England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Claim No: 2505/2013 Rolls Building, 110 Fetter Lane, London EC4 1NL
		7 June 2013

MR JUSTICE DAVID RICHARDS:

1. There are a number of applications before the court, but I have heard only one of them, which is an application to appoint administrators of Information Governance Limited ("IGL").
2. IGL is the wholly-owned subsidiary of Information Governance Holdings Limited ("IGHL"). There are 12 shareholders of IGHL. The largest single shareholder is Stephen Hall, whose shareholding is 39.45 per cent. Other shareholders include Michael Popham, with a shareholding of 14.48 per cent, Mr Clelland with a shareholding of 13.39 per cent, Mr Delaney with 10.5 per cent, and Mr Greenslade with 7.21 per cent. These companies were originally established by Mr Hall, Mr Clelland and Mr Greenslade, and that is reflected in certain provisions of a shareholders agreement (to which I will later refer).
3. IGHL is purely a holding company and has no business of its own other than holding the shares of IGL. The business of IGL centres round some software called Proteus Software, which has applications in the areas of corporate governance, risk analysis and security. The business of the company of IGL has involved the development of this software and its sale to clients, most of whom are substantial commercial concerns, with a particular emphasis in Spain. The sales of software are by way of licence to the clients, and clients will normally pay for support services and software updates.
4. There has been a fair degree of disagreement amongst the shareholders' of IGHL, and I suspect I may only have seen the tip of the iceberg today, but central has been the position of Mr Popham, who was a director of IGL and who, for a period before he ceased to be a director, was the only person working full time in the business, along with Mr Hall. Mr Popham was the subject of disciplinary action, I was told, in June 2011. He was removed by votes of 76 per cent of the shareholders from the boards of both companies in July 2012 and he resigned as an employee in August 2012. In October 2012 he lodged a claim in the employment tribunal against IGL, in which he is seeking a little over £84,000 in respect of loss of earnings, holiday pay and so on, and also compensation for what is described as an "investment loss" of £144,800. The employment tribunal proceedings are continuing.
5. The present application for the appointment of administrators of IGL is made by Mr Hall who, at the time when the application was issued on 31 May 2013, was the sole director of IGL. He made the application under paragraph 12(1) of Schedule B1 to the Insolvency Act 1986, which includes, amongst the persons who have standing to apply for the appointment of administrators, the directors of a company. Before the court has jurisdiction to make an administration order, it must be satisfied that the company is, or is likely to become, unable to pay its debts. Much of the argument today has focused on whether Mr Hall can satisfy the court that that is the case, but before I come to that, I will just sketch in a little bit more of the background.
6. In the latter half of last year, Mr Hall developed the idea of bringing together within a new partnership or similar association a number of businesses, including that of IFG, and he established a limited liability partnership called Clarity for that purpose. As I understand it, he did not have discussions with Mr Popham in relation to this proposal, but he did have discussions with Mr Greenslade and Mr Clelland. Those discussions in the end did not come to fruition, and it is the view of Mr Popham, and also of Mr Clelland and Mr Greenslade, that thereafter Mr Hall was set on a course of creating a situation in which IGL could go into administration, and the business, including the software copyright, could be sold, preferably to a company controlled by him, as part of a pre-pack administration. I am not today concerned to decide, nor could I, whether there is any truth in those views or, indeed, in allegations made by Mr Popham in some of the other applications which are listed before me today.
7. The evidence before the court as to the financial situation of the company comprises accounts for IGL for a number of financial years ending on 31 March, the latest of which is for the year ending 31 March 2012, together with more up-to-date information provided by Mr Hall in or annexed to witness statements made by him. The accounts for the year ending 31 March 2012, which state that they were approved by the board, i.e. by Mr Hall, on 10 November 2012, indicate that for that year the company made a pre-tax profit of £65,571. The balance sheet shows net current liabilities of £1,423, comprising current assets of £66,000-odd and current liabilities of £68,000-odd. In addition, there is a liability of £138,600, shown as falling due after more than one year. This is in respect of a shareholder loan made by IGHL. On the basis of those assets and liability figures, the company having a called-up share capital of just £100, there was a deficit of just over £140,000. But I do not think that it would be suggested by anyone that, on the basis of the financial position of the company as at 31 March 2012, it was either unable to pay its debts or likely to become unable to pay its debts. It is developments since then on which Mr Hall relies for his case that the company is unable to pay its debts.
8. Mr Hall has produced a schedule of liabilities as at 31 May 2013, which is based on his own knowledge of the business and affairs of IGL in his capacity as the sole director of the company. The current creditors are shown as totalling £110,998. Of those, liabilities totalling £7,000-odd are owed to what might be described as entirely outside creditors, and three of those have written letters to the company requiring payment of their debts. The other current creditors shown are either shareholders or businesses associated with shareholders. Mr Hall is owed £32,000 in respect of unpaid salary owed from 2010. As I understand it, he now does not receive a salary, but is paid, I think, on a commission basis. Mr Popham is shown as being owed £17,226, and that is the admitted part of his claim in the employment tribunal. Two businesses, RRM Solutions and Starcis Media, which provide support and software development for IGL and are controlled by Mr Ibbit and Mr Mason respectively, each of whom is a shareholder of IGHL, are shown as being owed £27,157 and £27,000 respectively. The schedule also shows a sum of £80,926 in respect of sums already paid under support and maintenance agreements for services yet to be supplied. In addition, there are contingent liabilities noted in respect of the disputed part of Mr Popham's claim and in respect of claims which have been lodged by National Bank of Egypt and by Prosis Egypt. The only other liability is in respect of the long-term loan made by IGHL. The assets IGL currently appear somewhat exiguous. I am told that there is £100 in the bank, that IGL has no overdraft facilities, and that the only remaining assets are the intellectual property rights associated with the software. On that basis, it is Mr Hall's case that IGL is unable to pay its debts, or likely to become unable to do so.
9. In opposing the making of an administration order, Mr Popham, who has been joined before me today by Mr Greenslade, Mr Clelland and Mr Delaney (who have appeared in person, but who I have heard under the relevant rules as persons interested in this matter), take the view that there is the prospect of sufficient business for the company to enable it to continue in business and pay its liabilities in the ordinary course.
10. It is difficult for the court here, on the level of information which the court has and in the absence of the sort of expert investigation into the affairs of the company which might be available on such an application (I will mention in a moment a report that has been put before the court), to reach firm views. This is a company which, on the face of it, is unable to pay its debts, but I take into account that most of the liabilities are not owed to third parties, and that those that are owed to third parties are of a modest amount. I cannot, for present purposes, attach any value to the contingent claims that are being made. Whether or not the company is insolvent will depend very much on whether it would be possible to revive the business sufficiently to meet liabilities and, in particular, on the attitude which would be taken by the fairly significant creditors who are also shareholders. Mr Popham has indicated a willingness to schedule the liability due to him, but Mr Hall's own position is not known and nor, I think, is that of Mr Ibbit and Mr Mason. It is an uncertain situation.
11. Accepting that this is certainly not a case where the company is quite clearly and irredeemably unable to pay its debts, I think that the conclusion which I should reach on the evidence before the court is that, for the purposes of paragraph 11 of Schedule B1, IGL is unable to pay its debts looking at the position as it exists today.
12. I mentioned that there was a report before the court. It is a 4-page report prepared by two insolvency practitioners who are employed by or are officers of a company called KSA Group Limited. Their report supports the view of Mr Hall that the company is insolvent and that the only viable way forward is for the business to be sold at the best available price to one or more of the shareholders of the company, and they therefore recommend a pre-pack sale in an administration. It is, however, fair to say that their views are based entirely on the information provided to them by Mr Hall, which is the information and evidence to which I have referred.
13. The second matter of which I must be satisfied is that an administration is reasonably likely to achieve one or more of the statutory purposes of administration. The relevant purpose in this case would be achieving a better result than a winding up. It is probably the case that an administration of this company would achieve a better result than a winding up. That then leaves the court with a discretion as to whether to make an administration order.
14. The circumstances of this case are very unusual indeed. The insolvency of the company (as I have found it to be) arises in the context of the disputes to which I have briefly referred between the shareholders of the company. While Mr Hall has been the sole director of the company since Mr Popham was removed last year, that is no longer the case. On 3 June 2013 Mr Greenslade and Mr Clelland exercised rights which they enjoy as parties to a shareholders agreement to appoint themselves as directors of IGL, each of them having a few days earlier exercised the same right to appoint themselves as directors of IGHL. The shareholders agreement is dated 23 November 2006 and is made between all the shareholders, whose names are listed in Schedule 1 to the agreement, of whom there were then nine, and IGHL. Clause 2 recognises the position of Mr Greenslade, Mr Clelland and Mr Hall as the founding shareholders. Clause 2.1 provides that the directors of the company, which is IGHL and its subsidiary IGL, were to be Mr Greenslade, Mr Clelland and Mr Hall, together with such other persons as the majority of the board shall approve from time to time. That remained the case for some time until Mr Greenslade and Mr Clelland resigned from the boards of both companies. The steps taken by Mr Greenslade and Mr Clelland to reappoint themselves as directors of both companies were taken pursuant to clause 2.2 of the agreement which provides:

"So long as each remains a shareholder of the company Christopher Greenslade, John Clelland and Stephen Hall shall each have the right from time to time and at any time to appoint and maintain a person as a director of the company and its subsidiary and to remove from office any director so appointed and appoint another in his place."

Clause 2.3 provides that any such appointment is to be effected in writing, signed by the member or members making the appointment, and takes effect upon lodging the written appointment at the registered office of the company.

15. The written appointments were lodged at the registered office by Mr Greenslade and Mr Clelland on 3 June. Submissions were advanced to me by counsel for Mr Hall that Mr Greenslade and Mr Clelland were not entitled to exercise these rights. In my judgment, it is clear that they do enjoy these rights. It is to my mind clear that clause 2 confers a right on each of them to appoint a director, remove that director, and appoint another in his place, and it is also, in my judgment, clear that each of them may appoint himself as a director. It would seem to me to make no sense, for example, that Mr Greenslade cannot appoint himself as a director under clause 2.2, and nothing in the language of the provision suggests otherwise. Mr MacEvilly, counsel for Mr Hall, suggested that the effect of clause 2.2 was simply to reflect the power of a director to appoint an alternate director contained in Table A which is incorporated into the articles of association of the company. I do not consider that to be right. The power to appoint an alternate director is a power vested in an existing director to appoint someone who can take his place temporarily at board meetings when the appointing director cannot attend. That is quite separate from the right of a shareholder to appoint a director under clause 2.2. Mr MacEvilly suggested, but did not press, that a provision of Schedule 3 to the shareholders agreement which requires the approval of members representing at least 66 per cent of the total voting rights of all members of the company was required before the appointment of any person as a director of either IGHL or IGL. I am clear that that is overridden by clause 2.2, and indeed the opening words of Schedule 3 provide that Schedule 3 applies "save as is expressly permitted or contemplated by this agreement".
16. Accordingly, Mr Greenslade and Mr Clelland have validly appointed themselves as directors of IGL. The position, which in my experience is unique, is that an application for an administration order is made by the one director who was on the board at the time the application was issued, but is opposed by two out of the three persons who are now, at the time of the hearing, directors.
17. I should say that, the application having been validly made by Mr Hall at a time when he was the sole director, I am clear that the court has jurisdiction today to make an administration order, notwithstanding the appointment of Mr Greenslade and Mr Clelland and their opposition to the making of an order. If I were satisfied that the company was insolvent by reference to third party liabilities and there was little or no real prospect of any revival in the fortunes of the company, then I would consider it right to make an administration order. But this very unusual situation is one where the two persons who, it may be said and is said by Mr Hall, have rather belatedly reappointed themselves to the board believe that there are matters which can be and should be investigated, including the viability of continuing the operations of the company. They will continue to be subject to the duties imposed on them as directors to have regard to the interests of creditors as well as members of the company, and it will be incumbent upon them rapidly to form a view as to the future direction of this company and as to whether it is appropriate for steps to be taken to put it into an insolvency proceeding. But I do not think it would be right in all the circumstances to take that step today, and accordingly I shall refuse to make an administration order on Mr Hall's application, which stands dismissed.
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