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
		4 November 2005

MR JUSTICE RIMER :

1. This application is by the joint administrators of GHE Realisations Limited. They are Peter Windatt and Gavin Bates. The administration order was made on 21 February 2005 by Lewison J on the application of the company, which was then known as Gatehouse Estates Limited. By the application, made by a notice dated 7 October 2005, the administrators ask for the court's directions as to the making of a distribution to creditors and, subject to that, the manner in which the company can exit from the administration.
2. The company formerly carried on business as an estate agency. Mr Windatt's evidence is that at the time of the administration order it was not regarded as reasonably practicable to achieve a rescue of the company but that the administrators did consider that they would be likely achieve a better result for the company's creditors as a whole than if the company were to be wound up without first being in administration. In these circumstances the administrators had to perform their functions with that objective (see paragraph 3 of Schedule B1 to the Insolvency Act 1986: all subsequent paragraph references are to that Schedule). Mr Windatt believes they have now achieved that objective and has explained that by reference to two progress reports to creditors dated 13 April and 16 August 2005.
3. The first report set out the administrators' statement of proposals and accompanied the convening by the administrators on 28 April 2005 of the initial meeting of creditors (see paragraphs 49 to 55). It explained that a review of the company's affairs showed that a going concern sale was possible but only if it was concluded within a matter of days of the administration order; and that within three days of the order the business was sold to Mr Osborne, a director of the company, for £131,000, with £80,000 being paid immediately and the balance of £51,000 being payable in specified instalments by 31 July 2005. Independent valuers appointed by the administrators had assessed that price as fair. By their proposals, the administrators invited the creditors to endorse the sale of the business and stated that they intended to realise the company's remaining assets. They said that they intended to obtain the court's permission under paragraph 65 to make distributions to non-preferential unsecured creditors without first placing the company in voluntary liquidation. They said that, subject to effecting any such distribution, they proposed to give notice to the registrar of companies to the effect that the company was to be dissolved in accordance with paragraph 84. Those proposals were approved at the meeting by all the creditors who voted, representing some 72.6% of the claims to which I next refer.
4. The second report to creditors explained that all but £11,000 of the sale price of the business had been received, with the balance being expected shortly. It said that, as originally reported, preferential creditors would be paid in full and that there would be a dividend for non-preferential creditors; that claims from non-preferential creditors totalling £1,177,385 had been received, of which about half were the subject of inquiry, and that other creditors totalling some £130,000 had not yet submitted claims; that an application was to be made to the court under paragraph 65; and that directions might also be sought regarding the release of the administrators after the completion of the distributions. That application is now before me.

Permission to make a distribution to creditors

5. Paragraph 65, headed "Distribution", provides:

"65. (1) The administrator of a company may make a distribution to a creditor of the company.

(2) Section 175 shall apply in relation to a distribution under this paragraph as it applies in relation to a winding up.

(3) A payment may not be made by way of distribution under this paragraph to a creditor of the company who is neither secured nor preferential unless the court gives permission."

6. No floating charge relates to the property of the company and so the provisions of section 176A of the 1986 Act do not apply. The only question under this part of the application is whether it is appropriate to give the administrators permission to make the distribution for which they ask. The evidence in relation to that is that the company ceased to trade upon the sale of its business, that the administrators presently have some £194,393.28 in hand, with a further £3,500 due from the purchaser of the business. Preferential creditors amount to about £1,200 and will be paid in full. Claims from non-preferential unsecured creditors are likely to amount to £1,177,385. The administrators wish to advertise for creditors to submit proofs of debt, give notice of their intention to make a distribution, pay the preferential creditors in full and then declare and pay a dividend to the non-preferential unsecured creditors.
7. Whilst paragraph 65(3) imposes the need for administrators to obtain the court's permission to make the proposed distribution to non-preferential unsecured creditors, Schedule B1 provides no express guidance as to the criteria the court has to apply in considering whether or not to give permission. Mr Eaton Turner, for the joint administrators, pointed out that Rule 2.41(4) of the Insolvency (Scotland) Rules 1986 imposes express limitations on the administrator's power to make such distributions. The sense of that provision appears to be that even in a case in which the administrator has the prior leave of the court, he may only make such a distribution if (i) he has sufficient funds for the purpose, (ii) he does not propose that the exit from the administration should be into a voluntary liquidation pursuant to a notice given under paragraph 83, (iii) his statement of proposals to creditors, as approved by them, included a proposal to make the relevant distribution, and (iv) the payment of a dividend is consistent with the functions and duties of the administrator and any proposals made by him or which he intends to make.
8. Mr Eaton Turner did not suggest that I should regard those four factors as constituting pre-conditions to the giving of permission by this court pursuant to paragraph 65(3), and nor do I propose so to hold, although it does seem to me that a consideration of each of them is likely to be material to whether or not the court is disposed to give such permission. The submission that Mr Eaton Turner did advance was the more general one that, before giving the permission, the court should be satisfied that the making of the proposed distribution is in the best interests of the creditors as a whole, an approach which he said was consistent with an administrator's objective in paragraph 3(1)(b) of:

"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), …".

9. I am not convinced that paragraph 3(1)(b) itself provides the key to the suggested basis on which, in the present case, the court should grant or withhold permission to the making of distributions to non-preferential unsecured creditors, although I accept that in principle that is the consideration which should ultimately the govern the matter, and in this connection paragraph 3(2) is to be noted, which provides that:

"Subject to sub-paragraph (4) [which is not material in the present context], the administrator of a company must perform his functions in the interests of the company's creditors as a whole."

10. As to the sort of questions which might arise in applying that principle, Mr Eaton Turner referred me to Corporate Administrations and Rescue Procedures, 2004, Fletcher, Higham and Trower, in which the authors point out, at page 355, that the case may be one in which particular categories of creditors will be either adversely or beneficially affected according to whether any distribution is made in the administration or in a subsequent liquidation, and they give illustrations as to how this may arise. Mr Eaton Turner recognised that in cases such as that it will or may be difficult to determine whether or not a distribution by administrators will satisfy the general principle upon which he relies, but he submitted that in this case there is anyway no such difficulty. Mr Windatt's second statement of 13 October 2005 confirms that the joint administrators have expressly considered whether any unsecured creditors would be either particularly advantaged or disadvantaged by a distribution through an administration rather than a liquidation and have concluded that there are no creditors, or classes of creditors, who would be so affected. In addition, the first report to creditors stated expressly that the administrators intended to seek the court's permission to make a distribution and the administrators' proposals in that report were approved by the creditors on 28 April 2005. The administrators' evidence is also that they cannot think of any function that could usefully be carried out by a liquidator were the company to go into liquidation, and their proposal is that, subject to making the distributions, they should give notice to the registrar of companies under paragraph 84(1), with the intention of thereby bringing their appointment to an end and achieving the dissolution of the company (see paragraphs 84(4) and (6)). Their intention to take that course was also notified to the creditors in their first report and was also approved by the creditors.
11. Assuming that the court does give permission to the administrators to make the distributions, a further question also arises as to whether it will be open to the administrators to achieve a dissolution of the company under paragraph 84. Even if the answer to that question is no, I understand the administrators to stand by their position that it is still in the best interests of the creditors as a whole for them rather than a liquidator to make the distributions, since the distributed funds will have avoided the impact of the costs of the liquidation. In principle, I agree although I add the qualification that if I were satisfied that this was a case in which the only available exit from the administration was via a liquidation, I would regard that as a factor relevant to the giving or withholding of permission to make the proposed distributions in the administration. Since, however, for reasons I shall give, I propose to direct that the paragraph 84 exit route is in principle open to the administrators, that factor does not arise for consideration in this case. I propose, therefore, to say that I am satisfied that the making of the proposed distributions to non-preferential unsecured creditors is in the best interests of the creditors as a whole and I will give the permission that is requested under paragraph 65(3).

The exit route from the administration

12. Paragraphs 76 to 86 are in a section of Schedule B1 headed "Ending Administration". Paragraph 76 provides that an administrator's appointment ceases to have effect at the end of the first year but may be extended. Paragraphs 77 and 78 are ancillary to paragraph 76. Paragraph 79, headed "Court ending administration on application of administrator," provides:

"79. (1) On the application of the administrator of a company the court may provide for the appointment of an administrator of the company to cease to have effect from a specified time.

(2) The administrator of a company shall make an application under this paragraph if –

(a) he thinks the purpose of administration cannot be achieved in relation to the company,

(b) he thinks the company should not have entered administration, or

(c) a creditors' meeting requires him to make an application under this paragraph.

(3) The administrator of a company shall make an application under this paragraph if –

(a) the administration is pursuant to an administration order, and

(b) the administrator thinks that the purpose of administration has been sufficiently achieved in relation to the company.

(4) On an application under this paragraph the court may –

(a) adjourn the hearing conditionally or unconditionally;

(b) dismiss the application;

(c) make an interim order;

(d) make any order it thinks appropriate (whether in addition to, or in consequence of or instead of the order applied for)."

13. Paragraph 80 is headed "Termination of administration where objective achieved". It relates only to administrations where the appointment has been made by the holder of a floating charge (under paragraph 14) or by the company or its directors (under paragraph 22), neither being in point in this case. It provides that in the case of such appointments, and where the administrator "thinks that the purpose of administration has been sufficiently achieved in relation to the company", he may file a notice with the court and the registrar of companies, which will automatically cause the appointment to cease to have effect. Paragraph 81, headed "Court ending administration on application of creditor", enables a creditor to apply for the termination of the administrator's appointment, but such an application can only be made in reliance upon an alleged improper motive (i) in a case where the appointment was by a court order, on the part of the applicant for that order, and (ii) in any other case, on the part of the person who appointed the administrator.
14. None of paragraphs 76 to 81 provides for the termination of the administrator's appointment to be followed by any other insolvency regime, in particular by a liquidation. Paragraph 82, however, deals with the case in which the appointment of an administrator terminates upon the making of an order for the winding up of the company in the public interest. Paragraph 83, headed "Movement from administration to creditors' voluntary liquidation", provides what the heading says. It reads, so far as material:

"83. (1) This paragraph applies in England and Wales where the administrator of a company thinks –

(a) that the total amount which each secured creditor of the company is likely to receive has been paid to him or set aside for him, and

(b) that a distribution will be made to unsecured creditors of the company (if there are any). ...

(3) The administrator may send to the registrar of companies a notice that this paragraph applies.

(4) On receipt of a notice under sub-paragraph (3) the registrar shall register it.

...

(6) On the registration of a notice under sub-paragraph (3) –

(a) the appointment of an administrator in respect of the company shall cease to have effect, and

(b) the company shall be wound up as if a resolution for voluntary winding up under section 84 were passed on the day on which the notice is registered."

15. Paragraph 84, which is of immediate present relevance, is headed "Movement from administration to dissolution", and also provides for just that. There is no need to set out paragraph 84 in full, but I will set out sub-paragraphs 84(1) to (6):

"84. (1) If the administrator of a company thinks that the company has no property which might permit a distribution to its creditors, he shall send a notice to that effect to the registrar of companies.

(2) The court may on the application of the administrator of a company disapply sub-paragraph (1) in respect of a company.

(3) On receipt of a notice under sub-paragraph (1) the registrar shall register it.

(4) On the registration of a notice in respect of a company under subparagraph (1) the appointment of an administrator of the company shall cease to have effect.

(5) If an administrator sends a notice under sub-paragraph (1) he shall as soon as is reasonably practicable –

(a) file a copy of the notice with the court, and

(b) send a copy of the notice to each creditor of whose claim and address he is aware.

(6) At the end of the period of three months beginning with the date of registration of a notice in respect of a company under sub-paragraph (1) the company is deemed to be dissolved. ..."

16. Finally, paragraph 85 provides that, in a case in which the administrator was appointed by an administration order and the court makes an order under Schedule B1 that the appointment is to cease have effect, the court must also discharge the administration order. Paragraph 86 provides that where the court has made an order under Schedule B1 that an appointment is to cease to have effect, the administrator must give notice of the order to the registrar of companies.
17. In this case, the administrators' intention is first to make the distributions that I have permitted and, having done so, to give notice to the registrar under paragraph 84(1), a notice which will (they intend) lead both to the termination of their appointment as administrators and the dissolution of the company. They have, however, raised the question of whether that exit route will be open to them. The point turns on the words in paragraph 84(1) reading "If the administrator … thinks that the company has no property which might permit a distribution to its creditors, …". The relevant thinking by the administrators in the present case must, it seems to me, be thinking in which they must engage once they have made the distributions that I am permitting them to make and immediately before giving (or not giving) any notice under paragraph 84(1). The question which arises is whether, in those circumstances, the quoted words mean: (i) a distribution having already been made, the administrator thinks that the company has no further property which might permit a distribution to creditors; or (ii) that the administrator thinks that the company neither has, nor during the administration ever had, any property which might permit a distribution to creditors. If sense (i) is the correct one, the paragraph 84 exit route will be open to the present administrators; indeed, it will be a mandatory route (note the "shall" in sub-paragraph (1), although sub-paragraph (2) enables an administrator to apply to the court for a disapplication of sub-paragraph (1)). If sense (ii) is the correct one, the paragraph 84 exit route will not be open to the administrators.
18. The administrators' concern on the point is fully justified because in In re Ballast plc (in administration) and others [2005] 1 WLR 1928 Blackburne J, at paragraph 20, expressed the view that sense (ii) is the correct one. He said:

"20. Moreover, it might be thought that where, as paragraph 84 presupposes, there is no property which might permit a distribution to creditors (by which I understand no property available at any time during the administration which might permit a distribution to creditors, including, apparently, secured creditors) it would seem pointless if nevertheless the administrators must incur the cost of applying to the court for orders under paragraphs 79 and 85."

19. The particular points that Blackburne J had to decide in that case were whether it was open to administrators to have recourse to paragraphs 83 and 84 without first applying to the court for orders under paragraphs 79 and 85. He concluded in paragraph 21 that it was, adding:

"21. ... Whether the circumstances are present which entitle the administrators to have recourse to paragraph 83 (in the case of Ballast and Investments) and 84 (in the case of Management) is for the administrators. The court is not asked for a declaration that those circumstances are present. Be that as it may, having read the joint administrators' evidence, I am satisfied that that they are and therefore that it is entirely appropriate that Ballast and Investments move straight from administration to a creditors' voluntary liquidation under paragraph 83 and that Management moves straight from administration to dissolution under paragraph 84. The evidence discloses that the creditors have been informed of the joint administrators' wish so to proceed; none has objected."

20. I presume from those observations that the evidence disclosed that Management had never had any property available to it during the administration that might have permitted a distribution to creditors. But I also regard it as clear that it was not part of the ratio of Blackburne J's decision that that state of affairs was a pre-condition to the availability of paragraph 84, although that was the view he had expressed in the parentheses in paragraph 20. In short, I regard that expression of view as having been obiter.
21. Blackburne J's view receives support from the notes to paragraph 84 in Sealy & Milman's Annotated Guide to the Insolvency Legislation, second revised seventh edition, page 537. A view to different effect is expressed in Corporate Administrations and Rescue Procedures, 2004, Fletcher, Higham and Trower, page 418, namely that the duty under paragraph 84 will arise in two categories of case: (i) where it transpires that the company has no property available for distribution to creditors, and (ii) where the administrators have made distributions under paragraph 65 and there is no further distribution to be made, whether through the medium of an administration or a liquidation.
22. Mr Eaton Turner submitted that the latter view is to be preferred as the correct interpretation of paragraph 84(1). First, he said that if Blackburne J's suggested interpretation was correct the legislation could have said so unequivocally but did not. Second, he said that the key words in paragraph 84(1) were "Where an administrator thinks …", being words which show that what therefore counts is the factual position at the time that the administrator forms his view. He said that position may change in the course of the administration and will necessarily change following the making of a distribution. Third, he said that if Blackburne J's construction is correct, paragraph 84 would only rarely be available because if, from the outset, the company had no assets which might permit a distribution, it is unlikely that it would have been a candidate for administration in the first place. In such a case, the course which it would be likely that the administrator ought to adopt would be the making of an early application to the court under paragraph 79(2). Fourth, he said that, if paragraph 84 is not available to an administrator who has first made a distribution of all available assets under paragraph 65, it is difficult to see what such an administrator should do to bring the administration to an end. In particular, it will not be open to him to procure the company to move from administration to a creditors' voluntary liquidation under paragraph 83, because a precondition to that, in sub-paragraph (1), is that the administrator thinks (inter alia) that "a distribution will be made to unsecured creditors of the company (if there are any)." (In Scotland, of course, the rules preclude any distribution by an administrator who intends to have recourse to paragraph 83). Mr Eaton Turner acknowledged that it would instead be open to the present administrators to apply for the termination of the administration by an application to the court under paragraph 79(3) but he said that an order terminating the administration under this sub-paragraph would simply have the effect of leaving the company in limbo. In practice, it would presumably result in its control being returned to its directors. Alternatively, as it seems to me, the administrators could presumably present a petition for the compulsory winding up of the company.
23. Coming to my conclusions, I do not find the construction of paragraph 84(1) wholly straightforward and recognise that the statutory language can be read as supporting the view favoured by Blackburne J. I have, however, been persuaded by Mr Eaton Turner that that obiter view is not the correct one. If it were correct, then I agree with Mr Eaton Turner that it would seem improbable that the company would have been an appropriate candidate for administration in the first place and that in such a case the more appropriate course for the administrator to adopt would be to make an early application for the termination of his appointment under paragraph 79(2).
24. In my judgment, however, in the context in which they appear, paragraphs 83 and 84 are focusing on the situation in which the administrator has achieved a purpose of administration other than the rescue of the company as a going concern and in which the only remaining practical question is the route by which the company is to be given its final quietus. Before making that decision, the administrator has to consider what interest the creditors have in the available alternatives. If he is satisfied in terms of paragraph 83(1), then he can (but does not have to) give a notice under paragraph 83(3), which will have the effect of moving the company straight from administration to voluntary liquidation. If he is not satisfied in terms of paragraph 83(1), and thinks that the company has no property which might be distributed to creditors, then there will be no practical advantage in a voluntary liquidation and paragraph 84(1) requires him to avoid the expense of such a liquidation and instead to give a notice whose effect will be to terminate the administration and result in the prompt dissolution of the company. The mandatory terms of paragraph 84(1) are, however, not absolute, since paragraph 84(2) entitles the administrator to apply to the court for the disapplication of paragraph 84(1) in relation to the company. That might perhaps be because he had formed the view that, even though he could properly give a notice under paragraph 84(1), the case was one whose special circumstances required that there should be a winding up by the court. But subject to a consideration such as that, or some other proper basis for a disapplication of paragraph 84(1), I consider that the administrator would have a duty to give a notice under that sub-paragraph. In particular, in engaging in the thinking exercise that paragraph 84(1) imposes on him, I consider that he is only required to "think" whether at that time the company has property which might permit a distribution to be made to creditors. That is consistent with the tense of the statutory language being the present tense. Whether the company had assets which have previously been distributable and distributed is in my judgment immaterial. I agree with Mr Eaton Turner that if the prior distribution of all available assets precludes the giving of a paragraph 84(1) notice, it also precludes the giving of a paragraph 83(3) notice and so limits the exit options open to the administrator. Such an interpretation of paragraph 84(1) would appear to me to deprive the paragraph of a significant element of practical utility and I am not satisfied that it is correct.
25. I should add that, were I approaching the present application unaided by Blackburne J's judgment in the Ballast case, I would have required argument on whether – accepting that the paragraph 84(1) exit route is in principle open to the administrators – they would nevertheless also have to make an application to the court under section 79(3) seeking an order under paragraph 79(1). That is because this is a case in which the present administration is pursuant to an order of the court and the administrators think, or will think when they have made the distributions, that the purpose of administration has been sufficiently achieved. That being so, section 79(3) can be said to impose an obligation upon them to make such an application, although any order made upon it to the effect that the administration is to cease could, it seems to me, fit in with the automatic provisions to the like effect in paragraph 84(4). In the Ballast case, however, which was also the case of an administration pursuant to an order of the court, Blackburne J held that paragraph 84 is by itself able to do all the necessary work and that no application needs to be made under paragraph 79(3) and no order of the court discharging the administration order is required under paragraph 85. Mr Eaton Turner did not suggest that Blackburne J's decision on those matters was in any respect in error, and I propose to follow it and hold that in this case too no application under paragraph 79(3) was or is necessary.
26. The result is that I hold in relation to the second question that if, once the permitted distributions have been made, the administrators "think" that the company has no further distributable assets, they will be under a duty to serve a section 84(1) notice (but subject always to their discretion to make an application under paragraph 84(2)). I will hear Mr Eaton Turner as to the form of the order I should make.