Update | Insolvency: when the objective 'may be objectionable in administration

The case of Re Integral Limited [2013] EWHC 1745 (Ch) is a useful reminder that consideration must be given as to whether the purpose of an administration will be achieved before this process is used and that if it cannot be achieved then an administration application may fail and any concurrent winding-up petition may succeed.

The purpose of an administration is set out in schedule B1 to the Insolvency Act 1986. The purpose is set out by reference to objectives that must be considered in the following order; (a) the rescue of a company as a going concern, (b) achieving a better result for creditors as a whole than would be likely to be achieved if the company were wound up, or (c) realisation of property in order to make a distribution to one or more secured or preferential creditors. This is not a choice of objectives but a hierarchy. Further the administrator must perform his functions in the interests of the creditors as a whole and only seek to achieve the third objective if he will not unnecessarily harm the interest of the creditors of the company as a whole.

This ability to achieve the purpose must be considered by the court when considering making an administration order, under paragraph 11 schedule B1 and must be confirmed by a proposed administrator when providing his statement of administrator and consent to act under Insolvency Rule 2.3(5)(c).

In AA Mutual International Insurance co Limited [2005] 2 BCLC 8 it was held that the appropriate test is whether there is a "real prospect" that the purpose will be achieved.

In the Integral the court faced an application for an administration order, made in response to a winding up petition. The first hearing had been adjourned, at the request of the company's directors in order to allow time to pay. Before the adjourned hearing came back before the court, the directors made an application for an Administration Oder. The court considered that there was never any prospect of payment being made in the intervening period and referred to Re Pinstripe Farming Limited [1996] 2 BCLC 295 as support to the proposition that such conduct was relevant to the decision to make a winding up order. Indeed, it is to be noted that in Pinstripe the court considered that, where a company obtained an adjournment for a purpose which it did not then use the time grated to achieve, but another purpose, it would be the duty of the solicitors acting for the company to inform the opposing party and the court, at the very least, before the alternative purpose was achieved.

Obvious burden

The court considered the merits of an administration against those of a liquidation. The court rejected evidence that a litigation claim was more likely to be funded in an administration than in a liquidation. This was a claim that the company's directors said would enable the company to pay all creditors if won, notwithstanding evidence that an interest in the proceeds of the claim had already been granted to five other parties. Indeed the court rejected much of the evidence put before it by the directors. It referred to the case of Re Bowen Travel Limited [2012] EWHC 3405(Ch) which set out what may be considered to be an obvious burden upon an applicant for an administration order, to present evidence to the court that is reliable insofar as it is accurate, supported by underlying material, not contradicted, credible and a full account of all potentially relevant circumstances.

The court considered that it was relevant that an action in wrongful trading under section 214 Insolvency Act 1986 could only be taken against the directors of the company in liquidation, there being some evidence that the company had traded on after it had become unable to pay employees.

Also, the directors had incorporated a company with a similar name that would be restricted by sections 216 and 217 Insolvency Act 1986 but only in the event of a liquidation. The court considered this to be an important factor notwithstanding that the use of those provisions would not result in a return to creditors.

Further, the court preferred to ensure that the "relation back" period for anti-avoidance provisions of the Insolvency Act under Sections 238 and 239 Insolvency Act 1986 (Transactions at an Undervalue and Preference claims) were preserved, since certain claims that appeared may not have been caught by the look back period (which, in the event of compulsory liquidation, would start with the date of the petition) in the event that the petition was dismissed. The court considered this to be a significant factor in its decision making. Indeed, in Bowen, the court also cited the need to investigate payments made by the company after the presentation of the winding-up petition (deemed to be void under section 127 Insolvency Act 1986) as one of its reasons for refusing to dismiss the petition and make an administration order. Further the court noted that, in a compulsory winding-up procedure, the official receiver had a duty to investigate the failure and business dealings and affairs of the company and report to the court as he thinks fit (section 132 Insolvency Act 1986) which it considered was an additional benefit to the creditors. It can therefore be appreciated that it is not merely a comparison of the return to creditors that the court will take into account.

In Integral, the court was unimpressed with the conduct of two proposed administrators who seem to have adopted an unquestioning approach to information provided to him by the company's director, which was not questioned even in the light of significant opposing evidence adduced by the petitioner.

The court referred to the decision in Re Structures & Computers Limited [1998] 1 BCLC 292 in which the court said that the conduct of a company, which would require investigation, would not itself justify refusal of an administration order where this could be investigated by either a liquidator or administrator. Further the court may still decide to make an administration over a winding up order where the majority of creditors were opposed to it since it would not follow that they would object to the administrator's proposals. While accepting the position, the court in Intergral thought that the view of the creditors would, nevertheless, be relevant where the subject of the necessary investigations might be behind the directors' true reasons for making the administration application and where creditors were facing the loss of sums due to them and potentially a request for funding for investigations.

Return to members

Other grounds for applications for administration orders relied upon, which the court did not accept achieved the statutory purpose, were considered in Doltable Ltd v Lexi Holdings plc [2006] 1 BCLC 384. The company applied for an administration order, the purpose of which was to rescue the company as a going concern by enabling an administrator to take over the sale of land, being the company's only asset and achieve a better price than was about to be achieved through a sale by a LPA receiver appointed by a secured creditor. It was said, in support of the application, that the administrators would investigate the ability to exploit the land and generate a surplus for members, whereas the duty of the LPA receiver was to the secured creditor only. The court did not accept that a return to members necessarily meant that the company would be rescued where there was no evidence that there would be any going concern at the end of the process, therefore objective (a) was not achieved. Objective (b) did not feature. The court considered that the only purpose of making the application for an administration order was to use the moratorium against a secured creditor. The court also noted that other remedies were available such as an injunction with appropriate undertakings as to damages, which the applicant was seeking to avoid, and a transaction at undervalue claim if the land was sold at too low a value and so on.

The requirements of paragraph 3 of schedule B1 (the administrator's duty to perform his functions with the objective of achieving the statutory objective) only applies once he is in office. However, in the case of an out of court appointment (under paragraph 14 or 22 of schedule B1) an administrator is required to provide a statement of proposed administrator. This confirms his belief that the purpose of the administration can be achieved. It is not necessary for the administrator to identify which of the objectives he thinks will be achieved; merely that one of the objectives can be achieved (Harris Simons Construction Leisure Ltd [1989] BCLC 202).

However, an administrator must apply some thought to this prior to accepting the appointment to enable him to make the statement required. It is difficult to see how an administrator might be expected to make this statement in circumstances where he may have had no involvement with the company prior to appointment.

Once appointed the administrator must make proposals for achieving the purpose of the administration as soon as reasonably practicable and in any event within eight weeks. The Insolvency Service criticised office holders, as long ago as May 2004, for failing to comply with Insolvency Rule 2.33(2)(m) which requires that the proposals include a statement as to how it is envisaged that the purpose will be achieved, which according to paragraph 111 (1) schedule B1 means an objective under paragraph 3 schedule B1. A statement of all three objectives would not satisfy this requirement.

Paragraph 49(2)(b) allows the administrator to conclude, by the time he is making the proposals, that the objective of the administration cannot be achieved. However, it does not follow that (in the absence of some challenge before the court) the administration will have been invalid. While paragraph 79(2) appears to compel the administrator to make an application to court, in those circumstances, to end the administration, it was confirmed in Re Ballast [2004] EWHC 2356 that this was merely a choice of exit route and there was, in fact, no obligation to make an application to the court where exit could be achieved through other means. This would mean that there would be no consideration by the court as to whether the company should have been placed into administration in the first instance.

The line of cases following Minmar Limited v Khalatschi [2011] EWHC 1159 (Ch) was a stark reminder that out of court appointments may be challenged by aggrieved parties, and that creditors faced with losses in the wake of the recession and directors and shareholders in conflict with their business associates, may well seek to challenge appointments and this may be an option where it appears that the objectives cannot and could not ever have been achieved.

Administrators must carefully consider the basis of their appointment and record the basis of their decision, even where information is scant, in order to avoid criticism by the court for taking an appointment which is found not to have been in the interests of the creditors as a whole.