivership. The Receivers demanded for a significant price increase. Jacob J held that the Receivers had acted properly, notwithstanding their exploitation of Ford’s vulnerability.

Section 393 of the Companies and Allied Matters Act, 1990 (CAMA) provides for the Receiver’s powers. The Eleventh Schedule has a list of powers deemed to be conferred on a Receiver/Manager by a debenture under which he is appointed. Unlike Liquidators, Receivers are not expressly empowered to “disclaim” executory contracts. Nonetheless, Receiver/ Managers are not barred from terminating pre-receivership contracts. Just like companies may repudiate contracts prior to receiverships, Receiver/Managers (as agents) may also do so. Further, Receiver/Managers are empowered to do all things “incidental” to the exercise of the powers in the Eleventh Schedule. A Receiver/Manager may repudiate a pre- receivership contract in exercise of this incidental power.

Remedies Available to Pre-Receivership Counter Parties

Damages

Where a Receiver causes a company to repudiate contracts, the counter party is entitled to damages against the company: Airlines Airspares Ltd v Handley Page Ltd (1970) 1 All ER 29 at 31. Generally, a Receiver is personally immune from claims arising from a company’s contract. First, under common, law a Receiver is an agent of the company: Re B Johnson & Co Ltd (1955) 2 All ER 775 at 779. In Gomba Holdings UK Ltd v Minories Finance Ltd (1989) 5 BCC 27 at 29C-H, Fox LJ explained that a receiver acts as an agent for the company – having the power to engage the company’s position by acts which, though done to the benefit of the debenture-holder, are treated as acts of the company. It is trite that an agent acting bona fide and within the scope of his authority, cannot be personally liable for inducing breach of contract or breach of contract: Said v Butt (1920) 3 KB 497 at 505-506; Lathia v Dronsfield Bros Ltd (1987) BCLC 321 at 324(b)-(c).

Second, section 390(1) of CAMA deems a Receiver/ Manager an agent of the person on whose behalf he is appointed. The general practice, is for the debenture deed to empower the debenture-holder, as agent of the company, to appoint a Receiver-Manager. This practice was highlighted by Karibi-Whyte JSC in Intercontractors Nigeria Ltd v UAC (1988) 2 NWLR (Pt 76) 303 at 322G where his Lordship stated that: “the Receiver/Manager is usually appointed the agent of the company, as was done specifically in this case”. See also Unibiz Nigeria Ltd v CBCL Nig Ltd (2001) 7 NWLR (Pt 713) 534 at 542C, NBCI v Alfijir Nigeria Ltd (1993) 4 NWLR (Pt 287) 346 at 357D-E, 357G, UBN Ltd v Tropic Foods Ltd (1992) 3 NWLR (Pt 228) 231 at 244D, Intercontractors Nigeria Ltd v NPFMB (1988) 2 NWLR (Pt 76) 280 at 292E. The Receiver would only be personally liable, where he acts outside the scope of his authority: SEAPS Ltd v Ogunnaike (2008) LPELR 8470 (CA) at 21-22C-A; Tanarewa Nigeria Ltd v Arzai (2005) 5 NWLR (Pt 919) 593 at 641. Specific performance

A counter party may seek for an order of specific performance compelling a Receiver/ Manager to perform pre-receivership contractual obligations. Specific performance would be ordered where damages is not sufficient remedy. The contract in Land Rover Group Ltd v UPF (UK) Ltd (supra) at 235[52] involved the production of specific goods as opposed to generic goods. Norris J held that specific performance was a suitable remedy. In Ash & Newman Ltd v Creative Devices Research Ltd (1991) BCLC 403 at 405 Harman J reaffirmed an injunction restraining a company in receivership, from violating a pre-emption contract and restriction on sale to third parties. In Freevale Ltd v Metrostore Ltd (1984) BCLC 72 at 81-82 the court ordered the Receiver to transfer an outstanding legal estate in perfection of an equitable interest already vested in a purchaser of land.

Courts will not compel Receiver/Managers to perform pre-receivership contracts as a matter of course: Airlines Airspares Ltd v Handley Page Ltd (supra) at 32. Doing so would frustrate the objective of receiverships, as most counter parties would often seek for this remedy.

Sometimes, a Receiver’s repudiation of a contract may injure the company’s business and goodwill. Under common law, a Receiver has no duty to the company to preserve its business and goodwill: Re B Johnson & Co Ltd (1955) 2 All ER 775 at 783. Consequently, an order of specific performance, may not be made merely to protect a company’s business and goodwill. In realising the security, the Receiver may take actions which may damage the company’s business: Airlines Airspares Ltd v Handley Page Ltd (supra) at 31. The foregoing is premised on the ground that the Receiver’s primary duty is to the debenture- holder: Lathia v Dronsfield Bros Ltd (supra) at 333(d)-(e).

Under CAMA, a Receiver-Manager may not deal with pre-receivership contracts in a manner which may damage the company’s business and goodwill. The Manager is deemed to stand in a fiduciary relationship with the company, and must observe the utmost good faith in transactions on behalf of the company: section 390(1). The Receiver/Manager is required to act in what he believes to be the best interests of the company so as to preserve its assets, further its business, and promote its objects: section 390(2)(a). Further, section 390(2)(b) requires a Receiver/ Manager, in considering whether a particular transaction or course of action is in the company’s best interest, to have regard to the interest of the company’s employees and members. Instructively, CAMA has placed Receiver/ Managers in the same position as Directors, given that both have similar fiduciary duties to the company: see sections 279(1), 279(3) and 279(4) of CAMA. It seems awkward that fiduciary duties are imposed on Receiver/Managers, whose primary responsibility is to protect interests of debenture holders.

Conclusion

A Receiver/Manager may disregard pre-receivership contracts, where this will ultimately further the realisation of the security. However, the Receiver/Manager must be cautious not to act in wanton breach of his fiduciary duty to the company. An injured counter party has remedy in damages against the company, or, in appropriate cases, an order of specific performance.