CHANCERY DIVISION BRISTOL DISTRICT REGISTRY
B e f o r e :
IN THE MATTER OF THE INSOLVENCY ACT 1986
AND
IN THE MATTER OF SWITCH SERVICES LIMITED - IN ADMINISTRATION
____________________
S B CORPORATE SOLUTIONS LIMITED |
Applicant |
|
-and- |
||
(1) COLIN ANDREW PRESCOTT (2) ANDREW POXON |
Respondents |
____________________
Counsel for the Respondents: Paul French (instructed by DAC Beachcroft LLP)
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Crown Copyright ©
Introduction
"A Declaration that the purported appointment of Mr Andrew Poxon and Mr Colin Andrew Prescott as joint administrators of Switch Services Limited on 17 March 2011 is null and void.
And for an order that
The Order made by Recorder David Blunt QC on 17 March 2011 putting Switch Services Limited into administration and appointing Mr Andrew Poxon and Mr Colin Andrew Prescott as joint administrators be rescinded under Rule 7.47(1) of the Insolvency Rules 1986."
(1) Mr Poxon and Mr Prescott were not appointed joint administrators of Switch Services Limited ("Services") on 17 March 2011 (despite an erroneous reference to "interim administrators" in the court order based on counsel's draft). In fact, as the order itself recited, Mr Poxon and Mr Prescott were appointed interim managers of Switch Services Limited under paragraph 13 of Schedule B1 to the Insolvency Act 1986. No administration order was made on 17 March 2011.
(2) Although an interim order was made on 17 March 2011 suspending the powers of the directors in Services and vesting them in Mr Prescott and Mr Poxon, as licensed insolvency practitioners authorised by the Court, no administration order was made in relation to Services until 25 March 2011.
Dominic and Marco Marrocco and their companies
(a) Burning Bed Productions Limited, of which Connect is the sole shareholder and Style Loop Limited the ultimate parent company; and
(b) 186K Limited ("186K") of which Dominic Marrocco and David James Richards are the directors, and Dominic is the sole shareholder.
Commercial relationship between Services and Connect
networks which transported the call, including both fixed and mobile networks, BT, Services and eventually the ultimate customer who contracted with Connect for the use of the number. BT had no contract with Connect, but only with Services.
"6.5. Switch shall send the Reseller a monthly report within 10 days from the end of the month from which the traffic was generated. The Reseller must send Switch an invoice for the amount detailed in the Report, no later than 30 days from the end of the month in which the traffic was generated. Switch shall make payment to the Reseller 45 days from the end of the month in which the traffic was generated. If the Reseller fails to deliver an invoice within 30 days of the month end, Switch may delay, at its sole discretion, payment for one calendar month for each month that the Reseller fails to deliver an invoice to Switch as aforesaid.
6.6. All rates in the monthly reports shall be exclusive of all taxes or duties."
Connect's customer was notified of the total number of calls made through the premium rate telephone number and the amount that it was entitled to invoice Connect. Details of the call traffic were forwarded by Services to BT Wholesale who verified the figures, using its own monitoring software, and then made payment to Services. Services should then make payment to Connect, less an administrative handling charge, which, in turn, would make payment to their customer, less an administrative charge. That customer would then make payment to its own customer, if there were one, and so on.
Revenues Received
Invoice date | Invoice number |
Payment terms |
Payment by | Total excluding VAT |
VAT (17.5%) |
Total |
05/10/2010 | 51296 | 0 days | 05/10/2010 | £324893.30 | £56856.33 | £381749.63 |
03/11/2010 | 51839 | 0 days | 03/11/2010 | £422185 | £73882.38 | £496067.38 |
01/12/2010 | 53382 | 0 days | 01/12/2010 | £465532.10 | £81468.12 | £547000.22 |
02/02/2011 | 56742 | 0 days | 02/02/2011 | £295892.98 | £59178.60 | £355071.58 |
between Connect and Services, at the very least by late 2010, had become one whereby Services was obliged to pay Connect almost immediately upon receipt by Services of payment from BT. I accept Mr French's submissions on this issue.
Financial difficulties
2010.
17 December 2010: £204,710.62;
21 December 2010: £44,001.68; and 27 January 2011: £41,711.40
The Applicant: SB Corporate Solutions Ltd
"... throughout that period [ie 2011] was instructed by Mr Dominic Marrocco, the ultimate owner of a group of companies of which Connect and Services formed part, and his younger brother Marco. Dominic was and is a successful entrepreneur with many interests who is resident in Nevada, USA, some 8 time zones away. He was content to leave Marco, who was based in Leeds, to serve as the sole Director of both Connect and Services. Our instructions were to advise on, and where appropriate to represent, the interests of the group of companies as a whole".
"The Marroccos and their companies were very much my clients in a sense that it was I personally who had a close relationship with them. Although Desmond [LeRoy] performed valiantly in seeking to hold the fort during my illness, he lacked the detailed knowledge of their affairs. He therefore sought to avoid, or defer, the taking of any important decisions in relation to them".
ABOUT SPENCER BROWN
SB Corporate Solutions is a firm of consultants whose partners have over 20 years experience in practice. Our business falls in to two specific categories being rescue and recovery and raising turnaround finance for these situations.
We are not Insolvency Practitioners (IP) but management consultants with absolute insolvency expertise.
The role of an Insolvency Practitioner is to act in the best interests of the creditors and should a conflict of interest arise between the requirements of the directors of a company and the needs of the creditors, the IP has little choice but to act in accordance with the wishes of the creditors. Our responsibility is to act in the best interests of the directors and members of our client companies. ...".
Mr Wolman's correspondence before and after 17 March 2011
"As I understand it from my instructions, the situation is as follows.
The main business of Switch Connect Ltd has derived from its contract with Switch Services Ltd, which in turn has the crucial "air minutes" contract with BT. Without the supply of those telecommunication services ie the air minutes, Switch Connect has no viable business.
Switch Services Ltd and the business of Switch Connect Ltd having both been previously under common ownership, were acquired at the same time in February 2008 by companies connected to Dominic and Marco Marrocco.
Shortly after those acquisitions, on 1 March 2008, Switch Connect entered in to a contract with Switch Services which substantially reflected the previous contractual arrangements between the two companies or their predecessors. The contractual terms were largely taken from other industry precedents. One of its purposes was to act as a fire-break in the event that either company was the victim of the Artificial Inflation of Traffic" ("AIT") as it is called in the contract. That clearly includes the £250,000 fraud of which Switch Connect became a victim last autumn and which has led to the current unhappy situation.
Under the terms of the contract, if Switch Connect, referred to as the "ResellerJ' in the contract, has either:
(1) Permitted, even unwittingly, its network to be used inappropriately for fraudulent purposes, in particular AIT, or
(2) An administrator [is] appointed over all or part of its business,
then Switch Services is entitled to terminate the contract forthwith. It also becomes entitled to "early termination fees"and a variety of other payments, as well as the return of the hardware and software which it has provided to Switch Connect.
Notwithstanding the occurrence of the first triggering event, Switch Services Ltd has so far refrained from exercising its contractual rights to terminate its supply to Switch Connect of BT air minutes, in the hope that a sensible financial solution can be found between all the affected parties. But that has not proved possible, partly because of the uncompromising and ostrich-like stance so far taken by your client. From tomorrow, however, assuming your application for the appointment of an administrator is granted, I am advised that Switch Services will immediately exercise all its termination rights.
In that situation, I am instructed that Switch Connect will no longer have either the ownership or the benefit of any significant assets, either tangible or intangible. All the remaining value in the company will rapidly drain away. In addition, substantial further liabilities to Switch Services will crystallise.
I would therefore ask you and the creditors who support you say you have garnered to consider an adjournment of the hearing tomorrow for 14 days. That would be to permit a more concerted attempt to be made to hammer out a compromise or composition. Under its terms, third party funds would be made available to Switch Connect so that a large part of the value of its business could be preserved for the benefit of its creditors. At the same time, all parties would have to agree to bear some of the pain and financial consequences of the fraud (unless and until the stolen money and damages are recovered in full).
Yours faithfully Clive Wolman Barrister
Cc Kevin Hawthorn, the proposed Administrators, Marco Marrocco".
11, 45am on 18 March 2011, Mr Wolman provided a copy of the contract, stating that his client was the Applicant.
17 March 2011
(a) The winding-up petition in relation to Connect presented to the Royal Courts of Justice on 21 January 2011 by Tania; and
(b) An application by Numbers, presented to the Court in Bristol on 23 February 2011, for an administration order in relation to Connect.
Administration application in respect of Connect on morning of 17 March 2011:
Concerns about dissipation of money and the termination of the Telephony Agreement
"THE RECORDER: Right, thank you. I think what I will do, Mr French, before I ask you about this caveat, which is the suggestion by Mr Boardman, I think I want to hear Mr Wolman, as to what he says the position is or should be.
MR BOARDMAN: My Lord, yes, of course.
THE RECORDER: Yes, Mr Wolman?
MR WOLMAN: My Lord, as I said, we do not oppose the administration application or the administration order, if that is what they want to do; nor indeed a winding up petition. I have been instructed to come along today just to see if there was scope for negotiating a settlement with a substantial input of third party funds. But, if there is not, and that seems to be the position, then there is not. I suppose I was also sent along possibly because the director of Switch Connect felt that I ought to be here to defend the company against any allegations that have been made and, in this case, wholly unfairly.
The sequence of events is this. These companies, the two companies, Switch Connect and Switch Services were effectively companies which were associated with each other prior to 2008. The business of Switch Connect, which was the company called Switch Call, was itself insolvent or appeared to be insolvent. It was then bought from - I am not sure whether it was a liquidator or an administrator, but it was acquired.
THE RECORDER: So which one?
MR WOLMAN: The business of Switch Connect was acquired in February 2008 from an office holder, and a company was specifically set up, namely Switch Connect, to acquire that business.
THE RECORDER: Mr Wolman, no one, as I understand it, is asking me to make any adverse findings.
MR WOLMAN: No. Well, in that case, may be I do not need to say anything.
THE RECORDER: What is being said is that there are lots of questions and lots of mysteries from which, if there are not satisfactory answers, one might read certain conclusions, but I do not think anyone is actually saying those conclusions should be reached today.
MR WOLMAN: Then I do not quite see the point in raising all these insinuations, which, in our view, are wholly unjustified. They have told you only part of a story. In our view, Tania, in particular, has been largely to blame, if not responsible for the fraud, which is what has brought this company down.
.....
MR WOLMAN: ...
If you are not interested in making any findings, then I do not know if I need to detain you on dealing with this correspondence. We say that we had an agreement with Tania, by which they were supposed to withdraw the petition, and they did not do so. In our view, Tania - and this is not a criticism in any way, and I am not extending this to the other creditors, including the applicant for administration - but, as far as Tania are concerned, we think they behaved reprehensibly throughout. But if you are not going to make any findings, I do not need to detain the court and go in to details.
THE RECORDER: No, right.
MR WOLMAN: As far as the administration application is concerned, we accept we owe Switch Connect Services a lot of money, there is no dispute about that, and we are unable to pay it. Therefore, if they want an administration application, then we have to accept that they are entitled to get one. We invited them to see if we could find a way of negotiating a settlement about this, but of course that is in their hands. It is not for you, we would say, to try and preserve them from their own folly in taking a very hard line, when it would be more appropriate to bring in a third party [... who ...] is prepared to put in substantial [funds]. If they do not want to do that, then that is their decision. In that situation, we have to accept that there should be an administration order or a winding up, or whatever combination you want to do".
"I am also aware that there were discussions between Counsel, namely Mr Wolman (for Switch Connect), Paul French (for Numbers) and Christopher Boardman (for Tania) prior to the hearing of Numbers administration application. The discussion revolved around why the company would wish to terminate its agreement with Switch Connect in the event of Switch Connect's administration, since, with no other customers, the Company's income stream would be terminated immediately, as would Switch Connect's, which would hardly be in anybody's best interests. I understand from my solicitors and Counsel that Mr Wolman's response was quite simply "if the administration order is made, we will terminate the contract". I understand that the response from Counsel for Numbers was to question who the "we" referred to, and I further understand that no response was forthcoming. I also understand that Mr Wolman was questioned by Counsel for Tania as to whether, to date, the Company had actually made any threats to terminate the contract, to which Mr Wolman said that he had seen a draft letter. I do not know who drafted that letter, when it was produced by the Company or when it was communicated to Switch Connect (and then on to Mr Wolman). I would have thought that would have been revealed by the communications between Mr Wolman and Switch Connect, but Mr Wolman has to date refused to provide them."
The hearing before Mr Blunt QC on 17 March 2011 after 1.25 pm
In the end, it was not necessary for this route to be followed, since the administration order which was made was an immediate order, with liberty to rescind. On that basis, the administrators immediately took up their office.
"MR FRENCH: This is a without notice application on behalf of the administrators of Connect, Mr Prescott and Mr Poxon just having been appointed as administrators.
We are hugely concerned on behalf of the administrators about two matters. First of all, the matter that Mr Boardman has already taken you to; that Services appear to be divesting itself of money, which would otherwise be due to Connect, and secondly, the threat of termination of the supply contract, in effect. Despite Services being in common ownership amongst the same family, the same ownership as Connect, who are all owned by the same family, the Marrocco Brothers, by way of a threat in order to preserve position, Services were intending to terminate the supply contract, which will thereby have an impact both on Services' business, Connect's business, and the businesses of the third parties with whom Connect provide services.
In those circumstances, on behalf of the administrators of Connect, Connect being a creditor of Services, because we understand that, for the last couple of months, Services has not been paying to Connect the sums which are due from Services to Connect under the supply contract, Services is getting money from BT, is sitting on it, not paying Connect deliberately in order to retain the cash, we think with a view to creating this indebtedness set off on termination of the contract to get out of the liability to pay Connect. So that is the smoke screen behind which everyone is operating. So, from the point of view of the application that the administrators are seeking to make, the joint administrators of Connect will seek to obtain an administration order in relation to Services. (My emphasis)
THE RECORDER: Right.
MR FRENCH: It is a creditor of Services, because Services has not paid the sums due from Services to Connect in the last couple of months, and that is information that has been obtained by an employee of Connect, who has told the administrators that. We are a creditor. Services is insolvent, because it has not paid the money to us, and it is balance sheet insolvent on its last filed accounts. It has net assets exceeded by its liabilities. Thirdly, the purpose of the administration is the same purpose of the administration, to hold fire pending, so there can be an orderly wind down and an orderly realisation of the assets of both Services and Connect in due course.(My emphasis)
MR FRENCH: What I am seeking is, under para 13 of what your lordship was taken to, on the administrators' undertaking to issue by the end of tomorrow an application for an administration order, because they now being in control of Connect, a creditor can do that, that they be appointed interim administrators pursuant to para 13, that they be entitled to exercise the entirety of the powers that are otherwise vested in the directors of the company, and the directors of the company, whether they are de jure directors, de facto directors or shadow directors ... (My emphasis)
THE RECORDER: Directors of Services?
MR FRENCH: Of Services. They shall not be entitled to exercise any powers as directors of the company. Those are the three provisions that I seek on my undertaking to issue the application by the end of tomorrow. (My emphasis)
THE RECORDER: What about service?
MR FRENCH: Service will be effective [effected] forthwith. There is one provision. This is what I drafted whilst we were sitting and your lordship was providing the costs; that the liberty to the company to apply on 48 hours written notice.
THE RECORDER: Yes.
MR FRENCH: I do not have instructions to give an undertaking in damages. Ordinarily, when an administrator or an office holder is seeking an injunction to preserve the status quo pending determination of an issue, whether it is the transaction [at an undervalue] or a [misfeasance] claim or something like that, the undertaking in damages would be given, and is commonly limited to the value of the assets of the company.
THE RECORDER: Yes, why can that not be done?
MR FRENCH: We do not know what we are getting in to. If we are prepared to limit that undertaking in damages to the value of the assets in the company, which would cap a potential liability, and, in the event, would not expose my clients to that liability, I would take some instructions, my lord.
MR FRENCH: But my clients having just got in to Connect and had only been appointed over Connect in the last 15 minutes, discussions with the risk officer Leonard Curtis have not been forthcoming as to liability. But, if your lordship is prepared to limit it to the value of the assets that are in Connect's hands, such that there is no personal liability, I will take some further instructions. There is also the possibility in due course, in relation to the share transfer that was referred to in due course, that the administrators of Connect would be taking proceedings against Style Loop, the ultimate owners of 97% shares now, to recover those shares, either in breach of fiduciary duty or as a transaction at an under value with restoring that 97% back [...]
THE RECORDER: Yes, but you are not asking for injunctions now.
MR FRENCH: I am not asking for that yet, but that is something I may have to in due course, to preserve status quo in those circumstances.
THE RECORDER: Right. Mr Boardman, do you have any position?
MR FRENCH: I believe Mr Boardman is supportive.
THE RECORDER: Do you have any position?
MR BOARDMAN: My lord, yes. Obviously this is something that has developed out of the representations that we made in the light of what we heard this morning. My lord, in so far as I can formally express a view, obviously I have no locus because I am simply a creditor now of the company. But certainly, I would like to express support for the application that has been made. I do not have formal instructions from the client to appear on this application, but I would submit to you that, obviously, you have to be persuaded that it is an appropriate order. Obviously, there is no evidence before you, but my learned friend will, no doubt, put that before the court in support of it, and obviously, there will be other caveats that my learned friend has alluded to, which are entirely appropriate and I have nothing further to add to.
THE RECORDER: Ought we not to have a return date for this ex parte application?
MR FRENCH: It would be, because the administration application is normally on 5 days notice, so it would come back and will be listed in 5 days. We have had immense listing problems in relation to this.
MR FRENCH: Ordinarily, with without notice orders, one would expect it to come back before the same judge so that, in due course, obviously the matter can be discussed."
(1) Mr Wolman had not been instructed on behalf of Services. He had attended court on 17 March on behalf of Connect, not Services.
(2) Mr Wolman's own letter, dated 16 March (trial bundle 1 page 45), which referred to termination by Connect of its contract with Services, was regarded as a present threat. Therefore, to disclose to him the intention would have been to defeat the very object of the exercise, since it was felt that he would refer this matter back to the Applicant and/or Services.
(3) Furthermore, Mr French met the allegation that a freezing injunction coupled with an injunction preventing Connect from terminating its contract with Services would have been much less draconian than the interim order which in fact which he sought, by arguing that he had not seen a copy of any
version of the Telephony Services Agreement. Moreover, it was only one of two versions, both of which had been unknown to Connect's employees. In fact, a freezing injunction would not have helped solve the position, since such an injunction would not have prevented disposals in the ordinary course of business. His concern was that the Marrocco Brothers had no concept of what the ordinary course of business was, because they were disposing of assets belonging to Connect to an associated company, 186K Limited.
(4) The administrators of Connect could not understand what commercial justification there was for Services seeking to sever its connection with Connect, in the absence of any indication of who could have been substituted for Connect with a new purchaser from Services.
The order made in relation to Services on the afternoon of 17 March 2011
It is entitled:
"In the matter of an intended application for an administration order in respect of Switch Services Limited and In the matter of the Insolvency Act 1986."
It continued:
"Upon the without notice application of Switch Connect Limited (in administration) (acting by its administrators Colin Andrew Prescott and Andrew Poxon ("the applicant")."
(i) Serve a copy of the order and
(ii) Issue and serve an application for an administration order in respect of the Respondent at 10.30 on Friday 25 March 2011 at Bristol Civil Justice Centre.
(1) Pursuant to Para 13(1)(d) of Schedule B1 to the Insolvency Act 1986:
1.1 Colin Andrew Prescott of Leonard Curtis, 2nd Floor, 30 Queens Square, Bristol, BS1 4ND,
1.2 Andrew Poxon of Leonard Curtis, DTE House, Hollins Mount, Bury, Lancashire, BL9 8AT
shall be appointed as interim administrators of the Respondent.
(2) For the period that this order is in force:-
2.1 Colin Andrew Prescott and Andrew Poxon shall be entitled to exercise all the powers invested in the directors of the Respondent;
2.2 The directors of the respondent, whether de jure, de facto or shadow directors, and in particular Marco Marrocco and Dominic Marrocco, shall not be entitled to exercise any powers as directors of the Respondent.
(3) Anyone served with or notified of this order, including the Respondent or its members, may apply to the court at any time to vary or discharge this order (or so much of it as affects that person), but they must first give the Applicant's solicitors (Beachcroft LLP, Portwall Place, Portwall Land, Bristol, BS9 7UD; ref GIH) 48 hours' written notice. If any evidence is to be relied upon in support of the application, the substance of it must be communicated in writing to the Applicant's solicitors in advance.
(4) This order shall:-
4.1 Take effect from 1.50pm on Thursday 17 March 2011; and
4.2 Remain in force until the final disposal of the administration application in respect of the Respondent, unless the Court in the meantime orders otherwise.
(5) The costs of this application are reserved to the Judge hearing the application for an administration order. "
Jurisdiction to make an interim order
13(1) On hearing an administration application the court may-
(a) make the administration order sought;
(b) dismiss the application;
(c) adjourn the hearing conditionally or unconditionally;
(d) make an interim order;
(e) treat the application as a winding-up petition and make any order which the court could make under section 125;
(f) make any other order which the court thinks appropriate.
13(2) An appointment of an administrator by an administration order takes
effect -
(a) at a time appointed by the order; or
(b) where no time is appointed by the order, when the order is made.
13(3) An interim order under sub-paragraph (1)(d) may, in particular-
(a) restrict the exercise of a power of the directors or the company;
(b) make provision conferring a discretion on the court or on a person qualified to act as an insolvency practitioner in relation to the company.
13(4) This paragraph is subject to paragraph 39 [effect of administrative
receivership]."
do so - although no-one urged him to do so, have made a full administration order and appointed Mr Prescott and Mr Poxon administrators of Services.
"10 An administration order is an order appointing a person as the administrator of a company.
12(1) An application for the court for an administration order in respect of a company (an "administration application") may be made only by -
(a) The company.
(b) The directors of the company.
(c) One or more creditors of the company.
(d) ...
(e) A combination of persons listed in paragraphs (a) to
(d).
13(1) On hearing an administration application the court may-
.....
(d) make an interim order;
net deficit and the profit and loss account showed the same balance for the two years, although the debtors cash at bank and creditors had significantly increased between 2008 and 2009.
Amended order
"1. Pursuant to Para 13(1)(d) of Sch B1 to the Insolvency Act 1986, for the period that this order is in force:
1.1 Colin Andrew Prescott and Andrew Poxon shall be entitled to exercise all the powers vested in the directors of the respondent;
1.2 The directors of the respondent, whether de jure, de facto or shadow directors, and in particular Marco Marroco and Dominic Marroco shall not be entitled to exercise any powers as directors of the respondent. "
17 to 25 March 2011
those witness statements were heavily influenced by material and information supplied to him by Mr Conway.
Correspondence between 17 and 19 March 2011
"Dear Sirs
Further to our letters of 17 and 18 March, we write to inform you that our clients were also appointed as interim administrators of Switch Services Limited ("Services") on 17 March and a copy of the Order is attached. You will
note that the powers of any directors of Services are suspended and those powers have effectively transferred to our clients for the time being.
We understand that Spencer Brown have provided advice to the Company [i.e. Connect], We also understand that you instructed Clive Wolman of 11 Stone Buildings under a Direct Access Scheme to act as Counsel for the Company [i.e. Connect]..."
"When responding, please confirm whether you have been instructed by Services at any time."
2011, even though it was expressly made aware of it by that email. However, different counsel, Ms Lisa Walmisley, was instructed on behalf of Services for the hearing on 25 March 2011 at which the interim order was to be reconsidered, as was the question whether an administration order should in fact be made in relation to Services.
Hearing on 25 March 2011
(i) The interim order was void and should be set aside for procedural irregularity and/or want of jurisdiction;
(ii) It had not been demonstrated that Connect was a creditor of Services;
(iii) Services was not insolvent, having regard to (a) some draft management accounts prepared to 31 March 2011; (b) a cross claim which Services would have against Connect; and (c) because a director or third party would pay any money due to Connect;
(iv) Mr Poxon and Mr Prescott could not be administrators or managers of both Connect and Services, because they had a conflict of interest. This arose because Services denied the existence of any Telephony Services Agreement, and Connect was relying on such an Agreement;
(v) An adjournment of the hearing of the application for an administration order was necessary, because of late change of solicitors and late service of the application returnable on 25 March 2011. Moreover, counsel alleged that Mr Marco Morroco had been unwell and this limited his opportunity to provide full instructions;
(vi) A transfer of the proceedings to Leeds was appropriate.
Application by Mr Marrocco and/or Services to rescind the administration order of 25 March 2011 in relation to Services
Leeds, on behalf of Marco Morocco, the sole director of Services, applied in Bristol for an order, under the liberty to apply provisions in the order of 25 March 2011 and/or rule 7.47 of the Insolvency Rules 1986, for the rescission of the administration order in respect of Services made on 25 March 2011. The application notice itself stated:
"The principal reasons why the administration order ought not to have been made are that the first Respondent, Switch Connect Limited, was not and is not a creditor of the Company and the Company is not, and is not likely to become unable to pay its debts. Alternatively, and so far as may be necessary, the Applicant is willing and able to discharge all the liabilities of the Company and the costs and expenses of the administration so that the administration order ought to be rescinded ..."
"An order that the appointment of the Administrators cease to have effect pursuant to para 81(1) of Sch B(i) to the Insolvency Act 1986, alternatively that the Administrators maybe directed to apply pursuant to para 79(1) ibid for the appointment to cease to have effect;"
Proceedings under s 236 Insolvency Act 1986
"If your client, purporting to act as administrators of [Services] intend to pursue me or [the Applicant] any further on the matter, we shall be making an application to the court for a declaration that your clients' appointment was not validly made and an order that the purported appointment be set aside. We shall also be seeking costs and damages and reserve our rights to invite other parties who have suffered loss as a result of your clients' bogus appointment to join us in making such a claim."
The current application
(a) As a person served with or notified of the order, it had liberty to apply at any time to vary or discharge the order on 48 hours written notice, and/or
(b) It is a creditor of Services and a person affected by the interim order.
As a result of the order in relation to Services made on the afternoon of 17 March 2011, the existing director was removed, insolvency practitioners took his place and third parties were notified wrongly that an interim administration order had been made, all of which, inferentially, tipped Services into insolvency when it had not previously been insolvent. As a result, the Applicant, as a creditor, has lost its fees for 11-12 hours work done for Services and the potential of recovering a 'success fee', which I was told by Mr Wolman was £25,000.
"Anyone served with or notified of this order, including the Respondent or its members, may apply to the Court at any time to vary or discharge this order (or so much of it as affects that person), but they must first give notice to the Applicant's solicitors (Beachcroft...) 48 hours' written notice. If any evidence
is to be relied upon in support of the application, the substance of it must be communicated in writing to the Applicant's solicitors in advance."
(i) The interim order was served on the Applicant not as an interested party or as a party affected but as an agent or conduit for onward transmission to Services and Connect. The registered office of Connect was at the Applicant's premises and the Bristol premises had been vacated;
(ii) Even if the interim order were served on the Applicant as an interested party, it merely permitted an application to be made on 48 hours notice before the return date on 25 March 2011. It did not give a perpetual right to the Applicant, or any other person affected thereby served with the notice, to apply to set aside the interim order after the return date at their leisure.
(iii) Even if the Applicant were served as a person affected by the interim order, they had an opportunity to attend the court on 25 March 2011 and to be heard. After all, Services was then represented and there was a draft witness statement from Marco Marrocco. In my view, this all happened with the knowledge of the Applicant which chose not to attend or to be separately represented.
Procedural framework for resolving the dispute whether the Applicant is a creditor
"7.7A Witness Statements - General
7.7A(1) [Evidence in witness statement] Subject to Rule 7.9, where evidence is required by the Act, or the Rules as to any matter, such evidence may be provided in the form of a witness statement unless -
(a) In any specific case a Rule or the Act makes different provisions; or
(b) The court otherwise directs.
7.7A(2) [Cross examination of a person making witness statement] The court may on the application of any party to the matter in question order the attendance of cross-examination of a person making the witness statement.
7.7A(3) [Failure of person to attend] Where, after such an order has been made, the person in question does not attend, that person's witness statement must not be used in evidence without the leave of the court".
"7.10(3) [Directions as to evidence] The court may give directions as to
the manner in which any evidence is to be adduced at a resumed hearing
and in particular as to -
(a) The taking of evidence wholly or partly by witness statement or orally;
(b) The cross-examination of the maker of a witness statement; or
The evidence for and against the Applicant as a creditor
"(3) Until May 2011, I was a joint director of SBCS [Applicant] with my brother Desmond LeRoy. He resigned after I had recovered and returned to work following a serious kidney-related illness from which I suffered in February and March 2011. This profoundly affected and handicapped my involvement in the above matters. It was at the time when both companies, Switch Connect Limited ("Connect") and Switch Services Limited ("Services") were put, or allegedly put, into administration as a result of the manoeuvrings of the Cross- Respondents and their lawyers.
(4) Throughout that period, SBCS was instructed by Mr Dominic Marrocco, the ultimate owner of a group of companies to which Connect and Services formed part, and his younger brother Marco. Dominic was and is a successful entrepreneur with many interests who is resident in Nevada, the US, some eight time zones away. He was content to leave Marco, who is based in Leeds, to serve as the sole director of both Connect and Services. Our instructions were to advise on, and where appropriate to represent, the interests of the group of companies as a whole.
(5) The Marroccos and their companies were very much my clients in the sense that it was I personally who had a close relationship with them. Although Desmond performed valiantly in seeking to hold the fort
during my illness, he lacked the detailed knowledge of their affairs. He therefore sought to avoid, or defer, the taking of any important decisions in relation to them."
"As far as the position of Spencer Brown is concerned, the company was instructed by Mr Marco Marrocco both personally and on behalf of Switch Services Limited. You claim to be representing the administrators of Switch Services Limited. But I have taken legal advice on this matter and I do not believe that your clients were validly appointed."
"(3) You are not a creditor, director, member or contributory of the Company [i.e. Services], You acted simply as an advisor to the Company. The order of 17 March was served on you on the basis that Spencer Brown was the registered office of the Company and also
acted as its advisor. The Order did not affect you and as such you have insufficient locus now to apply for an Order for rescission."
"In relation to the third point of your defence, I can confirm that we were and are creditors of the Company. If necessary, I shall provide a further witness statement to that effect."
"28 There is now shown to me... a copy of the Applicant's letter in reply in which the Applicant claims that they are creditors of the Company. That is the first mention that has been made of the Applicant being a creditor of the Company. There is no evidence amongst the records of the Company that that is the case. The Applicant's letter of 4 August... show payments totalling £50,000 to the Applicant in the period prior to administration. It is difficult to ascertain fees justifying payment of £50,000 let alone any greater sum being due."
"3. The first matter which I need to nail down once and for all is the insinuation of Mr Prescott that SBCS is not a creditor of Switch Services Limited. SBCS provided approximately 11-12 hours advice and financial analysis to Switch Services Limited, at the request of the management of Switch Services, in particular of its director Mr Marco Morrocco, in the period from 9 to 17 March 2011.
4. This was noted and acknowledged by Beachcroft, the solicitors acting for the Respondents on 19 March, two days after they ceased control of Switch Services Limited. They said in an email to us...: "We understand that Spencer Brown have provided advice to the Company [viz. Switch Services] .... [A]dvice to the Company... remains the Company's property. "
5. On the basis that (presumably) this advice and "property"might have significant value, and on the basis that the Respondents have been appointed "interim administrators"with all the powers of the company's directors, Beachcroft in its email then proceeded to demand from us all kinds of information and documents.
6. In contrast to the above, Mr Prescott now says at paragraph 36 of his witness statement:
"There is no evidence amongst the records of the Company of any unpaid invoice. "
However, he disingenuously avoids mentioning the evidence amongst the records of the Company which shows that SBCS provided advice to it, as his solicitors stated on 19 March.
7. The reason that SBCS has not submitted an invoice to the Respondents for the work done in March is that I was told, and still believe to be true, that in May the Respondents entered into a conditional deal with Mr Marrocco. Under its terms as I understand them, Mr Marrocco and his associates will buy back Switch Services Ltd. - and pay off all its creditors including SBCS.
8. I have sought confirmation that SBCS is indeed entitled to payment for its advice in March from Mr Marco Morrocco in a letter that I sent to his solicitors yesterday... Mr Marrocco has not responded and our threat of issuing a witness summons against him remains. But I am advised that, under the procedural rules, such a summons, even if issued, could not be effective for tomorrow's hearing. I should add that when SBCS made its application two weeks ago, we were assured of the support of Mr Marrocco, and I said so in my first statement. I do not know what or who may have changed his mind since then, if indeed he has changed his made."
"51. I recognised that Connect and then subsequently Services needed professional advice from someone with specialist knowledge of turnaround and insolvency situations.
52. I instructed Spencer Brown (SB Corporate Solutions Ltd) who were recommended to me by Andrew Sacks. I understand he agreed an hourly rate of £250 per hour plus VAT. Subsequently I needed Spencer Brown to provide advice to Services. This advice was provided between in or around 9 and 17 March 2011. Services has made payment of monies to Spencer Brown but I believe that these monies were largely paid in respect of work undertaken by Spencer Brown on behalf of Connect and there is only a limited sum outstanding in relation to Services.
53. There is currently an issue between myself and the Administrator as to what sums were paid".
"Subject: Re: Switch Connect - In Administration - URGENT
Dear Sirs, I have the letter that you emailed to our office over the weekend.
The main client manager and fee earner, Mr Liam LeRoy, is seriously ill at the
moment so it has been left to me to respond.
We were engaged by Dominic Marrocco, who we believed to be the ultimate owner of a group of companies including Switch Connect Ltd and Switch Services Ltd. We later got instructions from Switch Connect Ltd but only on the understanding that our first responsibility was to the group of companies of which it was part. In fact, Mr Marco Marrocco, the brother of Dominic and sole Director of SC, told us that he accepted that if it was decided to sell off, or let go of, Switch Connect Ltd (or for that matter Switch Services Ltd), our duties and the duties of those we might need to commission (including a lawyer such as Clive Wolman) would be exclusively to Switch Connect's parent company and its ultimate owner. Switch Connect Ltd would make no demands of us or them in that situation. We would not have been prepared to go ahead on any other basis.
Two or three weeks later we instructed and signed a client care letter with Clive Wolman, a Barrister of 11 Stone Buildings, who we have previously used in legal disputes dating back to 2008.
It was not suggested that when we did this we were meant to be agents of Switch Connect Ltd or even that we have commissioned Clive Wolman with the authority of that company. We did not do so. On the contrary we got Mr Wolman on board on our own initiative, knowing that we would have to pay his fees. However, it was after a conversation with Dominic from which we realised that the situation of Switch Connect Ltd got so much worse but it was likely to accept help including a barrister, at an urgent hearing the next day, from whoever could offer it. Mr Wolman did indeed attend the next day hearing.
I hope this answers your points.
Kind regards".
There was no suggestion in that email that there was any contract between the Applicant and Services.
"20. During the course of the negotiations it became clear to the directors [of Connect] that there were problems with the management team and it appeared that they were in collusion with some of Connect's creditors which was later justified by a witness statement from one of the key sales people within the company.
21. The shareholders of Services were concerned about protecting the BT contract within Services, and then asked Spencer Brown to assist in protecting the assets of Services from the creditor's disputes within Connect and the actions of the management team in Connect.
22. The remuneration package for Spencer Brown was agreed on a time cost basis and a substantial success fee based on successfully protecting Services from the actions of Connect Managemeneam and creditors who appeared to be working together.
23. The package was agreed but never formally finalised with Spencer Brown as the interim administration order was placed on Services without the company being able to defend itself as noted in points 7 and 8 above and asked that the interim administration order was placed on Services the Directors were advised that no agreements could be formalised without the Administrators agreement.
24. I am aware of the considerable amount of hours that Spencer Brown spent in relation to Services including liaising with the company solicitors at their own expense".
1. There was no engagement letter setting out the charging basis and the terms of service, no invoice or time records evidencing the work done for which payment was being sought. This position has remained so, notwithstanding the fact that the Applicant has had the opportunity to file further evidence relating to this issue. None has been filed except the witness statements of Mr Marrocco and Mr Sacks.
2. Mr Marrocco stated in his witness statement that he had instructed the Applicant on the recommendation of Mr Sacks. However, Mr Marrocco was not a shareholder of Services, and Mr Sacks stated that it was the shareholders of Services who had instructed the Applicant.
3. Mr Marrocco stated that the Applicant was to be paid an hourly rate of £250 plus VAT, as agreed by Mr Sacks, but the basis of his understanding was not given. Nor was any explanation given as to why Mr Marrocco would instruct the Applicant, only for Mr Sacks thereafter to negotiate the terms of the engagement.
4. Mr Marrocco stated that the Applicant gave advice to Services in the period 9-17 March and, whilst acknowledging that Services made a payment to the Applicant, his evidence was that the payment was made in relation to advice given by the Applicant to Connect. He stated there was only a limited sum owing to the Applicant, which suggested that only a limited amount of work could have been done by the Applicant. Yet it is unclear on what basis he made that assertion, given the complete lack of any supporting documentation.
5. Although there is clear evidence of the Applicant having created a client account for Services, the Applicant received payment of £30,000 from Connect and £20,000 from Services. Moreover, £20,000 was paid to Mr Wolman out of Services' bank account on or shortly before 17 March 2011. Yet, Mr Wolman appeared on behalf of Connect on the morning of 17 March 2011, not Services. Mr Marrocco's evidence is lacking in any supporting documentation showing any work done by the Applicant for Services. Nor is it apparent why Services paid the Applicant £20,000.
6. No documentary evidence is exhibited in support of Mr Sacks witness statement. Mr Sacks is inconsistent with Mr Marrocco, in that the former indicated that the shareholders of Services instructed the Applicant, whereas Mr Marrocco stated that he did, yet he is not, nor was he a shareholder of Services. Moreover, it is implicit from Mr Sacks first witness statement that the shareholders of Services agreed the terms of engagement with the Applicant, but Mr Marrocco has stated that Mr Sacks agreed those terms.
7. Mr Sacks stated in his first witness statement that the Applicant had, as part of his remuneration package a "substantial success fee". However he then went on to concede that the remuneration package was never formally finalised. For his part, Mr Marrocco did not mention any success fee at all. Nor is it clear to me precisely what the terms were of any such success fee.
8. It appears that there were problems between Mr Sacks and Mr Liam LeRoy, because unless instructed to do so, Mr LeRoy indicated that he would not discuss the matter of Connect with Mr Sacks after 11 February 2011. It is therefore unclear, in the context of that bar, when the retainer with the Applicant was negotiated and what actual knowledge Mr Sacks could have had in relation to the alleged engagement.
9. The Applicant raised an invoice to Firenet Ltd. In the Applicant's client account ledger for Services, £12,000 is shown as having been paid on 25 February 2011. There is only evidence of one invoice for £12,000, and Mr Prescott believed that this invoice was raised by the Applicant, for work done in relation to Services, and was addressed to Firenet Ltd.
10. Accordingly, there was no formal basis upon which the Applicant had been instructed by Services. From the evidence which had been filed, it had been variously claimed that the Applicant had been instructed on behalf of:
(1) Dominic Marrocco;
(2) Mr Marco Marrocco in his personal capacity;
(3) Mr Marco Marrocco in his capacity as a Director of Services;
(4) Services;
(5) Firenet;
(6) The shareholders of Services.
11. Mr Sacks stated that the Applicant's retainer was never formally finalised. That statement was itself unsupported by any evidence of a retainer letter and the evidence has been confused by the numerous contradictions in terms of who actually instructed the applicant.
12. Mr Sacks prepared a draft Statement of Affairs of Services, which did not show the Applicant as a creditor. Mr Prescott attempted to contact Mr Sacks since he produced the Statement of Affairs, but he has failed to reply to Mr Prescott.
"3. Mr Prescott seeks to attack the credibility of my assertions in paragraphs 21-24 of my first witness statement. I said that:
(a) A remuneration package for Spencer Brown was agreed by Services on a time cost basis for its assistance in protecting the assets of Services from the fall-out of the dispute between Switch Connect, some of its management and some of its creditors;
(b) A substantial success fee was also agreed for Spencer Brown contingent on Services successfully defending itself;
(c) The package was agreed orally but never formally executed in documentary form because those in control of Services were taken by surprise by the interim administration order made without notice on 17 March which prevented them from doing anything further; but
(d) I was aware of the considerable amount of hours that Spencer Brown had spent in relation to Services".
Invoices and Accounts
Submissions on whether the Applicant is a creditor
(i) Mr Prescott had provided a detailed time statement showing how his own fees were calculated in this period;
(ii) The creditors have approved these time costs of Mr Prescott;
(iii) Only two documents had been written by Beachcrofts concerning the interim order emails dated 19 March 2011 and 21 March 2011. No bill had been rendered by Beachcroft for any work which they may have done.
Conclusion on the Applicant's status
The Core Issue
"Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interests and subject to the conditions provided for by law and by the general principles of international law.
The preceding provisions shall not, however, in anyway impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions to penalties."
(i) Any evidence of insolvency, with the consequence that a possibly healthy and solvent business was taken from its owners and its shares rendered valueless or diminished in value;
(ii) Any evidence of the purpose the administration would serve;
(iii) Any notice to the existing owners or management of the company so to give them an opportunity for them to defend their position and resist a seizure.
Procedure for the making of an administration order.
"2.2(1) [Witness statement required] Where it is proposed to apply to the court for an administration order to be made in relation to a company, the administration application shall be in Form 2.1B and a witness statement complying with Rule 2.4 must be prepared, with a view to its being filed with the court in support of the application.
2.2(3) [Application by creditors] If the application is to be made by creditors, the witness statement shall be made by a person acting under the authority of them all, whether or not himself one of their number. In any case there must be stated in the witness statement the nature of his authority and the means of his knowledge of the matters to which the witness statement relates.
2.3(3) [Application by single creditor] If made by a single creditor, the application shall state his name and address for service.
2.3(5) [Statement by proposed administrator] There shall be attached to the application a written statement which shall be in Form 2.2B by each of the persons proposed to be administrator stating -
(a) That he consents to accept appointment;
(b) Details of any prior professional relationship(s) that he has had with the company to which he is to be appointed as administrator; and
(c) His opinion that it is reasonably likely that the purpose of administration will be achieved.
2.4 Contents of application and witness statement in support
2.4(1) [Inability to pay debts] The administration application shall contain a statement of the applicant's belief that the company is, or is likely to become, unable to pay its debts, except where the applicant is the holder of a qualifying floating charge and is making the application in reliance on paragraph 35.
2.4(2) [Company's financial position etc.] There shall be attached to the application a witness statement in support which shall contain -
(a) A statement of the company's financial position, specifying (to the best of the applicant's knowledge and belief) the company's assets and liabilities, including contingent and prospective liabilities...
(e) Any other matters which, in the opinion of those intending to make the application for an administration order, will assist the court in deciding whether to make such an order, so far as lying within the knowledge or belief of the applicant.
2.6 Service of the application
2.6(3) [Persons to be served] The application shall be served in addition to those persons referred to in paragraph 12(2) -
... (e) On the company, if the application is made by anyone other than the company.
2.8 Manner in which service to be effected
2.8(1) [Service not less than five days before hearing] Service of the application in accordance with Rule 2.6 shall be effected by the applicant, or his solicitor, or by a person instructed by him or his solicitor, not less than five business days before the date fixed for the hearing.
7.4(6) [In case of urgency] Where the case is one of urgency, the court may (without prejudice to its general power to extend or abridge time limits)
(a) hear the application immediately, either with or without notice to, or the attendance of, other parties, or
(b) authorise a shorter period of service than that provided for by paragraph (5);
and any such application may be heard on terms providing for the filing or service of documents, or the carrying out of other formalities, as the court thinks just."
"7.55. No insolvency proceedings shall be invalidated by any formal defect or by any irregularity, unless the court before which objection is made considers that substantial injustice has been caused by the defectn or irregularity, and that the injustice cannot be remedied by any order of the court. "
"7.51 A(2) Subject to paragraph (3), the provisions of the CPR (including any related practice direction) not referred to in the table apply to proceedings under the Act and Rules with any necessary modifications, except so far as inconsistent with these Rules.
12A 55 (1) The provisions of CPR rule 2.8 (time) apply, as regards computation of time, to anything required or authorised to be done by the Rules.
(2) The provisions of CPR rule 3.1 (2)(a) (the court's general powers of management) apply so as to enable the court to extend or shorten the time for compliance with anything required or authorised to be done by the Rules."
"3.1 - (1) The list of powers in this rule is in addition to any powers given to the court by any other rule or practice direction or by any other enactment or any powers it may otherwise have.
(2) Except where these Rules provide otherwise, the court may -
(a) extend or shorten the time for compliance with any rule, practice direction or court order (even if an application for extension is made after the time for compliance has expired);
....
(m) take any other step or make any other order for the purpose of managing the case and furthering the overriding objective.
"Where an application notice should be served but there is not sufficient time to do so, informal notification of the application should be given unless the circumstances of the application requires secrecy."
"The subterfuge in which the Respondents engaged by waiting until I left the court before making their without notice application was not only unjustified legally, it was also unnecessary - unless the Respondents realised that I would raise the same procedural objections to their application that are raised in the skeleton argument."
Mr Wolman's arguments that the Court lacked jurisdiction to make the Interim Order. and Mr French's replies thereto
"THE FAILURE TO SATISFY EIGHT CRITERIA
ONE: NO APPLICATION.
- The application was not in Form 2.1B, with the creditor's name and address, in accordance with IR r. 2.2(1) and r. 2.3(3). Indeed the application was not in writing at all.
Mr French: There was an oral application, as a matter of urgency.
TWO: NO EVIDENCE
- No witness statement - or for that matter any other testimonial or documentary evidence - was prepared or filed in accordance with IR r. 2.2(1).
Mr French: The evidence was partially written, in the sense that Deputy Judge had already seen the evidence of insolvency, and partially oral, on instructions and by reference to what had happened in respect of the termination threat, which the Deputy Judge had already heard in relation to Connect.
This was confirmed by the later witness statement evidence of Mr Prescott.
THREE: NO SUFFICIENT KNOWLEDGE TO MAKE AN APPLICATION
- Contrary to IR r. 2.2(3), not only was no witness statement made for the hearing of 17th March but no witness statement could have been made by the Rs or anyone acting on their behalf who had sufficient knowledge at that time of the matters to which the witness statement had to relate. Those matters were necessary to satisfy the court in accordance with Paras. 11 and 12(1)(c) of Sch. B.
- Para. 11 says that the court may make an administration order "only if satisfied- (a) that the company is or is likely to become unable to pay its debts, and (b) that the administration order is reasonably likely to achieve the purpose of administration."Para 12 says that an administration application may be >made only by the company itself, its directors or its creditors.
- The Rs had no sufficient knowledge at that time to provide any evidence on these matters because they had only just been appointed as administrators of the creditor, or alleged creditor, viz. SwitchConnect, 15 minutes earlier, as Mr French admitted to the court.
- Handicapped by that lack of knowledge, the Rs had only the thinnest of justifications for asserting that SwitchConnect was a creditor of Services. As Mr French explained (see transcript p.): "Services has not paid the sums due from Services to Connect in the last couple of months, and that is information that has been obtained by an employee of Connect, who has told the administrators that. "
- Thus the only "evidence" that the Rs had of outstanding payments that were properly due to SwitchConnect from Services was hearsay evidence from an unidentified employee who may or may not have had sufficient factual or legal knowledge. This was at a time when several of the managers of SwitchConnect (including the employee?) had been suspended from their jobs for attempting secretly to exploit its financial difficulties by organising a cut- price buy-out of its assets.
- Similarly the only evidence that the Rs had for asserting that Services was or was "likely to become unable to pay its debts" was that the balance sheet of Services in December 2009, i.e. 15 months earlier, had shown its liabilities to be slightly in excess of its assets. But no one had obtained a court judgment or issued a statutory demand, let alone a winding-up petition against Services since December 2009 and the owner of the group, Mr Dominic Marrocco, MM's brother, had given every indication that he would inject funds in support of Services, if that were necessary. The evidence of the 2009 balance sheet was wholly inadequate to satisfy the court that the company was insolvent in March 2011.
Mr French: There was knowledge of insolvency from Services' last filed accounts.
There was knowledge of insolvency from the fact that Services had not paid Connect for a few months, confirmed to Mr Prescott by an employee of Connect who was at Court. This was confirmed by the later witness statement evidence of Mr Prescott.
The fact of insolvency was confirmed by the making of the Administration Order, in which respect insolvency is a necessary pre-requisite. There was knowledge of the termination threat, because it had been communicated by Mr Wolman and express reference had been made to it during the course of the hearing in respect of Connect.
FOUR: NO STATEMENT ON ACHIEVING THE PURPOSE OF ADMINISTRATION
- Contrary to IR r. 2.3(5)(c) the Rs failed to make any written statement that in their opinion it was reasonably likely that the purpose of the administration would be achieved. This provision is not just an empty formality. As licensed insolvency practitioners seeking to become officers of the court, the Rs would be expected to review the legal, financial and trading situation carefully and thoroughly before making such a statement. They could not have possibly done so within 15 minutes.
- What is also striking is that, as the transcript shows, Mr French failed to make even any oral submission on behalf of the Rs that they believed that the purpose of an administration would be achieved. He gave an undertaking that an administration application would be filed by the Friday evening, 18th March, and that application would need to include such a statement of belief. But how could he give such an undertaking when he could not have known what opinion the Rs would, if acting in good faith, reach about achieving the purposes of the administration?
- Meanwhile, he was asking the court to let the Rs seize immediate control of the company, which the court duly did. The Rs within the following 24 hours wrote emails and letters and spoke to large numbers of suppliers, sub-contractors, counterparties and employees. They said that the company had been put into "interim" administration and they therefore had to follow their instructions, not those of the previous management.
- How would the situation have been unravelled if the Rs by the following evening had failed to conclude in good faith that the purpose of the administration could be achieved?
Mr French: The statement of purpose was communicated orally (in so far as it had to be to justify the hearing of an application for an administration order on which an interim order could be made).
This was confirmed by the later witness statement evidence of Mr Prescott.
The fact of appropriate purpose was confirmed by the making of the Administration Order, in which respect the achievement of a purpose of administration is a necessary pre-requisite.
FIVE: NO EVIDENCE OF INSOLVENCY
- Contrary to IR r. 2.4(1) the court had before it no statement of insolvency viz. a statement of the Rs' belief that Services was, or was likely to become, unable to pay its debts. For the reasons set out above, the Rs were in no position to make such a statement at 1,25pm on 17th March. Again, assume that by 5pm on 18th March, when they were due to file an administration application in accordance with their undertaking, the Rs had come to the conclusion, perhaps after discussions with the management and owners of Services, that the company was after all able to pay its debts. Once again, the question has to be raised: how would they have unravelled their seizure of control of the company and their usurpation of its management?
- The only conclusion to be drawn from the above is that the Rs were not acting in good faith or as independent insolvency practitioners in accordance with the ethics of their profession. They had already decided in advance that they were going to say that the company was unable to pay its debts and that the purposes of the administration would be achieved, regardless of what they discovered over the subsequent 24-27 hours.
Mr French: There was knowledge of insolvency from Services' last filed accounts. There was knowledge of insolvency from the fact that Services had not paid Connect for a few months, confirmed by an employee of Connect who was at Court.
This was confirmed by the later witness statement evidence of Mr Prescott. The fact of insolvency was confirmed by the making of the Administration Order, in which respect insolvency is a necessary pre-requisite.
SIX: NO EVIDENCE OF FINANCIAL POSITION
- Contrary to IR r. 2.4(2)(a), there was no statement and no evidence of Services' financial position, other than an oral submission about its 2009 balance sheet.
Mr French: See the points re knowledge and knowledge of insolvency above. Mr Sacks, in his draft Statement of Affairs has confirmed insolvency.
SEVEN: NO DISCLOSURE OF ADVERSE MATTERS
- Contraryto IR r. 2.4(2)(e), there was no statement of any other matters which would assist the court in deciding whether to grant an order. This provision overlaps with the common law duty of an applicant making a without notice application to disclose fully and fairly to the court any matters of fact or law which are adverse to his case. See the Chancery Guide (2010 version) para. 5.22.
- So for example Mr French claimed that Services was insolvent because "it is balance sheet insolvent on its last filed accounts", without disclosing that those accounts were nearly 15 months old and that there was no evidence that Services had any unpaid creditors other than (arguably) SwitchConnect. More fundamentally, the Rs failed to point out to the judge any of the legal flaws or weaknesses in the procedure that they were following, as outlined in this skeleton argument. The fact that the Rs may not have intended to mislead the court is irrelevant.
- In the analogous procedure for the appointment of a provisional liquidator, when (in contrast to the appointment of administrator) an application can be made without giving notice to the company (although not without providing evidence), the court has set aside an order obtained as a result of material, although innocent, non-disclosure. See Re OJSC Ank Yuqraneft; Millhouse Capital UK Ltd v Sibir Energy plc [2008] EWHC 2614 (Ch). [20091 1 BCLC 298. In that case, Mr Justice Christopher Clarke held at [107]: "Whilst I have no doubt that there was no intention to mislead the court I am satisfied that, for whatever reason, inadequate disclosure was made to Evans-Lombe J, and that the extent of the non-disclosure is such that, had I not struck out the claims, I would have set aside the order appointing a provisional liquidator and dismissed the claim. It would then be open to Yugraneft to commence new proceedings. "
- Further, the transcript of the two hearings on 17th March shows that the Rs not only failed to discharge its duties of full and fair disclosure of adverse matters but actually acquiesced in the suppression of such matters.
- Thus, in the first hearing of the application for the administration of SwitchConnect, after Mr Boardman, counsel for Tania, another creditor, made several allegations against SwitchConnect, I said, according to the transcript p. 13: "the director of SwitchConnect felt that I ought to be here to defend the company against any allegations that have been made and, in this case, wholly unfairly".
- This led to the following exchange (with my emphasis added):
"THE RECORDER: Mr. Wolman, no one, as I understand it, is asking me to make any adverse findings.MR. WOLMAN: No. Well, in that case, maybe I do not need to say anything. THE RECORDER: What is being said is that there are lots of questions and lots of mysteries, from which, if there are not satisfactory answers, one might read certain conclusions, but I do not think anyone is actually saving those conclusions should be reached today.
MR. WOLMAN: Then I do not quite see the point in raising all these insinuations, which, in our view, are wholly unjustified. They have told you only part of the story...."
- I then started to relate part of the background to the fraud that led to the SwitchConnect's insolvency but did not deal with the allegations made by Tania, or SwitchConnect's complaints against Tania. I concluded: "if you are
not going to make any findings, I do not need to detain the court and go into details. " (p. 15)
- At this stage in the proceedings, the Rs and/or their legal representatives must have been contemplating the making of a further application that day, for an administration order against Services, which is what they did a short while later. But to make that application, they would have to ask the Recorder to do precisely what he said they were not going to ask him to do. That was "to make any adverse findings...today" (sic) arising from the questions, "mysteries" and allegations about SwitchConnect and its associated companies.
- Indeed, as soon as Mr French began his submissions on the second without notice application, he said: "We are hugely concerned on behalf of the administrators about two matters. First of all, the matter that Mr. Boardman has already taken you; that Services appears to be divesting itself of money, which would otherwise be due to Connect, and secondly, the threat of termination of the supply contract, in effect. "
- The matter to which Mr Boardman had taken the court was one of the key subjects on which, as the transcript indicates, I had intended to address the court by way of explanation or rebuttal. But the Rs and their lawyers did nothing to contradict what the learned judge said to prevent me from doing so viz. that this was not an issue on which anyone wanted him to reach adverse conclusions on that day. At the very least, even if (which is not accepted, see below) the Rs were justified in concealing their intentions from me as the representative of the Services group, the Rs' counsel could still have said to the Recorder: "We suggest that it might be fairer to let SwitchConnect's counsel deal with these allegations now, in the way he wishes to, because what he says may be of relevance to submissions that we may have to make later."
Mr French: No disclosure of adverse matters.
There are no adverse maters that required disclosure.
The Deputy Judge had just heard the administration application in respect of Connect and was well capable of recalling those matters.
The purpose of the application for the Interim Order was to preserve the position, pending the full hearing of the Administration Application.
There were no adverse findings against anybody on the making of the statement of purpose.EIGHT: FAILURE TO NOTIFY THE COMPANY
- The last defect in the procedure followed by the Rs is perhaps the most fundamental. It is simply not possible to do what the Rs sought to do viz. to obtain an administration order against a company without giving notice to the company and to various other statutorily prescribed parties.
- The Rs said they were concerned to ensure that the incumbent management of Services could not terminate its contract with SwitchConnect and disconnect its datafeed, which they alleged would have been an entirely uncommercial and self-destructive step. Therefore they wanted to seize control without giving any warning to the management. In fact, as is made clear in WS-AS, para. 28, p. , it would have taken Services several hours to cut off SwitchConnect, so the Rs could have given Services (through me) notice of their intended application. The CPR Practice Direction 23A, r. 4.2 says: "Where an application notice should be served but there is not sufficient time to do so, informal notification of the application should be given... "
- The subterfuge in which the Rs engaged by waiting until I left the court before making their without notice application was not only unjustified legally. It was also unnecessary - unless the Rs realised that I would raise the same procedural objections to their application that are raised in this skeleton argument.
- Further Services had a perfectly sound commercial reason for replacing SwitchConnect with other counterparties. See WS-AS para. 27. There were many other resellers who could have stepped into the shoes of SwitchConnect and Services had both the contractual right and a legitimate commercial motive to arrange for them to do so.
- In any event, if the Rs believed that Mr Boardman's allegations (that Services was siphoning off money) would withstand judicial scrutiny, they could have sought a freezing order against Services on a without notice application (although not without proper witness evidence). Another avenue was also open to the Rs if their fears were genuine and well-grounded enough to persuade a judge. They could have applied on a without notice basis for an interim injunction restraining Services from terminating its contract with SwitchConnect and from cutting off its datafeed.
- Finally, under s. 135 of the IA and rr. 4.25 and 4.26 of the IR, it would also have been possible to obtain the appointment of a provisional liquidator without notice, although once again witness evidence is always essential. However, an application may be made only after a winding-up petition has been presented against the company in question and before a winding-up order has been made. In our case, no winding-up petition, or even statutory demand, had been presented against Services.
- The provisions requiring notice of an administration application to be given to the company, in particular IR rr. 2.6(3) and 2.8, are explicit. Although in cases of great urgency, the statutory five business days' notice period can be abridged by the court under CPR r. 3.1(2)(a), the notice period cannot be abolished. These rules are quite different from those for the appointment of a provisional liquidator. The contrast makes clear that the difference between them is intentional and not the result of an oversight by the Parliamentary draftsman.
- The presumed reasoning of Parliament is that if the allegations against a company, typically of fraud or wrongful trading, are serious enough to justify its seizure by insolvency practitioners and the ousting of its existing management without giving them notice, then they must also be serious enough to warrant the prior presentation of a winding-up petition. The very presentation of a petition does at least put the company and its management on notice that their survival is under threat, allowing them the possibility of taking pre-emptive action (for example obtaining a moratorium for a Company Voluntary Arrangement).
- By contrast, the procedure followed by the Rs, if legitimated, would allow companies to be seized from their owners and managers out of the blue and possibly tipped into insolvency without giving them any opportunity to defend themselves. That is, and must be, a breach of the ECHR First Protocol, Art. 1 and of the principle dating back to Entick v Carrington,
- If creditors or others such as the Rs feel that they are justified in seeking urgent sanctions against a company without giving the owners or managers notice, then they must content themselves with more limited and less draconian forms of intervention."
Mr French: As regards the failure to notify Services, such notification would have defeated the object of the Interim Order.
It was necessary to preserve seamless supply of telephony services between Services and Connect, in order that Connect could supply services to its customers.
The supply of services from Connect to its customers was the route by which Services earned its money; without that supply, there would be no money for Services or its creditors.
Ordinarily, there would not have been an issue, because the majority of the shares in Services were owned by Connect, so that Connect could maintain control.
There was an issue about that, because of the dubious share transfer.
Unbeknownst to Connect, it appears that a letter of termination had already been prepared and, allegedly, served.
However, despite having been in effective control of Services from 17 March 2011 onwards, Mr Prescott never saw that letter until the exhibits to Marco Marrocco's witness statement dated 20 October 2011 were served.
The letter was never acted upon, because the supply continued, for the benefit of Services and Connect.
After the event, that justifies the Interim Order even further.
There were two reasons for not notifying Mr Wolman of the proposed application. The genuine view (still maintained) was that he had been representing Connect at the hearing of the application for an administration order in respect of Connect, and was not representing Services at that hearing.
In so far as Mr Wolman might have been representing Services, he was the channel through which the termination threats had been channelled, both in correspondence before the Connect hearing and at the hearing.
It is entirely appropriate to seek an order without notice where notification of an intention to seek such an order might bring about the very event that brings about the jeopardy in the first place. Advance notice of the proposed application to Services would have made the position worse, not better.
Provisional liquidation would have been pointless, as that, as a rather more drastic step than the proposed administration, or the position under the Interim Order, could very well have brought about the termination of supply. Administration would not; the whole point of the administration of Services was the continuation of business with a view to an orderly sale and the business could not have continued in the event of a termination of services."
Without notice administration orders
" ... There are plainly negotiations being carried on for disposal of either the licences or the ships or both on some arrangement intended to remove the licences from the ships. There are also allegations made that the licences are not the property of the company but are, in fact, the property of the managing director of the company personally. It seems to me on the face of it improbable that that is so, but nonetheless that is the claim made and there are threats that the licences may be disposed of separately from the ships. The ships are plainly assets of the company. They are mortgaged pursuant to ship mortgages in the proper form to the bank, but if the ships are not available with fishing licenses the evidence is that they will be substantially less valuable and the company's assets will not cover its debts.
In those circumstances Mr Adkins applies on behalf of the petitioning creditor for the appointment of a manager, described as an interim manager, to cover the position between the presentation of the petition and its service upon the company and the hearing of the petition. He also applies for abridgement of time for the hearing of the petition which, in my view, is clearly desirable and, indeed, necessary.
The evidence shows that there are difficulties attendant upon the realisation of the assets and the carrying out of the threats to realise them. It seems to me this is not essential in this case to appoint a manager to run the whole affairs of the company in the shortish interval between presentation, service and hearing of the petition, but that it would be right to restrict, pursuant to sec.9(5) of the Insolvency Act, the powers of the directors and of the company to dispose of its assets in the meantime..."
" The question of whether or not the court may dispense with service has caused some difficulty in the past ...Dillon L.J. expressly approved earlier criticism by Harman J of the practice of obtaining administration orders on such undertakings. Despite the criticism of this practice, it is considered that in special cases and administration orders can and should continue to be made on undertakings."
" The period fixed for the service of the application inter alia enables the person entitled to appoint an administrator an opportunity to consider whether or not to support or oppose the making of the order. If cicumstances demand urgent action this period may be abridged and, if this is contemplated, it is normal to obtain written consent of short notice from the person entitled to appoint an administrative receiver. In Re a Company (No00175 of 1987)
...The Court was influenced by the parlous position of the company, the necessity to place the business in the hands of an administrator quickly and the fact that the bank knew at local branch level of the intention to present the application on the same day that the director received advice that effect; the Court considered that this was a case in which to exercise his general power under IR 1986, r. 12.9 to abridge the service period. The court has displayed a flexible and creative approach in expediting the making of an administration order, ranging from the appointment of a manager to the making of an order upon an undertaking to present an application."
Rescission
"7.47(1) [Powers of courts] Every court having jurisdiction for the purposes of Parts I to 4 of the Act and Parts I to 4 of the Rules, may review, rescind or vary any order made by it in the exercise of that jurisdiction."
"The jurisdiction under r.7.47 is very wide, and extends even to the review, rescission or variation by a High Court judge of a decision of any judge of that court: Re W & A Glaser Ltd [1994] B.C.C. 199 at 208, per Harman J. A judge can review his or her own decisions under Rule 7.47(1) - Re Thirty Eight Building Ltd (No.2) [2000] B.P.I.R. 158. The court has power to make retrospective orders under IR r. 7.47(1) - see Re Roches Leisure Services Ltd [2005] EWHC 3148 (Ch); [2006] B.P.I.R. 453 (retrospectively extending date for expiry of administration)."
"[21]
Mr Riley says that this demonstrates that exceptional circumstances are not needed and is consistent with his argument that the high hurdle imposed by Fitch's case is restricted to cases where the rescission of a bankruptcy order is in issue. In a case like the present one, the wide scope of s 375 allows the court to assess the matter afresh.
[22]
I do not accept these submissions. First, the fact that the court has a wide jurisdiction does not throw light on how the jurisdiction should be exercised. In Fitch's case the Court of Appeal noted that the power bestowed on the court by s 375 was 'in theory at least, virtually unlimited', that the 'statutory discretion is in terms unlimited' and that it created an 'absolute discretion' to rescind or vary any of its orders. Nevertheless the court said that the discretion could only be exercised in exceptional circumstances.
[23]
Second, there is nothing in the wording of s 375 which suggests that it should be applied in a significantly different way in different cases. The authorities do not support that approach either. Even if Millett J's decision in Re a debtor (No 32/SD/1991) can be construed as suggesting a lower threshold where what is being sought is the rescission of a refusal to set aside a statutory demand, that view does not appear to have commended itself to the Court of Appeal in Fitch's case. Millett J's judgment was cited to the court in Fitch's case yet it held that s 375 applied to 'any order made in the exercise of the bankruptcy jurisdiction' and that it could be applied 'to rescind or vary any of its orders' without distinguishing in any way between them (my emphases).
[24]
Third, I do not accept that Re a debtor (No 32/SD/1991) supports Mr Riley's argument. On the contrary, Millett J said:
'As a matter of discretion I have no doubt that the jurisdiction ought to be rarely exercised, since the effect of doing so would be to allow what would amount to a renewed application to set aside a statutory demand after the period limited for making the application.' (See [1993] 2 All ER 991 at 995, [1993] 1 WLR 314 at 318.)
[25]
It seems to me that a number of propositions can be formulated in relation to s 375. Some of them are derived from the passages cited above. (1) The section gives the court a wide discretion to review vary or rescind any order made in the exercise of the bankruptcy jurisdiction. (2) The onus is on the applicant to demonstrate the existence of circumstances which justify exercise of the discretion in his favour. (3) Those circumstances must be exceptional. (4) The circumstances relied on must involve a material difference to what was before the court which made the original order. In other words there must be something new to justify the overturning of the original order. (5) There is no limit to the factors which may be taken into account. They can include, for example, changes which have occurred since the making of the original order and significant facts which, although in existence at the time of the original order, were not brought to the court's attention at that time. (6) Where the new circumstances relied on consist of or include new evidence which could have been made available at the original hearing, that, and any explanation the applicant gives for the failure to produce it then or any lack of such explanation, are factors which can be taken into account in the exercise of the discretion.
[26]
The second and fourth of these propositions merit some expansion. Inherent in s 375 is the concept that something has changed so that it is appropriate for the court to reconsider its own earlier order. If there is no change in circumstances, the only way to challenge the order is by appeal. The court is not to review its order simply on the basis that the applicant wants to present essentially the same facts and the same arguments but more forcefully or attractively. This is apparent from the following passage in Fitch's case:
'[A]n appellate court can quash a bankruptcy order only if it is satisfied that, on the evidence which was before the court which made the order or on new evidence which is admitted in accordance with the rule in [Ladd v Marshall [1954] 3 All ER 745, [1954] 1 WLR 1489], the order should not have been made. An application under section 375(1) is essentially different. It must be based on a change in circumstances since the order was made or, more rarely, on the discovery of further evidence which could not be adduced on appeal.' (See [1996] 1 WLR 242 at 246.)
[27]
The same requirement that there should be something new appears to be inherent in Millett J's judgment in Re a debtor (No 32ISDI1991):
'Where an application is made to the original tribunal to review, rescind or vary an order of its own, however, the question is not whether the original order ought to have been made upon the material then before it but whether that order ought to remain in force in the light either of changed circumstances or in the light of fresh evidence, whether or not it might have been obtained at the time of the original hearing. The matter is one of discretion, and where the evidence might and should have been obtained at the original hearing that will be a factor for the court to take into account; but the rationale of the rule in Ladd v Marshall that there should be an end to litigation and that a litigant is not to be deprived of the fruits of a judgment except on substantial grounds has no bearing in the bankruptcyjurisdiction. The very existence of s 375 is inconsistent with such a rationale.' (See [1993] 2 All ER 991 at 995, [1993] 1 WLR 314 at 318-319.)
[28]
This passage supports the sixth proposition set out at [25] above."
"THE APPLICATION FOR RESCISSION
Finally, as a fallback application, if for any reason, the court refuses to grant the declaration of nullity that is sought, SBCS seeks rescission of the
administration order under IR r. 7.47(1). It is accepted that in order to succeed in such an application, SBCS must show that the circumstances are exceptional and probably that the order would never have been made if the correct procedure had been followed and the full facts had emerged.
The facts outlined in the various witness statements and the legal arguments set out above provide more than sufficient basis for the court to conclude that the circumstances are indeed exceptional and that the Rs should never have succeeded in obtaining their order."
Utility of the application
(i) It is for the general good of the body of creditors that the administrators cannot claim their fees or any expenses incurred between 17 and 25 March 2011 when the interim order was in force. However, as I have already indicated, the creditors have approved these fees.
(ii) The application sends a powerful message to Leonard Curtis, the firm for which the Applicants work, that it cannot displace the management of a company without due process and strict compliance with the statutory code set down in the Insolvency Act 1986 and the Insolvency Rules 1986;
(iii) It will allow the Applicant to back up its claim that it was wrongfully denied of this success fee, or the opportunity to earn it, by the unwarranted interim order;
(iv) It will pave the way for the setting aside of the administration order itself made on 25 March 2011, if the administrators wrongly got in control of Services and thereby tipped it into insolvency;
(v) It would provide a basis for the creditors to ask these administrators to stand down as administrators of Services;
(vi) It will make clear the legal position of all the parties.
"I note that you say, as part of your case, that 'no application has been made against you or Spencer Brown by the administrators of the Company. The application [i.e. under section 236] was issued by the administrators of Switch Connect Limited'.
As of today, that assertion is correct. However, are you prepared to give an undertaking on behalf of the administrators of Switch Services Limited that no application or claim will be made against SB Corporate Solutions Limited or any of its directors or officers personally? Are you also prepared to give an undertaking that none of the confidential and/or privileged documents that I have provided or may provide to the administrators of Switch Connect Limited, either pursuant to the order of last week or otherwise, will be used by or on behalf of those same persons in their capacity as administrators of Switch Services Limited? Finally, if it is established that Switch Services Limited does indeed still owe this company fees for advice given earlier this year, will you undertake to pay those fees?
If you are willing to provide these undertakings, then I will agree (subject to the resolution of any cost issues) to withdraw my application which is due to be heard next Wednesday."
Discretion
Conclusions
His Honour Judge McCahill QC
Specialist Chancery Judge
Bristol
Approved Judgment handed down in Court on 22 December 2011