England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		20 December 2002

Mr Justice Peter Smith:

INTRODUCTION

1. This Judgment arises out of an application made before me on behalf of the Administrators of TXU UK Limited (In Administration) ("the Company") to make a payment in settlement of potential claims against it and/or Powergen.
2. I acceded to the application and made the Order indicating that I would give reasons for making the Order in a later Judgment, which I now do.
3. The application was urgent because Powergen, which was contributing towards the settlement, indicated that it would only make its contribution (of £70,000.00) if the settlement was completed by Monday 25 November 2002.

MERITS OF PAYMENT

4. The Company's solicitors dealing with the potential claims, Messrs Masons, gave advice as to the merits of settlement. That advice was privileged and commercially sensitive and confidential and I do not propose to make any reference to it in detail. Having seen it however, it seems to me that the advice is sensible and that the settlement was likely to be beneficial to either the creditors of the company generally or if it turns out to be insolvent or to its shareholders it turns out to be solvent.

POSSITION OF THE COMPANY

5. The company is part of a large TXU group of companies described in the evidence before Blackburn J when he made an administration order on 19 November 2002. I do not propose to rehearse that evidence in this Judgment.

JURISDICTION

6. Under Schedule 1 of the Insolvency Act 1986 (paragraph 18) administrators are given an express power to compromise. In addition there is also an express power to make any payment (paragraph 13) "necessary or incidental to the performance of his functions".
7. Finally, in this context there is a general paragraph under section 14 (3) I.A. 1986 to apply for directions.
8. The power under paragraph 13 has received a number of judicial observations. First, in Re WBSL Realisations 1992 Ltd [1995] BCC 1, 118 Knox J express a view that the power to make payments necessary or incidental to the performance of the functions enable administrators to make payments to the creditors of the companies as opposed to making payments in accordance with either a voluntary arrangement or a scheme of arrangement.
9. In Re Powerstore (Trading) Ltd. and another [1998] BCC 305 Lightman J distinguished WBSL. He declined to make an order in the circumstances of the case before him. The issue was as to whether or not the company should go into compulsory or voluntary liquidation. If the former, the preferential creditors would be ascertained at the date of the making of the Administration Order. If the latter, they were to be ascertained at the date of the resolution to wind up. The result would be that a large number of creditors who would have preferential status if they were to be determined at the date of the Administration Order would not have that status if it were determined at the date of the resolution to wind up. Therefore those creditors who would be thus disadvantaged would only agree to a voluntary liquidation if there preferential status was preserved. The administrators sought an Order in order to do that.
10. Lightman J determined that the Court could not direct future liquidators to disapply the statutory regime.
11. He considered a second type or Order where by the administrators would pay creditors or pay funds necessary for the purpose of paying credit to future liquidators on trust to pay the creditors. He determined that whilst administrators had power under section 14 (1) I.A. 1986 to do "all such things that are necessary for the management of the affairs viz the property of the company" that power was only excisable to advance the purpose for which the administration order was made. The payment was not necessary for the management of the affairs business or property of the company; it was only to secure a more advantageous method of distribution of assets. He concluded that he had no authority to make this type of Order.
12. He distinguished Re WBSL on the basis that in that case there was an exceptional special circumstance, which would have the possibility of leading to a substantial realisation in the future.
13. Neuberger J followed Powerstore without observation in Re Philips Alexander Securities 1988 BCC 819 at page 824.
14. In Re Mark One (Oxford Street) Plc 1998 BCC 984 Jacob J sidestepped the Powerstore decision and held that the Court had an inherent power to make the payment proposed to preserve the preferential status of creditors under section 14 (3) and 18 (3) I.A. 1986 and its inherent power to control administrator as an officer of the Court. On the facts of the case before him he concluded that it was appropriate to make an Order in effect preserving that status. Another aspect of his decision in relation to conditional winding up Order has not been followed see Re Norditrack [2000] 1 All ER 369.
15. The concept of the Court having an overriding inherent jurisdiction to sanction the arrangement has been approved in subsequent decisions see Re Wolsey Theatre Company Limited [2001] BCC 486 (Jonathan Parker J) and Re UCT (UK) Limited (In Administration) [2001] BCC 724 (Arden J).
16. On the evidence before me I made an Order as sought exercising the Court's inherent powers.
17. For my part (although this is not strictly necessary for the purpose of the Judgment that I have given because I have made an Order under the inherent jurisdiction in any event) I would have not followed the decision in Powerstore.
18. It seems to me that the wide powers set out in schedule 1 I.A. 1986 are designed to enable administrators to compromise any disputes and make any payments for proper purposes in accordance with the discharge of their duty as Administrators. It seems to me that when one looks at the purpose behind the administration on a case by case basis there are circumstances where payments can be made to creditors which achieves a benefit to the overall administration event though that has the effect of giving them a payment which they would not otherwise receive if the company went into liquidation subsequently. Provided there are no disputes about it and the matter has an overall benefit for the administration as a whole I cannot see why the administrators cannot exercise one of their powers given in schedule 1 to achieve that overall purpose.
19. They would be unwise to make such a decision without applying to the Court because they may face retrospective challenge. That has been averted to for example in Bailey Groves and Smith "Corporate and Insolvency Law Practice" paragraph 4-84. The Court will be alive to ensure that the proposal is a proper one to approve. It would do that under its inherent powers in any event.
20. After the hearing Mr Gabriel Moss QC who appeared for the administrators referred me to the decision of Jacob J in Denny -v- Yeldon and others [1995] 1 BCLC 560. The facts of that case are not important but in the course of giving judgment Jacob J said this (page 564):-

"It would be noted that my view deliberately ignores which of the statutory grounds were the basis for the administration order. Those grounds go only to what the administrators, as officers of the Court, should be trying to achieve. They do not limit the powers of the administrators once they are appointed. It follows that the administrators have power to act for the company in amending the definitive trustee and that the amendments were valid".

21. Denny was not cited to Lightman J in Powerstore nor was it referred to in Mark One. That is not surprising, as the subject matter of the decision had no relevance to those cases.
22. Nevertheless, the observation of Jacob J seems to me to be precisely on the point and supports my view of the interrelation between the purpose for the making of an administration order and the exercise of the powers conferred under schedule 1. If the administrators consider that the payments that they propose to make further the interests of the creditors they should be entitled to make those payments with the safeguards referred to above.
23. Accordingly for those reasons, I decided it was appropriate to make the Order in this case.
24. I am grateful to Mr Gabriel Moss QC for his helpful written submissions and the provision of the later authority.