England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY

		Birmingham Civil Justice Centre Bull Street, Birmingham B4 6DS
		15 May 2009

HHJ David Cooke :

Introduction

1. On 27 February this year I made an administration order in relation to Kayley Vending Limited, on the application of its directors, and indicated that I would give my reasons in writing at a later date, which I now do. Insofar as they relate to the particular application before me they are brief, as the circumstances were largely unremarkable. The purpose of the extended consideration has been to respond to the invitation made by Mr Morgan to give some guidance to the profession as to the approach of the Court to what have come to be called 'pre-pack' administration applications, in the light of the recently promulgated Statement of Insolvency Practice 16 entitled "Pre-Packaged Sales in Administrations".
2. Pre-packs are increasingly common, and highly controversial. The term refers to a sale of all or part of the business and assets of a company^[1] negotiated 'in principle' while it is not subject to any form of insolvency procedure, but on the footing that the sale will be concluded immediately after the company has entered into such a procedure, and on the authority of the insolvency practitioner appointed. That procedure is now most commonly administration, but not necessarily so. It may for instance be a receivership, though the relative incidence of receiverships has fallen since the reforms introduced by the Enterprise Act 2002, or a voluntary liquidation. Only if it is an administration is the court likely to be involved in the appointment, and even then the administrator is most often appointed out of court by the directors or the holder of a qualifying floating charge^[2], so the proportion of pre-packs in which the court has any direct involvement prior to the sale is likely to be small.
3. It has been the deliberate policy of the legislature, embodied in the changes to the regimes of administration, receivership and voluntary arrangements made by the Insolvency Act 2000 and the Enterprise Act 2002, to reduce the involvement of the court in the initiation of insolvency processes, and, where an application to the court is still required, to simplify the requirements and particularly the information that has to be provided for the purpose. This raises the question whether, if pre-packs are thought to be potentially subject to abuse, the courts realistically can, or should seek to, do anything about the problem by the approach taken in the relatively small number of cases that do come before them before the sale is made, or whether this is a matter for the legislature. I am also conscious that it is not for me to purport to lay down anything that could be construed as being a practice direction, local or otherwise.

SIP 16

4. SIP 16 is the latest in a series of guidance notes issued by the regulatory bodies responsible for supervising the conduct of licensed insolvency practitioners. It came into force in January 2009 and, as indicated by the title, relates only to administrations. I summarise its contents, I hope not excessively, as follows:

i) It reminds insolvency practitioners, whether advising the company prior to entry into administration or acting as administrator, of their duty, and the duties of those they advise, to parties who may be affected by a pre-pack sale, and that they should keep a detailed record of their reasoning in order to explain and justify the decision to follow that course.

ii) It reminds practitioners that although an administrator has power to sell the assets without prior approval from creditors, the exercise of that power may be subject to challenge under paragraph 74 (unfair harm to the interests of one or more creditors or members) or 75 (misfeasance) of schedule B1 to the Insolvency Act 1986 ("the 1986 Act").

iii) Specifically, practitioners are reminded of the potential liability of directors and others who caused the company to incur credit in the period prior to entry into administration (referring to potential liability for fraudulent or wrongful trading under sections 213 and 214 of the 1986 Act) and of the duty of the administrator when realising assets to act in the interest of creditors as a whole.

iv) An important statement of principle appears at paragraph 8: "it is in the nature of a pre-packaged sale in an administration that unsecured creditors are not given the opportunity to consider the sale of the business or assets before it takes place. It is important, therefore, that they are provided with a detailed explanation and justification of why a pre-packaged sale was undertaken, so that they can be satisfied that the administrator has acted with due regard for their interests."

v) Paragraph 9 contains a list of 17 items of information, which the administrator is required to disclose to creditors (subject to some caveats) with his first notification to them. He is also required to convene the initial creditors meeting as soon as possible after his appointment, presumably in order that the creditors can discuss the information provided and any concerns that they have. The practitioner is required to state the information "as far as [he] is aware, after making appropriate enquiries", thus placing an onus on him to go beyond merely accepting the directors' unsupported assertion on matters which may appropriately be investigated.

vi) As well as factual information about the terms of the sale, the information required includes a number of items directed to the question whether a better price might have been achieved by an alternative course of action, which would normally be to continue to trade the business as a going concern whilst marketing it to other potential purchasers. Thus the administrator is required to state:

a) the extent of his involvement prior to appointment

b) any marketing activities conducted or valuations obtained

c) the alternative courses of action that he considered, with an explanation of possible financial outcomes

d) why it was not possible to trade the business and offer it for sale as a going concern during the administration

vii) other matters relate to possible concerns creditors might have about benefits of the transaction to the directors or persons involved with the company; hence there is a requirement to disclose any connection between the purchaser and such persons, whether directors have given guarantees to any financier, and the nature of any wider transaction of which the sale forms part.

5. Mr Morgan makes the point to me that, in most cases, it should not put any undue burden or expense on the proposed administrator to provide much or all of the information required by SIP 16 to the court at the time the application for an administration order is made. This is because the proposed administrator will, in the nature of a pre-pack, have been involved in the negotiations for the sale, will be conscious not only of his general legal duties in considering the proposed transaction but also of his obligations under SIP 16 and will be collecting the required information during the pre-appointment period in order to comply with those obligations. There may be certain parts of the information which it would be commercially sensitive to have available to any person who may inspect the court file, but any such information could be protected by an appropriate direction pursuant to Rule 7.31(5).

Pre-packs, and concerns about them

6. I propose to examine briefly the nature of the concerns that have been expressed about pre-packs, and then the way in which the provisions of the 1986 Act as now in force, and the case law to date, have operated to give rise to them. The principal advantages of a pre-pack are well-known; they are that the process enables a business to be sold quickly, with the minimum possible adverse impact from either the public knowledge of its insolvency or the restrictions imposed by the insolvency process itself. Employees can be retained who might leave, or have to be dismissed, once a formal insolvency starts. Continuity of customer and supplier contracts can be maintained. Even if a going concern sale might be achieved by an administrator, the period of trading in administration whilst it is negotiated requires to be funded and may in any event result in a damaging leaching away of business.
7. The Association of Business Recovery Professionals publishes some helpful material on its website^[3], including a paper by Dr Sandra Frisby entitled "A Preliminary Analysis of Pre-packaged Administrations". In that, she summarises the debate as being whether pre-packs are an appropriate and effective method of realising the assets of an insolvent business and sets out a number of specific objections:

"a pre-packaged business has not, by definition, been exposed to the competitive forces of the market, which may lead to the business being disposed of for a consideration less than would have been obtained had it been marketed for an appropriate period

where a pre-pack is effected through administration, the rights of stakeholders to participate in the decision-making process, as envisaged by the Insolvency Act1986, are frustrated

the pre-pack process is insufficiently transparent: creditors, or at least certain classes of creditors, are not provided with information adequate to allow them to measure whether the practitioner has carried out is functions in a manner that has not improperly or unlawfully prejudiced their interests

… a lack of transparency inevitably results in a want of accountability: creditors are entitled to challenge the practitioner's conduct but are disabled from doing so without the information necessary to mount a challenge

pre-packs may be unacceptably biased towards the interests of secured creditors, most notably floating charge holders. There may be no incentive to negotiate a consideration as a business much over the amount necessary to discharge the secured indebtedness…

pre-packs may also be geared rather more towards achieving enough to satisfy the claims of the floating charge holder and practitioners fees and expenses, with no effort at capturing any premium over and above these amounts

where a pre-pack involves the sale of the business to a party previously connected with the company, usually as director, the process resembles the practice of 'Phoenixing'…

… the opportunities for and appearances of collusion with the purchaser of the business are heavily amplified where a sale of the business is effected through a pre-pack "

8. To these I might add a concern that is a corollary of one of the advantages claimed for the pre-pack. It is said that there may be difficulty obtaining funding in order to enable the administrator to continue to trade whilst he negotiates a sale of the business. If the negotiation process takes place before his appointment, and the business is continuing to trade in that period, there is an obvious risk that credit incurred in that period will not be paid so that the negotiation takes place at the expense of the creditors.
9. The data examined by Dr Frisby showed a sharp rise in the number of pre-pack cases, particularly in administration, since 2003. A high proportion of these cases were administrations, and in those cases she speculated that the increase was related to the introduction by the Enterprise Act of the ability to make appointments out of court. Other cases were receiverships, where there has been no similar procedural change. It may be (this is my speculation and not hers) that in these cases the increase is as a result of advisers and directors simply becoming more familiar with the availability of the pre-pack route and applying it to those cases where the floating charge holder retains the ability to appoint an administrative receiver. Among a number of provisional conclusions she noted that pre-packs from administration tended disproportionately to involve a sale to connected parties and particularly directors, that they seemed on average to produce a better outturn in terms of employment preserved and returns to secured creditors, but a worse one in terms of return to unsecured creditors, in each case by comparison with sales negotiated after appointment by the administrators.
10. The cynical concerns of those outside the process have been expressed elsewhere in rather more trenchant terms. Writing in 'Recovery' magazine in 2005 Mr Jon Moulton, who is a knowledgeable insider as the founder of a well-known company specialising in acquiring and turning round underperforming businesses, headed his article "The uncomfortable edge of propriety-prepacks or just stitch ups?" and said this:

"A company is heading into trouble. Its directors and shareholders are introduced to an appealing fellow who drives a very nice BMW who explains that if they work with him they will get rid of most of their creditors and buy back the business pretty well immediately at a very modest cost. Great sales pitch!

All they need to do is work with him to sort out an administration at a convenient date with, of course, a suitably appealing fellow to act as administrator at a fee commensurate with his taste in cars. The directors are concerned that the administrator will sell to someone else at such a bargain price…doesn't he have to look for the highest price?

The answer, much accompanied by head and eye movements, is that as long as you can come up with a plausible answer to the effect that it seemed likely no one else was interested (quite likely in view of the secrecy) or that the directors were likely to pay the best price (anybody's guess) or it would be too damaging to the business to shop it around (clearly an adoptable opinion) then there is no need to offer the company around.

Funnily enough, the rapid growth in pre-packs … has given rise to an unpleasant practices. The organising administrator has a clear conflict of interest as typically he wants to get the appointment and the management can influence that... It may suit a bank as it can allow it to participate in the equity going forward in a controlled way or to provide it with an assured return potentially at the expense of other creditors. Administrators generally like helping banks.

In the real world you see what look to be abusive practices. Pre-packs are carefully planned months or weeks in advance. Potentially, all goods and services acquired thereafter are being acquired with no intention of payment … but rarely do you see companies ceasing to incur credit for a period before a pre-pack…

The victims are usually the general creditors as the assets are sold at an undervalue but they struggle to prove it or lack the economic incentive to go to law in often complex circumstances. Who do they sue-the company (worthless), the directors (probably dodgy) or the administrator (professionally advised and well-informed)?

The USA has a more ordered form of pre-pack with some judicial review. Here the pre-pack is not a legal structure but a practice. There is an infrequent need for pre-packs but only rarely is there a compelling case for not trying hard to follow the law by seeking to maximise realisations for creditors.

This whole area of pre-packs needs regulation … perhaps a judge should bless pre-packs before they are implemented. "

11. A general summary of these concerns would be that the speed and secrecy which give rise to the advantages claim for pre-packs may too easily lead the directors and the insolvency practitioner to arrive at a solution which is convenient for both of them and their interests (perhaps also satisfying a secured creditor who might be in a position to appoint his own receiver or administrator), but which harms the interests of the general creditors because:

i) it may not achieve the best price for the assets

ii) credit may be incurred inappropriately in the pre-appointment period

iii) they are deprived of the opportunity to influence the transaction before it takes place, and

iv) having been presented with a fait accompli, they have insufficient information to make it worthwhile investigating and challenging the decisions taken.

12. It was no doubt in response to these concerns that SIP 16 was drafted and promulgated. It will act as a salutary reminder to insolvency practitioners of their responsibilities, which may influence the way in which they and the directors act, although it does not provide the creditors with any direct input into the decisions they take. It will however provide creditors with information on the basis of which they may ask questions and, possibly, seek redress after the fact. Any creditor who is dissatisfied with a pre-pack sale is of course still subject to the lack of economic incentive that Mr Moulton referred to: he may in practice have to fund the whole cost of investigating his concerns and any resulting litigation, at the end of which even if successful recoveries are uncertain and in any event go in to the general pool of assets from which, at best, he is only likely to receive an enhanced dividend.

Administration procedure, and information available to the court and creditors

13. Are these potential abuses matters with which the courts are properly concerned? The broad shape of the regime of administration as now in force still follows the original vision that the administrator is appointed with a view to achieving a statutory purpose, that once appointed the administrator would assess the business and the options available to him in pursuit of that purpose, present a set of proposals to creditors by way of a report, which they would consider at a meeting, and then act in accordance with those proposals, as approved with or without modifications, at that meeting. The assessment of those proposals is primarily a matter for the creditors, and is to be made in the light of their own commercial interests. As originally enacted, the administrator would be appointed by the court, and the proposed administrator was normally required to provide the court with an independent report in relation to the company to enable the court to assess whether the appointment was "expedient".
14. These reports became long and expensive to produce, resulting in issue of a Practice Note^[4] emphasising that such reports should not be unnecessarily elaborate and detailed but should be a concise assessment of the company's situation and the prospect of an order achieving one or more of the statutory purposes. Even with such a report, the court was often poorly placed to do anything other than accept the view expressed by the insolvency practitioner.
15. The regime now contained in Schedule B1 may be said to go to the other extreme. Most appointments are made out of court either by the holders of a qualifying floating charge or by the directors themselves. In such cases, there is an obligation to give notice of the appointment to the court, together with prescribed documents^[5], and the appointment is stated to take effect only once these requirements have been complied with^[6]. The court has no role other than to receive these documents. The documents to be lodged do not include any information about the affairs of the company or the proposals of the administrator beyond a simple statement (unsworn and not required to be supported by any evidence) by the administrator that in his opinion the purpose of administration is reasonably likely to be achieved, and a summary of his previous involvement with the company^[7]. Where the directors propose to make their own appointment, they must first give notice to the holder of any qualifying floating charge. Again there is no requirement for any substantial information about the affairs of the company or what action the administrator may propose to take, which was presumably not thought necessary as the charge holder will in practice either be able to obtain such information as he requires by arrangement with the directors, or has the remedy of making his own appointment if this is not forthcoming or is not satisfactory.
16. It is now settled that the administrator can exercise the power to dispose of the business of the company before a meeting of creditors has been held, and even before any proposals have been submitted to creditors. This was held to be the position before the reforms introduced by the Enterprise Act in Re T&D Industries Plc [2000]1 WLR 646, and position was held to be the same after the coming into force of the Enterprise Act in Re Transbus International Limited [2004] 1WLR 2654.
17. In the case of an out-of-court appointment, then, any proposals by the directors for a pre-pack would in practice be subject to the scrutiny of any qualifying floating charge holder (if there is one) but otherwise creditors have no involvement at all until after the appointment has been made and, presumably, the intended sale has been completed.
18. The directors may not, however, make their own appointment out of court whilst any petition for compulsory winding up is pending^[8]. Instead, they must make an application for an instruction to be appointed by the court. Such a petition is most often of course made by an unpaid and unsecured creditor, who must be given notice of the application. The petition is commonly adjourned and the petitioning creditor will of course have the opportunity of opposing the administration application. If an administration order is made, the winding up petition is dismissed^[9].
19. These are of course the circumstances in which most administration applications come before the court. The petitioning creditor may or may not oppose the application; in deciding what to do he will have available to him primarily the information lodged in support of the administration application. It is obviously important that he be sufficiently well-informed to be able to take a decision, and if he opposes the application, to be able to present his case in opposition to the court. Whether or not application is opposed, the making of an administration order is discretionary and the court must be satisfied in exercising that discretion that an administration order is appropriate, rather than for instance allowing any winding up petition to proceed. Mr Andrew Simmonds QC, sitting as a Deputy Judge of the Chancery Division, was so satisfied in exercising his discretion to make an administration order in DKLL Solicitors v HMRC [2007] EWHC 2067 (Ch), which was a pre-pack case, notwithstanding the opposition of the principal creditor, which had announced that it would oppose the proposed sale if the creditors meetings were held.
20. Is there then a case for supplementing the information already required by the rules to include any or all of the information required by SIP 16? The evidence required to be lodged in support of an administration application by directors is set out in rule 2.4, and includes a statement of the applicant's belief that the company is or is likely to become unable to pay its debts, a statement of the company's financial position, its assets and liabilities, details of any security held and any insolvency proceedings outstanding. All of this goes to the first of the two threshold requirements^[10], namely the company's inability to pay its debts. The only information specifically required by the rules which directly goes to the second of these requirements, the reasonable likelihood of achieving the purposes of administration, is the requirement that the proposed administrator should make a statement (again unsworn and not required to be supported by any evidence) of his opinion to that effect^[11].
21. Thus far, then, there is no requirement on applicant to provide any information to the court in relation to the purpose of administration, including matters such as a proposed pre-pack. I then come to rule 2.4(2)(e) which provides that the affidavit in support "shall contain…any other matters which, in the opinion of those intending to make the application for an administration order, will assist the court in deciding to whether make such an order, so far as lying within the knowledge or belief of the applicant." This language is of course entirely general. It is under this head that, typically, the applicant will provide information as to why it is thought that (if this be the purpose of the administration) administration is likely to lead to a better result for creditors than a winding up, including, commonly, an estimated outcome statement and information about the source of, and evidence to support, the amounts included in it. The fact that a pre-pack is proposed, and the value likely to be achieved (if known) would obviously be appropriate information to provide under this head.
22. The generality of this provision does not give the applicant a free hand in deciding whether or not to provide any additional information; in so far as he is of the opinion that it will assist the court either in reaching a decision on one or both of the threshold conditions or in the exercise of its general discretion as to whether an order should be made, the information must be included. This applies, of course, whether the information is favourable or otherwise to the order that the applicant seeks. Nevertheless in identifying what matters are likely to assist the court and selecting the information to be presented about those matters, the general nature of the requirement means that the court relies very much on the professionalism of the applicants and their legal advisers to ensure that the information is sufficient but not excessive, appropriately selected and fairly presented.
23. This is particularly so of course because any omission to provide potentially relevant information may not be readily apparent from the information which is in fact disclosed. If there is, or it appears that may be, a gap in information provided, it is left very much to the individual judge whether and how far to pursue it. The answer to one question may lead to another emerging, particularly perhaps in the case of a pre-pack where either the petitioning creditor or the court may suspect that it is in the interests of the applicants to provide the bare minimum of information. This is to some extent inevitable, but does not assist the parties in putting their cases or keeping costs down to a minimum on an opposed application, nor does it help the court to exercise the discretion which remains vested in it even in the case of an unopposed application.

Conclusion

24. It seems to me that in exercising its discretion in pre-pack cases, the court must be alert to see, so far as it can, that the procedure is at least not being obviously abused to the disadvantage of creditors in any of the ways outlined above. If it is, or may be, the court may conclude that it is inappropriate to give the pre-pack the apparent blessing conferred by making the administration order. In reaching that decision, it is likely to be assisted by the provision of information in relation to the pre-pack transaction and its background, and to that extent the provision of such information falls within rule 2.4(2)(e). While it is primarily a matter for the applicant to identify what information is likely to assist the court, and that information may not be limited to the matters identified in SIP 16, it seems to me likely that in most cases the information required by SIP 16, insofar as known or ascertainable at the date of application would fall within the requirement I have referred to and so ought to be included in the application. For the reasons given by Mr Morgan, it should not normally be unduly burdensome or costly for it to be so included, and no doubt if there are special reasons why it cannot readily be provided in a particular case this can be explained.
25. It would not in my view be satisfactory to wait until an application is actually opposed, and rely on the ability of the court to give directions for the filing of further evidence on the hearing of the opposed application. Information sufficient to evaluate the proposed pre-pack, it seems to me, is likely to assist the petitioning creditor in deciding whether or not to oppose the application and he should not be in the position of having to commit himself to opposition, with the cost implications that entails, in order to obtain such information.
26. Nor is it particularly satisfactory to say that in so far as the information is not made available to the court on the hearing of the application, it will be provided to creditors in due course and they may exercise any remedy in respect of abuse afterwards. No doubt that is the primary mechanism by which any abuse which in fact occurs will be remedied, but it suffers from all the difficulties referred to above which may mean that it is far from effective.
27. I emphasise that nothing in what I say is intended to add to the requirements of schedule B1 and the Rules, and it remains a matter for each judge presented with an administration application whether he or she is satisfied that sufficient information has been presented for the purpose of deciding it. Nevertheless I hope that these observations will be of some assistance to the profession in at least minimising the possibility that applications will be adjourned for the provision of additional information which the court identifies as required.

Commercially sensitive information

28. I mentioned earlier the possibility of a direction being made by the court pursuant to Rule 7.31(5) that information of a commercially sensitive nature should not be available through inspection of the court file. Plainly, certain of the information required by SIP 16 may be commercially sensitive, at least until the proposed transaction is completed. It would I suggest be convenient for practitioners and the court if any information which is sought to be protected by such an order is set out in a manner such that it can be conveniently separated, for instance by being contained within one or more identified exhibits to an affidavit or witness statement which may, if the court makes the order, be excluded from inspection in their entirety.
29. Where such an order is made, it is clearly important that practical arrangements are made so that the relevant information is not inadvertently disclosed if, for instance, the existence of the order is overlooked by court staff responding to a request to make a file available for inspection. I understand that in London a practice has developed of returning the documents containing the protected information to the solicitors for the Applicant, against their undertaking to lodge them again upon further order. That practice would provide the required degree of security, but clearly depends on the identification of particular documents that contain nothing material to the application other than that which is properly excluded from inspection by the order of the court.

The present application

30. Finally, I come to a brief statement of the reasons for making the order in this particular case. The business of the company is principally the supply of cigarette vending machines to public houses. The evidence is that it has suffered cash flow problems which the directors attributed to the ban on smoking in public houses and other matters. At the time of the application it faced a winding up petition in respect of unpaid Crown debts due to HMRC of some £79,000, which it was unable to pay. I was satisfied therefore that the company was unable to pay its debts. HMRC had voted down a proposed voluntary arrangement, but indicated prior to the hearing that they took no position for or against the proposal for an administration order. The evidence filed showed that the directors with the assistance of the proposed administrators were negotiating with two potential purchasers of the business as a going concern, neither of which was connected with the directors. These purchasers were the two principal competitors of the company, supporting the opinion of the proposed administrator that they would be the most likely purchasers and would be prepared to pay most for the assets. His opinion, supported by an asset valuer, was that if the company were to go into liquidation and the machines could not be serviced they could not be sold in their present locations and would have to be removed and sold separately, at a much lower value. On that evidence, I was satisfied that there was a reasonable prospect of achieving a better return to creditors as a whole. There was nothing in the evidence to suggest that an administration order ought to be refused as a matter of discretion.
31. I also made, at Morgan's request, an order that the proposed administrators pre-appointment costs be treated as an expense of the administration pursuant to paragraph 13 (1)(f) of Schedule B1, following the approach of HHJ Norris QC in Re SE Services Ltd (9 August 2006). That case is unreported, but I have been provided with a note made by counsel for the Applicant in it (the late Miss Claire Cunningham), and a transcript of a later decision by HHJ Purle QC in this court (Re Aldersley Battery Chairs Limited, Case No 9003/2008, 14 January 2008, also unreported) in which he accepted the accuracy of the same note and followed the decision of HHJ Norris QC. I also have no reason to doubt the accuracy of the note, the relevant parts of which I reproduce below:

"A further order is sought regarding costs. It is an order that the costs of the proposed administrat[or] pre-appointment in considering and completing form 2.2B shall be treated as expenses of the administration.

As is pointed out by Miss Cunningham, under the pre-Enterprise Act 2002 regime, the Court normally received a Rule 2.2 report. This contained an analysis of the trading condition of the company, the liabilities and assets, and the strategy to be adopted. This is all replaced under the new regime by Form 2.2B, with a bald statement that the purpose is likely to be achieved.

Under the pre-Enterprise Act regime, it was common for the court to order that the costs of the R2.2 report be treated as an expense of the administration.

The position under the new regime, is a position of some obscurity.

As is pointed out in the letter from the Insolvency Service to Insolvency Pracitioners, the Dear IP Letter [for September 2005]:

"Costs incurred prior to the administration are essentially a matter between the relevant insolvency practitioner and the party instructing them. For example if a company has concerns regarding its financial situation and approaches an insolvency practitioner for advice, then payment of fees incurred would be a matter between the company and the insolvency practitioner. In such a case any fees outstanding, at the date the company entered administration, would, in our view, rank as an unsecured claim".

Rule 2.67(1)(c) of the Insolvency Rules reads:

"Where an administration order was made, the costs of the applicant and any person appearing on the hearing of the application and where the administrator was appointed otherwise than by order of the court, any costs and expenses of the appointor in connection with the making of the appointment and the costs and expenses incurred by any other person in giving notice of intention to appoint an administrator".

The argument runs that the costs of the application should include fees he has to pay for work necessary to produce Form 2.2B without which the application can't succeed.

As is pointed out in the Insolvency Service letter:

"time spent by a proposed administrator, prior to any appointment, in determining that it is reasonably likely that the purpose of the administration would be achieved and to enable them to complete Form 2.2B, are arguably costs and expenses of the appointor/applicant for the purposes of Rule 2.67(1)(c) of the Insolvency Rules"

Miss Cunningham invites me to make an order in the form sought based on R2.67(1)(c) in the alternative she submits I have the power to do so under the general power in paragraph 13 of Schedule B1, which provides:

" (1) On hearing an administration application the court may..

(f) make any other order which the court thinks appropriate .."

Some care has to be taken in relation to the phrase "any other order", given the context in which it occurs, but I consider that an order relating to the costs of an administration application and how they should be dealt with plainly falls within the description of any other order in the context in which it applies.

In the present case, seems to me that the Insolvency Practitioner has put together a form of administration that is plainly for the benefit of creditors. Might not always be the case. It is the experience of the court that, although there is a more beneficial outcome, the thrust of the administration proposal is that the existing management should be able to buy the company shorn of the burden of historic debt. In such cases, the balance of advantage between existing creditors and the existing management appears to be heavily with the management.

In such circumstances, it is wrong for creditors to bear the burden of a choice which might give benefit to them, but more benefit to the management.

To construe 2.67(1)(c) as covering these costs would mean that in every case the pre-appointment costs could be charged wherever the balance lay.

Use of the power in paragraph 13(1) of Schedule B1 enables the Court to approach the matter on a case by case basis.

Miss Cunningham drew attention to the words of Neuberger J in Re A Company No 005174 of 1999 [2000] BCC 698 @ 708, where he said that the Court's jurisdiction is "a particularly flexible one, and, subject to complying with the express statutory provisions, I do not think that the Court should be quick to fetter that flexibility".

She also drew my attention to the words at page 709 "The purpose of the administration regime is best served by imposing as few hurdles as possible in the way of those seeking administration orders in appropriate cases".

I agree with both sentiments. But I believe that proper recognition of the flexibility of the scheme and proper recognition that the hurdles shouldn't be place[d would be given if I were to] say in the instant case that the appropriate power is paragraph 13 of Schedule B1.

Whether in a less meritorious case, the administrators could recover pre-appointment costs should await an application in the appropriate factual context."

32. The penultimate paragraph is somewhat obscure, probably because some words were omitted in the typing, but I believe it is sufficiently clear that HHJ Norris QC held that it was appropriate to use the power contained in para 13 of Schedule B1 to make an order on a discretionary basis, rather than to find that pre- appointment costs were in all cases part of the costs of the Applicant that must be allowed under Rule 2.67(1)(c). The italicised words are my own interpolation to that effect.
33. HHJ Norris QC further held that it was appropriate in the exercise of this discretion to make the order sought where the court is satisfied that the balance of benefit arising from the incurring of pre- appointment costs is in favour of the creditors rather than (in a pre-pack case) the management as potential purchasers of the business. In my judgment it is appropriate that the court should continue to follow this practice, as HHJ Purle QC also did in the Aldersley Batteries case.
34. In the present case the evidence showed a potential benefit to creditors, and there was no question of purchase by the management, and accordingly I approved the proposed order.

Note 1   I refer to a company for convenience but the phenomenon is not confined to limited companies    [Back]

Note 2   See paragraphs 14 and 22 of Schedule B1 to the Insolvency Act 1986    [Back]

Note 3   www.r3.org.uk/publications    [Back]

Note 4   [1994] 1WLR 160    [Back]

Note 5   Insolvency Act1986 Schedule B1 para 18 (1) and 29(1)    [Back]

Note 6   Paras 19 and 31 respectively.    [Back]

Note 7   See Rule 2.16(2), para 18(3) and Form 2.2B, and corresponding provisions on an appointment by directors.     [Back]

Note 8   Para 25(a)    [Back]

Note 9   Para 40(1)(a)    [Back]

Note 10   Para 11    [Back]

Note 11   Rule 2.3(5)(c)    [Back]