Twelve creditors (representing about 16% of company debt, and represented by a firm of licensed insolvency practitioners) have failed in an attempt to compel administrators to move to creditors’ voluntary liquidation, alternatively an order for compulsory liquidation. The Creditors also sought the revocation of a proposal ‘purported to have been deemed approved’.

The Company was involved in construction work, falling victim to the Covid-19 pandemic in that it was forced to cease trading following the announcement of lockdown on 23 March 2020.

The directors sought insolvency advice on 30 March 2020 to discuss the available options. Following unsuccessful attempts to obtain sufficient funding to trade through the difficulties it was concluded that administration was the preferable route ahead and Objective B could be achieved, that is to say a better result for creditors than would be likely if the company were wound up.

It was considered that Objective B could be achieved because this well established business with a pipeline of work could be marketed for sale as a going concern, or alternatively the Administrators could look to complete or sell the work in progress.

The Administrators were appointed on 15 May 2020 and once in, they instructed agents to review the business with a view to a sale. The agents reported back on 20 May 2020, advising that given the current lockdown restrictions, the fact the sites had ceased to operate and travel restrictions were in place, it would be very difficult to market the business and unlikely that the business could be sold as a going concern. They recommended sale of the chattel assets/stock by way of a timed auction online. That sale took place on 22 June 2020 achieving proceeds of just under £70,000.

A quantity surveyor was instructed to review and value the work in progress but following his investigations it was concluded by June 2020 that projects could not be completed for the benefit of the administration.

Prior to these reports it had been the Administrators’ view that Objective B could be achieved but with the benefit of the reports from the agents and quantity surveyor, it was concluded that Objective B could not be achieved: the estimated outcome for both administration and liquidation were similar.

This being the case, the Administrators concluded they could achieve Objective C, being a realisation of property to make a distribution to one or more secured or preferential creditors.

All this had occurred prior to the Administrators preparing, and being required to prepare, their Proposals, and so the Proposals were prepared on the basis of Objective C notwithstanding that they were appointed with a view to achieving Objective B.

Where a proposal states that Objective A or B cannot be achieved, administrators are not required to seek a decision from the company’s creditors as to whether they approve the proposals or not. Rejection of a proposal triggers potential court intervention which can bring the administration to an end, or some other discretionary remedy.

Accordingly, the Administrators issued their Proposal on the basis that creditor approval was not required.

A technical point which arose was whether, as in this case, it was possible to pursue Objective C if it was anticipated that there would be a distribution to non-preferential unsecured creditors either in administration (with court permission) or in a subsequent liquidation. The Creditors argued not, on the basis that excluding unsecured creditors from the Proposal approval process was inconsistent with a distribution to them – they had an interest in the administration and so therefore they should not be prevented from approving or rejecting the Proposal.

The Creditors had various complaints:

1. Prior to administration, the (then) proposed administrators created a ‘false impression’ to the Creditors that Objective B would be pursued;
2. The Company should never have entered administration;
3. The Administrators wrongly rejected Objective B (which required approval of creditors) in favour of Objective C (which did not require approval of creditors), a distribution to non-preferential unsecured creditors being within Objective B;
4. Objective C could not be pursued because it unnecessarily harmed the interests of creditors as a whole, in contravention of paragraph 3(4) of Schedule B1. The harm alleged was a cost and delay in a distribution to non-preferential unsecured creditors insofar as the Administrators would be required to apply to court for permission to make such a distribution.
5. Objective C could not be pursued where there was a prospect of a distribution to non-preferential unsecured creditors. In these circumstances, only Objectives A or B could apply. This turned out to be the primary submission of the Creditors in support of an immediate liquidation.

The court rejected all of these complaints:

• Objective C can be properly pursued even though non-preferential unsecured creditors may receive a distribution – this is not inconsistent with the removal of their right to approve or reject Objective C proposals because they did not have a ‘relevant interest’, not because they would not receive anything or would receive a full return, but because they would not be harmed by the administration as compared to liquidation.
• In support of this, the court referred to the fact that non-preferential unsecured creditors do not approve or reject proposals where they only participate in the prescribed part – creditors therefore have an interest in the conduct of the administration so far as it might bear on such a distribution but nevertheless they cannot approve or reject the proposals.
• The initial decision to place the Company into administration in the belief that Objective B could be achieved was not unreasonable. Whilst the Company had ceased trading as a result of lock-down, it did not follow that the business was not capable of being saved and sold as a going concern. The court rejected the complaint that the Administrators must have known from the outset that a sale of the business as a going concern would not be achievable. The court also observed that challenges to the placing of a company in administration were primarily governed by paragraph 81 of Schedule B1, which required such application to be served on the appointors which had not been done.
• Complaints about the Administrators’ conduct pre-administration did not fall within Paragraph 74 or 75 of Schedule B1, and so the court did not have jurisdiction to decide on such complaints.

Comment

Other than the circumstances of the Company’s demise, this would appear to be a fairly standard case of a proposed administrator finding out that matters were not quite as expected following appointment and some ‘poking around’ which led to the purpose changing prior to the Proposals being submitted. The court completely exonerated the Administrators of any wrongdoing.

The interesting technical point which comes out of this is that Objective C can be pursued even though the administrators expect to make a distribution to non-preferential creditors, whether that is during the administration (with permission of the court) or in a subsequent liquidation.