James is a Partner and Head of the Dispute Resolution team and primarily handles commercial…View Profile View all
In a recent decision, the High Court has refused to make administration orders over two companies. To make an Administration Order, the court has to be satisfied on a balance of probabilities that a company is or is likely to become unable to pay its debts (either balance sheet insolvency or cash flow insolvency will suffice). The court must also be satisfied that an Administration Order is likely to achieve the purpose of administration. The Insolvency Act 1986 requires an Administrator to perform his functions with the object of rescuing the company as a going concern, or achieving a better result for creditors as a whole than if it were wound up; or realising property in order to make a distribution to one or more secured or preferential creditors.
The companies argued that neither pre-condition was satisfied and put forward projections which they said demonstrated the likelihood, or at least a realistic possibility of survival, which they said contradicted any inference of insolvency. The Judge noted there was little or no room in the projections for slippage, but there was some evidence that further finance might become available which would assist cash flow. However, the Judge felt that he could not be confident about the projections and concluded that it was likely the companies would become unable to pay their debts in the future.
The Judge then had to consider whether an Administration Order was likely to achieve the purpose of administration. The Judge felt that an Administration Order would give a better result for creditors than a winding-up, if that were the only option. The Judge, however, took the view that there was another option available, namely to give the current management the opportunity to bring the businesses round without being subject to either Liquidation or Administration. The Judge was of the opinion that the appointment of an Administrator, which would inevitably lead to the very heavy costs that are commonly associated with such appointments, would be premature. He felt that in the exercise of his discretion, he could give the companies the opportunity to endeavour to see their way through their difficulties. The Judge said he would not have reached the conclusion that he did regarding the exercise of his discretion if there was firm evidence of past fraud or that those who are in control of the companies either had misappropriated assets, or were likely to do so in the intervening period between the hearing and the onset of a formal insolvency process. However, there was nothing in either case which made the Judge think that that applied.
The case is a timely reminder that the grant of an Administration Order is discretionary. Furthermore, the Judge appears to have exercised independent commercial judgment in concluding the best course was a “wait and see” approach. Traditionally, courts have refrained from making independent commercial assessments. The case also raises questions as to how the position of any future petitioner for liquidation might be treated, or how directors might be affected in terms of potential exposure to wrongful trading should the companies ultimately go under.