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15-10-2020

Validity of Appointment and Conduct of Administrators

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Kebbell & Anor v Hat & Mitre PLC & Ors [2020] EWHC 2649 (Ch) was an application by two shareholders and directors the purpose of which was to establish that the company was not, or should not have been, in administration. It questioned the validity of the appointment of the administrators and their conduct of the administration.

The case was a procedural mess: the application notice, issued over a year after the company entered administration, sought several heads of relief going to the invalidity of the administration, but did not specify the grounds on which invalidity was alleged, nor did the supporting witness statements. The grounds only emerged at the skeleton argument stage. The applicants limited their application to seeking relief in the form of a declaration that the appointment of the administrators under paragraph 22 Sch B1 Insolvency Act 1986 was invalid, an order terminating their appointment and an order that they be personally liable for their costs and expenses. In essence the applicants’ case was that the appointment of the administrators was a nullity because it had been passed, contrary to s. 171(b) Companies Act 2006,  for the improper purpose of furthering the interests of minority shareholders at the expense of the majority, rendering it void and thus invalidating the appointment of the administrators too.

The improper purpose was said to be that the chairman had used his casting vote at the crucial board meeting, as had another director, for personal gain. This gave rise to a further procedural difficulty: “For reasons which were never explained, and which caused substantial difficulties in getting to the bottom of what occurred, Mr Young and Mr Thoburn were not joined as parties to this application and they did not appear as witnesses.”

The company owned two connected properties in Farringdon Lane and Clerkenwell Close which recent accounts  recorded were valued at £6.5 m. Rent was not being paid and building work needed to be done, which led to financial problems. The directors considered various proposals which opened up divisions which ultimately led to the convening of the meeting that resulted in the administration. But whilst that course was supported by Mr Young and Mr Thoburn, it was opposed by Mr Kebbell and Mr Kitchen. The resolution was ultimately passed on the casting vote of Mr Young as the chairman.

Whether the company was insolvent at the time of the resolution was one of the issues between the warring factions. Trower J reminded himself that on an application to the court for the appointment of an administrator under paragraph 12 Sch B1 the court could only make an administration order if it was satisfied that the company was or was likely to become unable to pay its debts (paragraph 11(a)  Sch B1) whereas for an appointment by the directors under paragraph 22(2)  Sch B1, the question of the company’s actual or prospective insolvency was dealt with differently, the prescribed form of appointment under paragraph 29 and rule 3.25  Insolvency Rules 2016 requiring the appointer to make a statutory declaration that the company was or was likely to become unable to pay its debts (paragraph 30(a) applying paragraph 27(2)(a) Sch B1). Whilst he conclude that the company was balance sheet solvent, he noted:

“[T]he Applicants have not established that it would or even might have been obvious to Mr Young and Mr Thoburn that the Company was not insolvent on a cash-flow basis as at 19 December 2018. On the evidence adduced at the hearing, it is my view Mr Young and Mr Thoburn were entitled to take the view that the Company was or was likely to become unable to pay its debts. I must approach the allegation of improper purpose on the basis that there were solid grounds for thinking that the condition in which the Company found itself meant that it was (or at least was likely to become) unable to pay its debts and that it is not open to me to conclude that Mr Young did not believe that to be the case”.

On the question of impropriety Trower J decided that if the directors exercised their power to make an appointment for a purpose other than the one for which the power was conferred, they might be acting in breach of s. 171(b) Companies Act 2006 and could be liable to the company in damages for that breach, but that under the scheme of the Insolvency Act 1986, where a decision was made in breach of s. 171(b) but the exercise of the power otherwise complied with the technical requirements of Sch B1, the appointment should stand unless set aside in accordance with the provisions of  the Schedule. “It follows that for that reason alone, I decline to grant the first declaration sought by the Applicants”.

The judge plainly had sympathy for the difficulties the administrators had encountered in the face of the war between the two factions of shareholder. “In my view it is not at all surprising that the Administrators took a cautious approach on how to proceed. It had already become apparent to them that every aspect of the administration would be subject to detailed criticism from one faction or the other”, he said. He found no basis on which it could be said that the administrators had been partial or had caused unfair harm to the applicants as members in the way that they had approached “a difficult administration”. The application for relief under paragraph 74 Sch B1 was dismissed. “Likewise,” he said, “I do not consider that the Applicants have made out a case that the Administrators have not carried out their functions as quickly and efficiently as is reasonably practicable (paragraph 4 of Schedule B1).”

The judgment is worth reading for the judge’s analysis of the various kinds of relief available where the appointment or conduct of an administrator are questioned and of the law on the balance sheet and cash flow tests for solvency. The procedural  errors which he highlights (and overcomes) are warnings  to avoid sloppiness in litigation and the need to consider properly who needs to be made a party to any proceedings. But above all the case is a lesson to those who seek to appoint administrators in the expectation that “their” office-holders will do their bidding:

“There was every reason to think that the appointment of an independent office holder would ensure that, pending the taking of steps to rescue the Company as a going concern, its business and affairs would be conducted in a manner which had due regard to the interest of its members as a whole, and not just one or other of the two independent warring factions. The evidence simply does not justify a conclusion that Mr Young and Mr Thoburn thought that, by appointing the Administrators, they would have supine puppets in place, which would enable them to continue to control the Company. As that is the case, I do not consider that the Applicants have come anywhere near establishing that the power to appoint was not in fact exercised for a purpose for which it was conferred.”

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