England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY

		33 Bull Street Birmingham B4 6DS
		23rd July 2012

[The quality of the recording was poor in parts; the transcriber has endeavoured to provide as accurate a transcript as possible.] JUDGMENT
1. THE JUDGE: This is an application for an administration order upon the usual grounds that there is likely to be a better result for creditors than in a liquidation. There is a proposed prepack in favour of a company owned and controlled by Mr Mark Harrison, currently an employee of the company. There is also an extant winding-up petition but the petitioner, HMRC is, as it often does, sitting on the fence.
2. I am not at all happy with the history of this company. What happened is that, following the presentation of the petition by HMRC, Mr Morrison, who is the sole director of the company, approached Mr Harrison, because he was aware that the company's bank account was about to be frozen, and prevailed upon Mr Harrison to, as he puts it, "…provide financial assistance," using Mr Harrison's company's banking facilities for the company (which in fact had to be set up specially, there being no previous facilities). That meant that the company's main customer was prevailed upon to pay not the company, which would have only been able to pay the monies into a frozen bank account, but Mr Harrison's company. However, what Mr Harrison's company received was money due to the company, thereby enabling the company to discharge outstanding debts, including wages, and keep the company operational. It is said that there was a significant risk that the major contract would be lost if that was not done. It did not seem to occur to anyone that the permission of the court was needed because of section 127 of the Insolvency Act 1986. This section provides that any disposition of the company's property made after the commencement of the winding up is, unless the court otherwise orders, void. The winding up would in this case date from the presentation of HMRC's petition.
3. Another construction that can be put on what happened is that Mr Morrison and Mr Harrison effectively put the prepack in place before the administration occurred, thus pre-empting the court's decision. All of this only came to light as a result of an Order of HHJ Simon Barker QC requiring further information to be provided on the initial hearing of the administration application, as he was not happy with the adequacy of the evidence then before him.
4. The arrangements for switching the company's funds (and ongoing contract) into Mr Harrison's company were, at best, post-petition dispositions of the company's assets, potentially avoided by section 127 if the company is now wound up. Naturally enough, all the post-petition expenditure has been explained in witness statement evidence and in the main presently appears (leaving aside the impact of section 127) to have been proper, although I have some question mark on the round figure of wages paid to Mr Harrison, who seems to be immune from the vagaries of PAYE and National Insurance contributions, unless those are gross figures, unlike the separate figure given for payments of wages to employees and subcontractors of £15,000-odd.
5. It is proposed now to sell the business lock, stock and barrel to Mr Harrison's company, which I assume for present purposes is independent from Mr Morrison. A substantial sum for goodwill will be paid, by instalments, guaranteed by Mr Harrison, starting with an immediate payment of £4,000. Unsurprisingly, Mr Harrison can do that as he has just received £5,000 from the company. Naturally enough, the proposed administrator has put in a very full witness statement containing all the SIP 16 material and has reached the conclusion, no doubt genuinely, that almost any sale is better than a liquidation because the goodwill will in his professional judgment realise nothing on a liquidation, especially as the relationship between the main customer and Mr Harrison's company is already in place. He has not apparently investigated the creditworthiness of Mr Harrison or his company, assuming that cash flow from the ongoing business will suffice to pay the instalments to be left outstanding.
6. What will happen in the liquidation is that all the transactions which have occurred since the presentation of the petition, and which have apparently helped to put Mr Harrison in funds of £5,000, will fall to be investigated. Proper consideration of those transactions may also reveal that the company's goodwill has already been arrogated in whole or in part to Mr Harrison or his company, giving rise to a claim for payment or compensation for that goodwill. The proposed administrator's evidence acknowledges the risk that the main customer may take the decision to contract directly with Mr Harrison's company, because of the existing relationship. In truth, the existing relationship is the company's, and it is difficult to see how it could properly have been usurped by Mr Harrison's company in the way the evidence indicates it may have been.
7. I clearly have power to make an administration order. The company is, on the evidence, insolvent. In addition, there is evidence of the usual quality that the result of an administration will be better than a liquidation. Nevertheless, I still have discretion whether or not to make an administration order, and I decline to do so. In my judgment, this company should be put into liquidation, so that post-petition transactions can be considered against the background of section 127. .
8. I have power to make a winding-up order today, and am minded to do so, subject to any further observations of Counsel as to the relationship between this application and the petition.

THE JUDGE: Where is the winding-up petition pending, Mr Weaver?

MR WEAVER: In London, my lord.

THE JUDGE: And when is it due before the London Court again?

MR WEAVER: It is adjourned pending this application on… My lord, might I just turn my back just for a moment?

THE JUDGE: I can either transfer it here and wind the company up or let it take its course.

MR WEAVER: My instructing solicitor thinks it is a week today, back in London.

THE JUDGE: Well, the normal course, we usually remove them here to dismiss them, do we not?

MR WEAVER: Yes.

THE JUDGE: I do not know whether anyone else has given notice of intention to appear, so maybe it had better take its course in London.

MR WEAVER: We are not aware of any. HMRC have not made us aware of any supporting or opposing creditors of the petition. I cannot say there are any or have been…

THE JUDGE: Well, in that case, I will remove the petition to this court and make the usual compulsory order. HMRC obviously wants its costs as part of the liquidation costs. Could you draft an order, please, Mr Weaver?

MR WEAVER: Yes.

THE JUDGE: Thank you very much. Anything else, Mr Weaver?

MR WEAVER: No, I am grateful, my lord.

THE JUDGE: Thank you, Mr Weaver. I am trying not to get all these papers mixed up now.

[Hearing ends]