How A Creditor Can Fail To Get An Administration Order

Overview Of How A Creditor Can Fail To Get An Administration Order

If you are a creditor who wishes to place a company into Administration you need to ensure that a) you are a creditor and b) that the company’s liability to pay you has crystallised before you concern yourself with matters of insolvency and the statutory purpose being engaged.

If you had to subscribe to Bailii, the Chancery reports coming out this year so far have been arguably somewhat arid and not quite reaching the threshold for ‘popcorn’ value. There has been the odd one here and there but the volume of robust judgments simply has not been evident. You might have even been tempted to let such a subscription lapse.

In the matter of Interactive Digital Systems Ltd v VST Enterprises Ltd [2021] EWHC 887 (Ch) in which a creditor issued an application for a company Administration Order, it again did not quite cut the mustard and get into ‘popcorn’ territory. However, what it did do was get into some reasonably technical areas when considering the creditor’s application for a company Administration Order.

The class of creditor that had issued the application for the company Administration Order was not the norm being a contingent creditor, there was an extant winding-up petition that had been issued by shareholders on a ‘just and equitable’ basis under Section 122(g) of the Insolvency Act 1986 and the company accounts that sprouted in the evidence had some curious features.

Whilst clearly not front row of the stalls stuff, nevertheless some sufficiently distinct aspects that you might make you pop your head in for a quick look, take note and then off back to enjoying the sunshine.

A Matter Of Balance: How A Creditor Can Fail To Get An Administration Order

This was a case all about balance from start to finish.

The dominant issue at large was the matter of whether or not the Court would exercise its discretion in favour of the applicant creditor and grant the company Administration Order. It chose not to do so.

Remarkably there was a reference to a balance sheet that did not balance – more about unbalanced balance sheets later.

The arguments were finely balanced in a case that engaged all the advocates in the apparent view of the judge with some admiration for their notably able submissions. He referred to Louis Doyle QC and Robert Mundy putting together a “powerful case“. Both these Counsel have acted for our CEO, Elliot Green in the past.

As for the outcome, this was a case that really was in the balance. It seemingly could so easily have gone either way.

What Is A Company Administration Order?

A company Administration Order is an order made on an application put before the Court for a company to be placed into Administration. It is known as the Appointment Of Administrator By Court as opposed to the Out of Court appointment route, which is much more common.

The Contingent Creditor

The applicant was a contingent creditor because of a Settlement Agreement entered into in 2020 after having issued a winding up petition against the respondent company in 2019.

It appears acknowledged that a contingent creditor can issue a company Administration Order application:

Paragraph 12(1)(c) of Sch. B1 allows for an administration application to be made by “one or more creditors of the company”. Paragraph 12(4) provides that the reference to creditor “includes a contingent creditor and a prospective creditor”. It was held by Buckley J in Stonegate Securities Ltd v. Gregory [1980] 1 Ch 576 at 579 that a contingent creditor is “a creditor in respect of a debt which only becomes due on an event which may or may not occur” (in contrast to a prospective creditor where the contingency is one that will, as opposed to may, happen in the future).

If the court is satisfied that: (a) the applicant for an administration order does have standing, here that it is a contingent creditor of the company; and (b) the company is or is likely to become unable to pay its debts; and (c) that the administration order is reasonably likely to achieve the purpose of administration, then it has a discretion as to whether or not to make an administration order. As Sir Geoffrey Vos C (David Richards LJ and Asplin J agreeing) said in Rowntree Ventures Ltd v. Oak Property Partners Ltd [2017] EWCA 1944 (Civ) at [24]:

It is necessary first in my judgment to understand that the discretion provided to the court in para.13 of Sch.B1 is of a wide and general nature. It is not constrained in any way. Any appellate court considering a particular exercise of such a discretion must ensure that nothing it says operates so as to cut down the width of the statutory discretion that parliament has given to the court. The effect of this proposition is that a multitude of factors may properly be taken into account in deciding in any particular case whether it is appropriate to make an administration order when the two statutory pre-conditions have been held to be fulfilled. Nothing that I say today should be taken as limiting the factors that can properly be considered. The circumstances are likely to be infinitely variable. The interests of secured creditors, preferential creditors, unsecured creditors and the company itself will change from case to case.

Insolvency: How A Creditor Can Fail To Get An Administration Order

The most recent filed accounts for the respondent company showed that it was balance sheet insolvent. The net balance sheet deficiency was £2,311,028.

A Balance Sheet That Did Not Balance

Counsel for the respondent Company, Ms Lansbergen-Mills sought to place reliance upon a balance sheet dated 28 February 2021 which the Court had its attention drawn to a seemingly remarkable feature:

Ms Lansbergen-Mills placed most reliance upon the balance sheet as at 28 February 2021 which Mr Davis recently introduced into evidence, giving the explanation that the delay was due to the Company’s accountant having been delayed in providing it earlier because of the death of his elderly father. Mr Doyle was suspicious both of the lack of a more detailed explanation and the fact that the format of the balance was both very different from the format of the previous balance sheets but also deficient in a number of respects, most significantly (as observed by Mr Mundy) the fact that the balance sheet did not balance.

Perhaps even the incurious mind could not overlook that the balance sheet deficiency in these unbalanced accounts was worse than the balanced accounts that were filed at Companies House on 20 June 2020 for the period to 31 October 2019.

In any event, balance sheet insolvency was acknowledged as made out but not cash flow insolvency. This was a position that was affirmed by the court notwithstanding the following:

As necessary, I would also accept the submission of Mr Doyle that the failure by the Company to provide satisfactory documentary evidence to support its case in relation to insolvency buttresses this conclusion. If, as is the Company’s case, it is a well-run business with a strong product, a strong prospect of raising sufficient funding successfully to exploit that product, and a strong business plan, one would expect to see documentary evidence to this effect. Instead, the Company has failed to provide any financial forecasts or full financial information including profit and loss accounts, whether prepared by an accountant or by its own internal financial resource. It has failed to provide any details of the surprisingly large figure for creditors in the most recent balance sheet. It has failed to provide any details of the liabilities to Holdings or other debtors. It has failed to provide bank statements, only providing a bank balance statement as at two recent dates. Whilst the evidence from the most recent balance sheet showed that the cash at bank was only £47,968.69 at that point, the current evidence is that £500,000 was paid in on 6 April 2021 by a company which is also a shareholder and whose director is the subject of complaint by the Petitioners as to his being complicit in misrepresentations made to them. It is suggested that this recent injection of funds is an attempt to make the Company’s financial position appear better than it in fact is, rather than – as Mr Buckley asserts – a genuine business receipt. Whilst I am not in a position to make any findings as to the truth or otherwise of those allegations, I am not satisfied that this evidence is sufficient in itself to show that the Company may reasonably be expected in the mid to long term to be able to trade successfully without access to substantial external funding.

I also note that the Company has failed to provide any details as to any existing or future contracts or as to any existing or future fundraising opportunities. Although Mr Davis suggests that the fundraising opportunities are controlled by Non-Disclosure Agreements (“NDAs”), he does not produce these NDAs, redacted as necessary, or provide redacted details of these opportunities, other than some limited evidence by way of a letter written by Hill Dickinson.

After reading all of this how did the company respondent manage to keep out of Administration? The answer lies in the nature of the contingent company creditor.

The Court’s Discretion Can Cause A Creditor To Fail To Get A Company Administration Order

Insolvency was proven it would seem. Concerns expressed about the company’s dealings and an extant winding up petition whose supporters were of a similar view as to that of the applicant creditor. Game, set and match for an Administration Order? Not quite it seems. Never forget that you do not have to just show insolvency and concerns over conduct, you need to convince the Court that the Administration Order has a reasonable prospect of achieving one of the statutory purposes referred to above.

An issue was that the contingent creditor applicant would have been unlikely to receive anything from the Administration. The respondent company, therefore, made a submission that the company Administration Order application was a device to exert pressure to obtain further settlement monies. The Court did not entertain that it was in effect an abuse of process.

Clause 2 Of The Settlement Agreement

Clause 2 of the Settlement Agreement said as follows about presenting a winding up petition to enforce the terms of the settlement agreement:

Interactive acknowledges that upon execution of this Settlement Agreement it shall have no right to present a winding up petition against either VST or Davis Co in relation to the debt it and/or the claims is [sic] states it is due to it under the [prior agreements] and pursuant to the Dispute[1], its sole right shall be for enforcement of the Settlement Agreement (emphasis added)

The judge said that the Administration Application offended clause 2 of the Settlement Agreement.

The application failed inter alia because the judge said it was unlikely the applicant would receive the outstanding payment arising if the company went into Administration. The respondent company was still seeking funds and the serious allegations against the company were for the extant petition hearing to consider, not this discrete Administration Order application:

In summary, in my judgment it would not be right to make an administration order based on the third payment as a contingent liability in circumstances where:

(a) The third payment will never realistically in this case ever fall due once the administration order is made.

(b) The Applicant is unlikely, based on current evidence, to receive any substantial payment in the administration through proving a claim for misrepresentation or breach and being paid through the return of monies to the Company from Holdings, or persons or companies connected with it, when one considers realistically: (i) the amounts involved; (ii) the other likely creditor claims (including misrepresentation claims from other private investors); and (iii) the time and cost of pursuing claims for the return of monies as well as the likelihood of an actual recovery. Whilst I appreciate that this is no more than speculation at this stage, what is clear is that the Applicant has not put a coherent researched strategy for recovery on this basis before the court, so that it cannot fairly be described as anything more than speculative.

(c) The Company is still actively pursuing the fund raise. Whilst I accept that the evidence is less than detailed, the evidence of Mr Davis is supported, at least as regards the continuing discussions with a prospective investor, by the letter from Hill Dickinson. Moreover: (a) as I have said, there is no evidence that the Company is unable to pay its debts in the short to medium term, such as to justify a conclusion that it will be forced into insolvency before it could realistically convert any opportunity into an agreement; (b) the application is not supported by any other creditors; and (c) the existing management appears to be supported by the majority in number and value of the shareholders excluding Holdings, as is revealed by the letter written on 16 September 2020 following the Company general meeting held the previous day so that, even allowing for the position of the Petitioners and the apparent support from another private investor, this is not a case where it is clear that there is little no support from external investors. It may be that the Company is unlikely to obtain the funds it seeks, and I understand the Applicant’s scepticism given the history. However in the absence of hard evidence of the financial position of the Company significantly worsening it does not seem to me to be proper to allow the Applicant to put itself in a different position from that which is willingly entered into in November 2020 when it concluded the Settlement Agreement and agreed to wait for its money and to take the risk that the funds would not necessarily materialise in weeks.

(d) The serious allegations made against the Company in the J&E Petition ought to be properly investigated in that forum. Whilst I appreciate that the Company is contending that the Petition should be struck out as an abuse, I am not in a position to investigate that. Further, whilst I also appreciate that a J&E Petition will be a far slower process to bring to a conclusion than will be this administration application, that rather tends to support the argument that it would be wrong to short-circuit that process by relying on these allegations, which have not been independently investigated or tested, to justify placing the Company into administration when otherwise factors militate against that course. Finally, whilst sometimes the need for urgent investigation by an independent insolvency professional and/or the need to protect further investors would assume importance, here there is no real evidence that the former is of real urgency (since on Mr Doyle’s analysis funds have already been effectively transferred to Holdings and/or to persons or companies connected with it and there are no more funds in the Company) and there is no evidence of the Company presently actively seeking investment from gullible small investors by making plainly misleading representations.

Thus, for all of these reasons, the application fails.

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