England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		28th May 2004

Mr Justice Peter Smith :

INTRODUCTION

1. On Friday 21^st May 2004, I heard an adjourned application by the Claimant, seeking to restrain the First and Second Defendants from accepting the surrender of two leases currently held by HDS Studios Limited ("HDS"). At the conclusion of the submissions I indicated that the application would be refused for reasons, which would be given later in a written Judgment and this is that Judgment.
2. The application previously had come on before Laddie J on 14^th May 2004, when it was adjourned to 21^st May 2004, on (inter alia) Parmindar Singh Bhabra ("Mr Singh") undertaking to indemnify the Claimant against any costs it might have to pay pursuant to any order that the court might make against it, and also giving an undertaking in damages to the First and Second Defendants fortified by a payment of £24,000.00 into a joint account. In exchange for those undertakings the First and Second Defendants undertook not to accept the surrender of the two leases dated 18^th September 2003, granted by the Claimant to HDS. Pending delivery of this written Judgment, that undertaking has been given against a further undertaking given by Mr Singh as to damages beyond 21^st May 2004.

BACKGROUND

3. The Claimant ("Fliptex") is a wholly owned subsidiary of HDS. The share capital of HDS is held as a fifty percent by Mr Singh and the other fifty percent by Daljit Bhabra. Both Parmindar and Daljit Singh are directors of HDS. Parmindar Singh is a sole director of Fliptex.
4. Fliptex owns the freehold of a property known as Houston Business Centre, Springfield Road, Middlesex ("the Property"). Significantly for the purposes of the present application it does not trade.
5. HDS is a tenant of Fliptex. As set out above on 18^th September 2003, Fliptex granted two leases over the property for a term of ten years against a rent of £640,000.00 per annum. In about August/September 2003, HDS commenced business by licensing TV and Film Studio facilities at the Property. Its clients included the BBC and Channel 4.
6. In January 2004, HDS went into administration.
7. Fliptex's finances were difficult. On 17^th September 2003, it entered into a loan agreement with the Third and Fourth Defendants. The loan was for £5.4 million and was a bridging loan to refinance two existing loans which Fliptex had with National Westminster Bank Plc and Endney Enterprise Limited. The loan agreement is a background to the present application. Under the loan agreement (clause 7.1) the interest was calculated and charged to accrue from the date of drawdown at a rate of 1.52% per month, but at any time after demand had been made or Event of Default had occurred, the default rate was 2.5% per month. By clause 7.2, it was provided that should Fliptex fail to pay any amount due and payable under the loan agreement, it should on demand by D3 and D4 pay interest on the overdue amount up to the date of actually payment both before and after Judgment at the Default Rate.
8. Under clause 12.1 an Event of Default includes:-

"[if] the Borrower is unable to pay his debts within the meaning of section 123 of the Insolvency Act 1986 or becomes unable to pay its debts as they fall due, or the borrower otherwise becomes insolvent or suspends making payments (whether of principle or interest) with respect to all or any class of debt or announces his intention to do so".

9. A dispute arose between Fliptex and D3 and D4 as to whether or not Events of Default had occurred by reason of failure to make payments and whether or not the Default Rate then became payable and whether the Default Rate was a penalty. Those matters, if established in favour of D3 and D4 might constitute Events of Default.
10. It was not argued before me that there was any clearly established Event of Default in respect of those matters. The only issue argued before me, was whether an Event of Default had occurred by reason of clause 12.1.5 as set out above.
11. On 24^th November 2003, D3 and D4 purported to declare that the full amount of the loan was forthwith due and payable pursuant to clause 12.1(b). The second page of the letter, in its first paragraph alleged there was default in making interest payments that a winding up petition by Fliptex former solicitors Judge Sykes Frixou had been presented against on 21^st November 2003. As a result, it was contended that Fliptex was unable to pay its liabilities as they fell due and it was therefore insolvent within the meaning of section 123 of the Insolvency Act 1986, and that it had accordingly suspended making payment of classes of debts.
12. Before me, the Fist and Second Defendants ("the Administrators") did not seek to argue any of those matters were capable of resolution at an interim stage. The Administrators' stance is that the Claimant was unable to pay its debts as and when they fell due on 24^th November 2003. As I have set out, that was not the point alleged in the letter, but the First and Second Defendants contend (and it is accepted by Miss Kyriakides who appears for Fliptex) that they can rely upon other Events of Default which would have been available to them at the time in question had they known about them. This is based upon the decision of the Court of Appeal in Byblos Bank –v- Al-Khudhary [1987] BCLC 232.

ADMINISTRATION OF FLIPTEX

13. Shortly after the demand and on the same day, the Administrators were appointed Administrators under the provisions of schedule B1 of the Insolvency Act 1986, as amended by the Enterprise Act 2002. The notice was given to the Leeds District Registry on that date. The court allocated it a case number (there of course being no proceedings before that lodgement, as this was an out of court appointment). The statutory declaration was filed and the consents were lodged. The endorsement completed by the court and entered that the notice and attached documents were filed on 24^th November 2003.
14. The statutory declaration was apparently sworn at Sheffield on 20^th November 2003.
15. Pursuant to that appointment, the Administrators took possession of Fliptex's premises and property with a view to carrying out the administration. They had also provided the statement pursuant to paragraph 100 (2) of schedule 16, that they might exercise all and any of the functions of the proposed administrators. That too was dated 20^th November 2003, but has a court stamp of 24^th November 2003.
16. On 11^th December 2003, Matthew Arnold Baldwin, solicitors for HDS wrote to Cobbetts the solicitors acting for D3 and D4 challenging the appointment of the Administrators. The argument put forward in the letter, was that the appointment was made on 20^th November 2003, although it did not become effective until the form 2.6B was filed at the court at 10:56 a.m. on 24^th November 2003. The letter set out accurately that that filing followed a letter of demand sent to Fliptex at 10:43 p.m. on the same day. Accordingly, it was contended that the actual appointment was made on 20^th November 2003 and the power to appoint receivers and administrators pursuant to clause 7.1 of the debenture had not arisen as no demand had been made on 20^th November 2003. It was accordingly contended that the appointment was invalid and that the invalidity wasincapable of remedy.
17. HLW solicitors replies on behalf of the Administrators by letter dated 12^th December 2003. In that letter they rejected the arguments put forward and contended that the Administrators appointment took effect at 10:56 a.m. on 24^th November 2003, pursuant to paragraph 19 of schedule B1 of the Insolvency Act 1986. That occurred after the demand had been made and they maintained therefore that the Administrators' appointment was valid.
18. There then ensued silence in regards that issue. The Administrators continued to act. The officers of Fliptex assisted to a degree in the administration and this point was not raised again until the present application was made.

CHALLENGE

19. HDS, as I have said, hold leases of the Property. HDS is in administration. The leases are a liability and the Administrators of HDS sought to surrender the leases to Fliptex. There are considerable advantages to Fliptex in having a surrender of the leases. It will obtain vacant possession of the Property and it would accordingly be a far more marketable asset than if it is subject to leases of a company in administration. The administrators have obtained a number of valuations. For example, Edward Symonds on 12^th May 2004 estimated that the property would be worth about £7.8 million with vacant possession. They have earlier reported that there would be an uplift to £8.55 million on a vacant possession basis. This is to take into account the tenant's improvements allegedly carried out by HDS. Whilst those improvements would probably have little value if stripped out of the Property, they form, clearly, a significant marriage value which would facilitate the sale of the Property for a higher price, but that would be subject to HDS having a negotiated share to represent the uplift in price attributable to its fixtures and fittings.
20. Fliptex has not traded. According to the second witness statement of the First Defendant the amount due to creditors is £7,379,450.89. Part of that will depend on what rate of interest is payable to D3 and D4 and in addition interest will be payable on all creditors claims at the statutory rate of 8%. It follows therefore that if the Property is sold with vacant possession in accordance with the valuations, all of the creditors will be paid in full.
21. There are therefore clear sound reasons why the Administrators of Fliptex would be anxious to accept the surrender of the Leases from the administrators of HDS.
22. The Claimant does not challenge that proposed exercise of powers by the Administrator. Indeed there is no challenge as to the decision made by the Administrators. The challenge to the Administrators is as to the validity of their appointment and no more.
23. The real challenge is to the decision of the Administrators of HDS to surrender. HDS has recently entered in to a license agreement with the BBC for at least three of the five recording studios. That might run until November 2004 and might run beyond that. This is a short-term arrangement, but produces £72,000.00 per month. Notwithstanding that the Administrators of HDS are anxious to surrender the Leases. Mr Singh is unhappy about that. The reason being is that in the intervening period when Fleptex and he have taken the advantage of the moratorium caused by the administration they have been able to obtain conditional offers of refinance and negotiating in principle reductions of the amount of Fliptex's creditors. They would then hope to revive the operation carried on in the Property by taking over the benefit of the licence from the BBC and in effect starting up a new business.
24. They cannot proceed at the moment and the funding is conditional on the licence fee income being available to finance the borrowing. That might be laudable from their point of view, but it is not something that it can be said that the Administrators should have regard to. The reality of the present application is that it is not designed to do anything other than thwart the desire of the Administrators of HDS (without attacking them directly) to exercise their duties to surrender the Leases. If the Leases remain in place the reality is that the Property will remain unsold and Mr Singh will be able to carry on his strategy. That is something for him and it is no significant feature or justification, in my judgment, for seeking an injunction when no allegation of wrong doing is alleged against the Administrators and no claim is made in these proceedings against the Administrators of HDS in making their quite understandable decision to rid HDS of onerous leases. In this context whilst the passing rent is £640,000.00, only spasmodic payments have been made and those payments were in effect only the amount required to service the loan Fliptex had from D3 and D4. No payments have been made since December 2003. The presence of the Leases therefore has a negative impact on the administration of Fliptex, because they hinder a sale with vacant possession and they are not even generating an income.
25. It is therefore important to appreciate, as I have said, that there is no challenge to the decision making process. The only claim is that the Administrators have not been validly appointed.

ARGUMENTS

26. In effect, Miss Kyriakides refined the submissions before me and made three submissions. It is contended that the appointment was invalid for two reasons. First the appointment was made on 20^th November 2003 and on that date no valid appointment could be made because the power to appoint conferred on D3 an D4 by virtue of their debenture (paragraph 14 of schedule B1 of the Insolvency Act 1986) had not arisen because the requirements of paragraphs 16 were not satisfied on 20^th November 2004. Paragraph 16 provides:-

"16. An administrator may not be appointed under paragraph 14 while the floating charge on which the appointment relies is not enforceable".

Thus the appointment made on 20^th November 2003, was made at a time that no demand had been made so that there was no enforceable debenture at that time.

27. Mr Barker, who appears for the Administrators, accepts that the floating charge was not enforceable on 20^th November 2003. However, he submits that the appointment was not made until 24^th November 2003.
28. This involves a consideration of paragraph 19 of schedule B1. It provides:-

"19. The appointment of an administrator under paragraph 14 take effect when the requirements of paragraph 18 are satisfied".

29. Under paragraph 18 a person who appoints an administrator is obliged to file at the court a notice of appointment and any other such documents as may be prescribed. The notice of appointment must include a statutory declaration by or on behalf of the person who makes the appointment, that the person is a holder of a qualifying floating charge, that the floating charge relied upon is or was enforceable on the date of the appointment and that the appointment is in accordance with the schedule. It also requires that the notice of appointment identifies the administrator and must be accompanied by a statement by the administrator that he consents to the appointment and that in his opinion the purpose of the administration is reasonably likely to be achieved. The notice of appointment and any document accompanying it, is required to be in the prescribed form and the statutory declaration is required to be made within the prescribed period.
30. The prescribed period is set out in the Insolvency Rules 1986 2.16(3). The statutory declaration is not to be made more than five business days before the form is filed with the court. In this case it was made four days before filing with the court.
31. Miss Kyriakides submits that the schedule makes an express distinction between the time when the appointment is made and when it takes effect. Accordingly she submits the appointment is made on 20^th November 2003 and that appointment is invalid, because at that time the debenture was not enforceable as no demand was served until 24^th November 2003.
32. I do not accept that that is a correct interpretation of the schedule. Paragraph 19 plainly indicates that the appointment is only effective when paragraph 18 is satisfied. That makes sound sense. Where out of court appointments take place there will be no clear mechanism identifying the date and time when an appointment takes effect (contrast court appointments). It is therefore logical to dictate that the appointment is only effective when the conditions of paragraph 18 are satisfied. All documents executed before that date are executed subject to a condition that the appointment would become effective. Miss Kyriakides was constrained to concede that a person appointed as administrator before it became effective could do nothing, because the appointment was still not effective. Her submissions have odd results. Let us suppose for example, a debenture holder executes an appointment, which is intended to take into effect when the documents are lodged. On her analysis that appointment is immediately effective, even if, for example the administrator has not yet consented to act. Equally on her analysis the appointment would be made and a subsequent lodging of the documents in accordance with paragraph 18 not capable of challenge, even if in the intervening period the debt had been repaid. Such difficulties can be avoided by a straightforward construction. That construction gives sense to paragraph 19. The appointment only becomes effective for all purposes when the conditions in 19 are satisfied and it is then unconditional. That gives a clear date when everybody knows that all the conditions have been satisfied and the appointment then becomes effective. The idea that there is an appointment made, but not effective, but nevertheless is treated as having an effect is not a result that the draftsman of the schedule could have contemplated.
33. Miss Kyriakides sought to draw comfort in her analysis from paragraph 15, which imposes powers to appoint where there is an antecedent holder of a floating charge. I do not see that this advances her arguments. All that paragraph does is quite sensibly require a second or lower debenture holder to give notice of an intention to appoint to a superior holder to give it in effect an opportunity to consider making its own appointment.
34. I am reinforced in my conclusion by the wording of the statutory notice, which is prescribed. Although the declaration is dated 20^th November 2003 that is only in respect of paragraph 11.1. On that date which under the prescribed time limit can be made up to five days before notice of the appointment is given, he is merely confirming the contents of that notice are true. However, it seems to me that the wording of clause 1, "[the administrators] are hereby appointed administrators of Fliptex" is relevant. It seems to me that that can only take effect when the notice is given and that is on 24^th November 2003 when it is lodged at the court. The declaration whilst declared on 20^th November takes effect on that date.
35. For all of the above reasons, I conclude that the appointment of the Administrators was made only when it became effective, i.e. on 24^th November 2003. This is in accordance by analogy for example in relation to the execution to deeds. A deed might be executed in advance, subject to a condition, which has to be fulfilled. In the case of deeds when the condition is fulfilled the deed operates retrospectively to the date it was executed. Paragraph 19 makes it quite clear that that is not intended to be the case in respect of the appointment of an administrator. It makes it clear that the effective appointment is only when the conditions are satisfied. That makes sense and in my judgment means that the Claimants contentions are not made out.

DELAY

36. Even if that were wrong, my judgement would be that Fliptex is estopped from denying the validity of the appointment. After the initial flurry of the letters it plainly acquiesced in the appointment of the Administrators and allowed them to incur considerable fees (in excess of £300,000.00) and act as administrators. Fliptex participated in that by its cooperation and surrendering for example, control of its assets to them. If the present contention is correct Fliptex would seek retrospectively to hold the administrators to be trespassers, to be liable to disgorge their fees and be liable to pay damages as a result of their actions. Having stood by after the initial rejection of their arguments it would not be equitable for it so to do. It plainly had all the information available to it because the same argument is being made in front of me as was set out in the initial letter. If Fliptex wish to challenge the appointment on those grounds it should have done so speedily after the administrators solicitors made it quite clear that the argument was rejected. By delaying and acquiescing it has in my judgment made it impossible for such an argument fairly to be made at this late stage in the administration. The lack of response means that the Administrators were entitled to conclude there would be no challenge to the appointment.

UNABLE TO PAY IT'S DEBTS AS THEY FELL DUE

37. Miss Kyriakides second submission was that Fliptex was not unable to pay it's debts as they fell due. I can deal with this quite shortly. Fliptex's only source of income was the rent. The rent being paid, was not the full amount, but was only the spasmodic amounts to service the loans. It is quite clear there were significant other creditors who were pressing and could not be paid. The most significant example is Stephenson Harwood solicitors, where it is clear that they were owed £120,000.00. On 31^st October 2003 they had written to Mr Singh Bhabra making it quite clear that they should have a repayment schedule and that they were prepared to extend further time over a period of 3 months provided £40,000.00 was paid per month, the first to be paid on 15^th November 2003, with payments thereafter of 15^th December 2003 and 15^th January 2004. The letter provided in event of failure to pay any instalments the whole of the sum became due and payable. It sought confirmation of those terms by no confirmation was provided. There is no suggestion that any of the were made any way. This was a debt, which Fliptex could not pay. In this context I refer to the second witness statement of Lisa Hogg, the First Defendant, where she deals with the outstanding creditors whose debts were not being paid. Whilst Fliptex might have been balance sheet solvent, it is quite clear on that information which is not contestable to any serious degree in my judgment, that Fliptex was unable to pay its creditors as and when it fell due. Indeed, Miss Kyriakides acknowledged that Fliptex was in difficulties in this regard.
38. That disposes of the primary issues as to principle put forward by fliptex as to why the injunctive relief should be granted. For the reasons set out in this Judgment I have rejected those arguments. As I have said above, there is no challenge to the Administrators as to the manner in which they are carrying out the administration.

BALANCE OF CONVENIENCE

39. Miss Kyriakides third submission is that the balance of convenience favoured granting the injunction. If I was wrong in the above as I indicated on 21^st May 2004, I would have concluded by a very narrow margin that the balance of convenience would have favoured granting the injunction rather than refusing it. Whilst the undertaking in damages is weak, the reality is that I do not see that the Administrators and the creditors would suffer any determent over an injunction granted against the backcloth of a speedy trial. I cannot believe for one minute that the administrators of HDS would seek not to surrender the leases in the future. It is clear that they have been awaiting the outcome of the litigation. There is no evidence to show that there will be a sudden collapse in the vacant possession value of the property and there is a sufficient margin as between the creditors and the value of the property, which will provide significant comfort to any creditors if there is a delayed realisation. If there is a delay, it is in my judgment a delay, which will only cause Fliptex a loss as the creditors have full recovery when the property is sold. I do not see the short delay will effect that position.
40. For the above reasons, I dismiss the Claimants application for an injunction.