Alternative investments may offer attractive rates of return, but they should never be entered into without professional advice. A High Court case concerning numerous small investors who staked their life savings on the success of an ill-fated hotel development served as a cautionary tale.
With a view to obtaining long leases of hotel rooms when the project was complete, the investors paid deposits totalling about £4 million. The building work was, however, less than 70 per cent complete when the company behind the development entered administration.
The building was mortgaged to a lender who was owed around £8.36 million and enjoyed the status of a secured creditor. The investors were unsecured creditors and would therefore stand last in line when it came to distributing any money the company’s administrators raised by selling its assets.
In seeking judicial permission to sell the building in its incomplete state, as if it were mortgage free, the administrators acknowledged that taking that course was likely to result in the investors receiving nothing. The investors resisted the application on the basis that more should be done to find a third-party investor who might purchase the property, complete the hotel and run it as a going concern.
Ruling in favour of the administrators, the Court accepted that, in the absence of other viable options, their proposal represented the best course of action currently available. Despite expressions of interest, no confirmed offer from a third-party investor had been forthcoming that was acceptable to the lender and the building was in the meantime empty and deteriorating.
Two of the investors had obtained money judgments against the company that had been secured against the building. However, their claims too would rank lower in priority than that of the lender, who held fixed and floating charges over the property. The Court expressed immense sympathy for the investors and noted that the administrators had agreed to explore any further proposals made by a third-party investor prior to the property’s sale.