England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY

		Civil Justice Centre 33 Bull Street Birmingham B4 6DS
		10 April 2014

HHJ SIMON BARKER QC :

1. By a Form 2.1B application issued on 4 April 2014 pursuant to paragraph 12(1)(b) of Schedule B1 to the Insolvency Act 1986 (respectively : Sch B1 and IA1986), Mr Gareth David Shaw, as the sole director of Brown Bear Foods Limited (BBF), seeks an order for the appointment of two directors of Baker Tilly Restructuring and Recovery LLP (BTRR), Mr Damian Webb and Mr Dilip Dattani, as joint administrators of BBF.
2. An out of court appointment was not open to Mr Shaw. There is an outstanding winding up petition (the Petition), which was presented to the court on 21 February 2014 by Mr Radcliffe and Ms Wilson, who trade as T&E Properties (T&E) and are BBF's landlord, in respect of unpaid rent in the order of £35,000. There is also a qualifying floating charge holder, Close Brothers Limited (CBL). It appears that there is no outstanding secured debt to CBL, however CBL, or a group company, is owed substantial sums pursuant to one or more hire purchase agreements.
3. Service of the application was effected one day before the hearing but no difficulty arises from this because all relevant parties have consented to short notice of the application. By the time of the hearing, neither T&E nor CBL opposed the making of an administration order. That being said, I bear in mind that T&E originally opposed the application and neither T&E nor CBL have had much time to consider the evidence put forward.
4. BBF's history is very short, but significant. BBF was incorporated in May 2013 as HFTS 5 Ltd and changed its name by special resolution on 1 July 2013.
5. According to Mr Shaw, from incorporation until 10 March 2014, that is until 4½ weeks ago, BBF's sole shareholder and sole director was a Mr David Spicer Hepworth. Mr Hepworth had been a director of Q Cold Ltd which had been incorporated in 2005 and went into administration on 20 June 2013. BBF purchased Q Cold's food packaging trade and assets from its administrators.
6. Mr Shaw had been employed as operations manager at Q Cold for some 10 years and transferred to BBF in that role.
7. The evidence available to the court as to BBF's trade and state of affairs is very limited. From the available management accounts, which are rudimentary and concern only trading in the months of December 2013 and January 2014 together with a cumulative year to date trading and profit and loss account and an outline balance sheet as at 31 December 2013 and 31 January 2014, it appears that by then BBF was trading at a loss and balance sheet insolvent. More recent management accounts have not been produced in evidence on this application.
8. Nevertheless, Mr Shaw says that he acquired the one £1 issued share of BBF from Mr Hepworth on 10 March 2014 and that, also on that date, he replaced Mr Hepworth as BBF's sole director. According to his witness statement, Mr Shaw exhibits the agreement and other documentation relating to the sale and purchase of BBF's one £1 share (the SPA).
9. There are a number of notable features to the SPA. They include :

(1) Mr Hepworth's capacity as seller is described on the front of the SPA as nominee on behalf of the beneficial owners pursuant to a declaration of trust dated 31 August 2013; the beneficial owners are identified at Schedule 1 to the SPA as Harry Louie David Hepworth and Isabella Lily May Hepworth; but, by cl.6 of and Schedule 3 to the SPA, Mr Hepworth warrants that he is the sole legal and beneficial owner of the share sold;

(2) the buyer is not Mr Shaw personally but Brown Foods Limited. Mr Shaw's evidence provides no express insight into his relationship (if any) with this company; however, the import of Mr Shaw's evidence is that he regards himself as indistinguishable from Brown Foods Limited;

(3) the share the subject of the SPA is one £1 share in Hepworth Holdings (Herefordshire) Limited (HHHL);

(4) the purchase price which the buyer agrees to pay is £1million;

(5) the agreed terms of payment require the buyer to make a down payment of £50 and to pay the balance of the price by 15 monthly instalments of £66,663.33 commencing on 1 March 2015. On the same day, by a side letter, this obligation is varied so that the buyer is to make "adhoc payments of up to but not exceeding £200,000 in any one tax year, subject to available cash within the business group"; and,

(6) in addition, by the SPA, the buyer agrees to (a) "repay a loan provided to the business of £25,000" by 17 March 2014, and (b) "invest a sum in excess of £200,000 in the business as agreed" by 17 March 2014.

10. There is no indication in Mr Shaw's evidence of whether or not or how, if at all, he satisfied himself on or before 10 March 2014 that the subject matter of this transaction by which, on his evidence, he acquired BBF was or might be worth either £1million or even £50. There is no evidence from Mr Shaw as to the identity of the lender of £25,000 to "the business" or what is meant by "the business" or whether that sum was repaid, and, if so, to whom. Mr Shaw is also silent as to whether or not the promise to invest in excess of £200,000 in "the business" was complied with, and, if so, how and when this occurred and what, if any, benefit accrued to BBF. On the other hand, it is clear from the Barclays bank statements exhibited to Mr Shaw's witness statement that neither he nor Brown Foods Limited injected any cash sum into that account of BBF.
11. Whether or not Mr Shaw is correct to describe the SPA as "not necessarily relevant to this application", he is unquestionably wrong to state that by exhibiting the SPA he provides "completeness" of information about his acquisition of BBF.
12. It appears from another document, also exhibited in the context of the SPA "for completeness", namely a letter, also dated 10 March 2014, from Mr Shaw as director of BBF and Mr Hepworth as or for HHHL addressed to the directors of HHHL that the parties to the SPA agreed in respect of HHHL and BBF (as HHHL's wholly owned subsidiary) that the server and accounts IT infrastructure, together with proprietary software licences and including the Sage operating system would be "removed from the site … within 7 days from the date of [the SPA]", i.e. by 17 March 2014. This indicates that the sale of HHHL carried with it control of BBF. It also raises the prospect that accounting records of BBF may no longer be available on site to BBF or to Mr Webb and Mr Dattani if appointed pursuant to this application.
13. Based on Mr Shaw's evidence, I proceed on the basis that (1) he draws no distinction of substance for present purposes between himself and Brown Foods Limited, and (2) he regards BBF as or as part of "the business" acquired under the SPA.
14. Moving on through Mr Shaw's evidence, it is unclear when Mr Shaw became aware of the Petition. He says that as operations manager he "was not involved with the financial affairs of [BBF]". Mr Shaw also says that "Around 17 March 2014, after becoming aware of [BBF's] financial problems following my appointment as director, I sought professional advice from FRP" (FRP are the administrators of Q Cold).
15. Mr Shaw also says that he believes that "a factor which has contributed to [BBF's losses of £154,000 at 31 January 2014] was the disproportionate costs and remuneration associated with Mr Hepworth" and that "[BBF's] funds were used to pay non-business expenses and connected companies". Mr Shaw does not give further details or provide any clarification. Mr Webb provides some clarification by referring to a preferential payment of £104,000 to an unidentified connected company in respect of which a £50,000 recovery is expected in the course of any administration or liquidation.
16. To inform the court, Mr Shaw exhibits the bank statements for BBF's account with Barclays for the period 28 February 2014 to 31 March 2014. The statement for the period 21 to 27 February 2014 is not before the court; however, Mr Webb has today filed a further witness statement to which he exhibits the Barclays statement for the period 31 March to 9 April 2014.
17. The bank statements exhibited by Mr Shaw reveal that some £6,732 was paid to "Q Holdings Ltd" on 6 March 2014. More significantly, on 12 March 2014 BBF received a VAT refund from HMRC of £109,670.41. On that day, and on payment by BBF of a £25 same day transfer fee, £108,500 was transferred to Nwn Solutions (Nwm). By then, Mr Shaw had taken over control of and was responsible for the management of BBF. Mr Shaw's witness statement does not make any direct reference to those transactions which, in my view, cry out for explanation. Mr Webb's evidence, prepared yesterday and filed at court today, does draw express attention to the payments to Nwm. He says that his "present understanding" is that they "were payments made to a labour agency for labour supplied". However, by the time of the hearing today further enquiries had been made, including by Mr Dean, Mr Shaw's counsel, of his client. Mr Shaw had told Mr Dean that he did not authorise the payments to Nwm. I observe that by 12 March 2014 Mr Shaw alone was at the helm of BBF. Mr Dean had also ascertained from Mr Shaw that Nwm is not an independent third party, rather it is connected to Mr Hepworth and/or Q Holdings.
18. I recite these facts in some detail because on paper the criteria or preconditions for making an administration order, which are set out at paragraph 11 of Schedule B1, are made out : (a) there is no question but that BBF is unable to pay its debts, and (b) the evidence of Mr Webb points to it being reasonably likely that the purpose of administration (in this case a better result for the creditors than would be likely on liquidation) will be achieved if an administration order is made.
19. However, one of the side winds of making an administration order in any case where there is also a pending winding up petition is that dispositions of the company's property and any transfers of its shares after the presentation of the winding up petition cease to be void unless validated, albeit that they may remain open to challenge. In short, the effect of s.127 IA 1986 is neutralised.
20. Where the preconditions specified under paragraph 11 of Sch B1 are met, the court then proceeds to consider whether to exercise the discretion conferred by that paragraph to make an administration order. In an ordinary case, if satisfied that there are no objections of substance and that there is no reason for concern about the proposed administrators (and in this case I stress that there are no such concerns about Mr Webb or Mr Dattani, his co-director at BTRR) the court is likely to proceed to make the order sought.
21. I also bear in mind that both T&E and CBL have indicated that they do not oppose the making of an administration order; that on the evidence before me BBF will "run out of money" tomorrow (11 April 2014); and, that Mr Webb has identified two potential purchasers of BBF's trade and assets, one is Mr Shaw, but the other is understood by Mr Webb to be an arm's length third party.
22. When considering whether or not to make an administration order it is also necessary to bear in mind the range of powers open to the court on hearing an administration application. These are set out at paragraph 13 of Sch B1 and include, at (c), adjourning the hearing conditionally or unconditionally; at (e), treating the application as a winding up petition and making any order which the court could make under s.125 IA 1986; and, at (f), making any other order which the court thinks appropriate.
23. In my judgment, and as indicated to Mr Dean after hearing and considering his submissions, the court should not make an administration order on this application. There are four reasons :

(1) the evidence indicates that in March 2014, i.e. after presentation of the Petition, at least £115,000 was disbursed from BBF's account at Barclays to connected parties and/or for non-business purposes. This cries out for satisfactory explanation and justification, but there is none presently before the court. If at all possible, these payments should remain void unless and until justified, in which case they may be validated;

(2) there may be other dispositions in the period 21 to 27 February which may also be unjustifiable, and it is surprising that the bank statements for that period are not in evidence. Further, by reference to the bank statements which are in evidence, while some payments appear to be for wages or salaries of employees and are likely to be validated, others may not be justifiable. The point is that the onus is on Mr Shaw to proffer an adequate explanation for the payments made and he is either unable or unwilling so to do;

(3) the documentation exhibited by Mr Shaw as demonstrating his purchase of BBF's sole share causes me to conclude that that transaction cries out for explanation. Superficially, the SPA is intended to create the impression of an arm's length transaction of substantial, or potentially substantial, value; in fact, the impression created is of a transaction that is anything but arm's length; and,

(4) taken as a whole, and after making due allowance for the fact that the application and evidence will have been prepared under pressure of time and against a background of pressure on BBF with an inevitable knock on effect on Mr Shaw as BBF's director, I am simply not able to have sufficient confidence in Mr Shaw's evidence, bolstered as it is to some extent by that of Mr Webb, to regard it as reliable. In this context I bear in mind the elementary principle I applied in Re Bowen Travel Limited [2012] EWHC 3405 (Ch) at paragraph 19 and a decision of Mr Richard Snowden QC, sitting as a Deputy High Court Judge, in Re Integral Limited [2013] EWHC 164 (Ch) at paragraphs 64 and 66.

24. Having regard to the other powers of the court set out at paragraph 13 of Sch B1, it might be tempting to consider treating the application as a winding up petition. However, one consequence of that would be that the winding up would then be deemed to commence on the making of the order (see s.129(1A) IA 1986).
25. Accordingly, other alternatives require consideration. At this point I should make clear that when pre-reading for this application it occurred to me that an administration order might not be made and that some other insolvency process, including a liquidation, might be the outcome. For that reason, before the hearing today, the court contacted the Official Receiver's office in Birmingham and, fortunately, Mr J Taylor, the Official Receiver in Birmingham, was able to attend at the hearing.
26. Having heard Mr Dean's submissions in favour of making an administration order, thorough and forceful though they were, I was not persuaded to make such an order on the material before the court. Other courses were discussed and a brief adjournment granted for all present to consider the most appropriate course for the court to take in this case, having regard in particular to the interests of the creditors as a whole.
27. One possibility discussed before the brief adjournment was the transfer in and calling on of the Petition coupled with the exercise of the power under s.135 IA 1986 to appoint a provisional liquidator who would be empowered to sell the trade and assets; in the meantime, the hearing of the Petition would be adjourned for a short period.
28. In the light of the representations made by Mr Taylor after having an opportunity to familiarise himself with the background to this application and make contact with the Official Receiver in Cardiff (the relevant officer given BBF's trading location) and the further very helpful submissions made by Mr Dean, in the capacity of counsel assisting the court, the appropriate course for the court to take in the circumstances of this case is, in my judgment, broadly :

(1) to transfer the Petition to this court and call it on for hearing;

(2) to appoint Mr Webb as provisional liquidator and to empower him (a) to get in and realise the trade and assets of BBF on the best terms reasonably achievable in a short period of time, (b) to investigate dispositions of BBF's property since 21 February 2014 and make any appropriate application for a validation order, (c) to incur and pay certain expenses, and (d) to afford him permission to apply in the meantime;

(3) to continue the moratorium currently in place by reason of the administration application until the return date; and,

(4) to fix a return date (in the event 28 April 2014) and to direct the provisional liquidator to advertise of the Petition, but allow a window (up to seven days) for BBF's trade and assets to be realised in the meantime.

29. Mr Dean has helpfully produced a minute of order addressing these points and other more detailed points which, subject to minor amendments, I approve.
30. I conclude this judgment by expressing my gratitude to Mr Dean and his instructing solicitor at Veal Wansborough Vizards LLP, to Mr Taylor, and to Mr Webb of BTRR for the very considerable assistance each has provided to the court on this application.