In Rowtree Ventures Ltd v Oak Property Partners Ltd the High Court declined to exercise discretion on making administration orders in respect of two companies that were unable to pay their debts and where the statutory purpose was likely to be achieved.(1) Interestingly, the court appears to have exercised a degree of independent commercial judgement in determining whether to engage an insolvency process.
The applications involved two companies that claimed to be the owners of hotels. The companies were actually the freehold owners of the hotels with a business model of selling off individual rooms and common parts on long leases – they were not hotel operators, but quasi-property developers. The leases entitled the lease holders to repurchase the lease from the relevant company in certain circumstances. The administration applications were made on behalf of those who had acquired the leases.
The applicants sought the appointment of administrators. The leases were purchased with what the court described as "extravagant promises of a guaranteed return which appear to have been no more than optimistic and possibly reckless or wantonly misleading". While this issue was not considered further, the court accepted that the applicants were prospective creditors of the companies and had standing to apply for administrators under the relevant provisions of Schedule B1 of the Insolvency Act.
Paragraph 11 of Schedule B1 of the Insolvency Act provides that the court may make an administration order in relation to a company only if:
- the company is or is likely to become unable to pay its debts; and
- the administration order is reasonably likely to achieve the purpose of administration.
The court first must be satisfied on a balance of probabilities that the company is or is likely to become unable to pay its debts.(2) The court must also be satisfied that the administration order is reasonably likely to achieve the purpose of the administration. The 'purpose of the administration' is found in Paragraph 3(1) of Schedule B1 of the Insolvency Act, which requires an administrator to perform his or her functions with the objective of:
- rescuing the company as a going concern;
- achieving a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being in administration); or
- realising property in order to make a distribution to one or more secured or preferential creditors.
It is not necessary to establish which particular purpose is to be satisfied, but the court needs to be convinced that there is a realistic chance that one of the alternatives can be achieved.
The parties accepted that either balance-sheet insolvency or cash-flow insolvency would suffice for the purposes of establishing that the companies were unable to pay their debts. The respondents put forward evidence in the form of projections to demonstrate that the companies had a likelihood (or at least a realistic possibility) of survival.
However, the court considered the evidence and based on the facts – and with a degree of scepticism regarding the evidence – considered that each of the companies was either unable to pay its debts or likely to become unable to pay its debts: one company by virtue of the cash-flow test and the other by virtue of the balance-sheet test.
There was disagreement between the parties as to the purpose likely to be achieved. It was accepted by counsel for the applicants that the likely purpose was for no reason other than the avoidance of statutory fees in a winding up. That assumed there would be realisations – a proposition disputed by counsel for the respondents, who suggested that an administrator would have nothing to do as all of the units were leased and the 'hotels' were externally managed.
The court also considered the background to the application and the (as yet unproven) feeling of unsavoury matters concerning potential timeshare fraud.
The court held that while in both of the companies' cases the pre-conditions for making administration orders were satisfied, it would not be exercising its discretion in favour of doing so. The court asserted that while an administration process may be better than a winding-up, the option of remaining outside of an administration process and granting an opportunity to turn the companies around may ultimately have better prospects for the companies' creditors as a whole.
The court considered the applicants' concerns regarding the possibility of inappropriate dealings and commented that it may not have reached its decision to not exercise the discretion had there been firm evidence – as opposed to merely a suspicion – of past fraud and if those in control of the companies either had previously misappropriated assets or were likely to do so in the period before a formal insolvency process.
For further information on this topic please contact Louise Verrill, Joe Speakman or Mark Beardsworth at Brown Rudnick LLP by telephone (+44 20 7851 6000) or email (firstname.lastname@example.org, email@example.com? or firstname.lastname@example.org). The Brown Rudnick LLP website can be accessed at www.brownrudnick.com.
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