England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS IN MANCHESTER
INSOLVENCY & COMPANIES LIST (Ch D)

		Courtroom No. 42 Manchester Civil Justice Centre 1 Bridge Street West Manchester M60 9DJ 10.30am – 12.03pm
		14th February 2018

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JUDGE HODGE QC:

1. This is my judgment in the matter of Berkshire Homes (Northern) Limited, number 3125 of 2017. This is my judgment on the hearing of an application by Newbury Venture Capital Limited, acting by its joint liquidators, Mr Dean Anthony Nelson and Mr Nicholas Charles Osborn Lee, for an administration order in relation to Berkshire Homes (Northern) Limited. The application is brought on the footing that the Applicant is a creditor and in reliance upon paragraph 12 (1) (c) of Schedule B1 to the Insolvency Act 1986 (as amended). The Applicant is represented by Mr Matthew Weaver (of counsel). The Respondent is represented by Mr Paul Tindall (also of counsel).
2. Both counsel had produced detailed written skeleton arguments which I had had the opportunity of pre-reading, together with the witness statements and relevant exhibited documents, before the matter came on for hearing on Monday of this week, 12 February. Mr Weaver addressed me in opening either side of the long adjournment for a total of about an hour and a half. Mr Tindall then responded for about 50 minutes; and Mr Weaver then replied for about 25 minutes. The hearing concluded at about 3.35pm when I indicated that I wished to re-read the evidence in the light of the oral submissions that had been made to me. For the convenience of Mr Weaver, the matter was listed for judgment this morning at 10.30am (Wednesday 14 February) rather than yesterday morning as I had originally proposed.
3. The evidence in support of the application is contained within the witness statement of Mr Dean Anthony Nelson, one of the joint liquidators, dated 17 November 2017, together with exhibit DAN1. The matter first came before me on 1 December 2017 when I gave procedural directions to take the matter forward to the hearing on Monday of this week. Pursuant to those directions, evidence from the Respondent in answer to the application was served in the form of a witness statement of its sole director, Mr Harrison Kiely, dated 22 December 2017, together with exhibit HK1. Evidence in reply took the form of a second witness statement from Mr Nelson dated 15 January 2018.
4. In his witness statement, having given background information about the Respondent company and its financial position, Mr Nelson addressed the Applicant's status as a creditor of the company at paragraphs 15 through to 25. His starting point was the accounts of the Applicant company, which was associated (through common directors and shareholders) with the Respondent company, for the year ended 31 March 2013.
5. Those accounts showed at that time a debt owed by the Respondent to the Applicant in the sum of £1,852,716. Mr Nelson says that his investigation into the affairs of the company have not led him to believe that that figure is inaccurate. From 1 April 2013 until the date of liquidation of the Applicant company (which was 11 February 2016, when I made a winding-up order pursuant to a petition presented by the Secretary of State on public interests grounds), Mr Nelson had identified various payments passing between the Applicant and the Respondent. The figures show net payments from the Applicant to the Respondent of £2,955,600. That would result in a total sum due from the Respondent to the Applicant of £4,808,316.
6. In addition, at paragraph 19, Mr Nelson relates that a further £163,490 is also owed to the Applicant by the Respondent, increasing the indebtedness to a figure of £4,971,806. Mr Nelson says that he has written to the Respondent asserting an entitlement to that amount. He exhibits the resulting exchange of letters between the Applicant's solicitors and the Respondent. As a result of those letters, the Respondent asserts a number of set-offs, counter-claims or credits, which Mr Nelson addresses at paragraph 21 of his first witness statement.
7. Mr Nelson indicates that he does not accept that the Respondent can make out any of those set-offs, counter-claims or credits, given the absence of evidence to substantiate the claims asserted. If therefore maintains that the Respondent is indebted to Applicant in the sum of £4.9 odd million. However, even if the Respondent were able to persuade the court that those set-offs, counter-claims and credits are bona fide, after giving the Respondent credit for all of them (in a total sum of £3,790,000), the Respondent would still remain liable to the Applicant in a net sum of £1,181,806. For those reasons, Mr Nelson maintains that the Applicant is a creditor of the Respondent company and, as such, entitled to apply for an administration order.
8. The proposed administrators are Mr Nelson himself and Megan Wallace of a different insolvency practice from that of the joint liquidators of the Applicant. Mr Nelson addresses the statutory purposes of administration at paragraphs 31 to 35. This sets out the strategy that would be applied by the proposed joint administrators in order to achieve a better result for the company's creditors as a whole than would be likely if the company were wound up without first being in administration, i.e. the second in the hierarchy of purposes in paragraph 3 of Schedule B1.
9. In his witness statement, Mr Kiely expresses his concern that this administration application is being used as an attempt to short-circuit disputes between the parties involving asserted claims of transactions at an under-value and preferences previously intimated in the exchanges between the Applicant's solicitors and the Respondent. Mr Kiely addresses what he describes as the inter-company position at paragraphs 10 through to 15 of his witness statement. He explains that he had sought more time to pull together all of the evidence within his books and records to demonstrate the true inter-company position; but due to the time-frames available for service of evidence, he says that he has instead paid his accountants to produce a schedule of the position as it stands between the two companies.
10. He seeks to summarise the nature of the works done by the Respondent for the Applicant in paragraph 14 of his witness statement. He asserts, in summary, that the Respondent is owed a further £365,450 in respect works carried out by the Respondent for the Applicant on the Kandel Court site. Mr Nelson has allowed £1.5 million for those works, but Mr Kiely asserts that the true figure is £1,865,450.
11. In relation to another site at Springbank, Mr Kiely asserts that £2,373,534 was due, against which only £1.35 million has been credited as paid. In his calculations, Mr Nelson has allowed £1.4 million for that. In addition to the actual cost spent on the site by the company, Mr Kiely asserts (in paragraph 14.4) that the Respondent also has a claim for breach of contract against the Applicant arising by virtue of the Applicant's repudiatory breach of the build contract. Mr Kiely assesses that there is a damages claim of some £916,058 which is maintainable by the Respondent against the Applicant. That is said to be in addition to the other amounts Mr Kiely has identified.
12. Mr Kiely also refers to monies due in respect of Eagle Close, Blackburn and Brush Street, Burnley, but I am satisfied that Mr Nelson has already given credit for those claims in the sums of £90,000 and £800,000 respectively and that they have been included within the £3,790,000 credit. I need therefore say no more about those.
13. Mr Kiely addresses the financial position and summarises it at paragraphs 16 through to 18 of his witness statement. He produces a balance sheet prepared by the company's accountants, Hardy & Co, which, he says, demonstrates that the company is solvent and therefore should not be placed into administration on the strength of what he describes as a flawed application. The trade creditors are said to total just over £144,000, none of which is presently due for payment as it relates to work recently completed, and those creditors are said to be on 60-day terms. The company is said to have a number of sales in the process of completing which, it is said, will generate sufficient income to clear these creditors when they become due for payment. The balance sheet shows net assets of £332,589: see page 92 of exhibit HK1.
14. Mr Kiely sets out his conclusion at paragraph 19. He does not consider the Respondent to be indebted to the Applicant, nor is the Respondent insolvent. The Applicant is said to have made it perfectly clear that it wishes to litigate potential claims without establishing a potential basis for doing so or considering the relationship between the companies. It is said that Mr Nelson appears to have formed a financial view of the Respondent with no proper investigation or attempt to properly reconcile the financial position between the company and the Applicant. The application is said to be without merit; and Mr Kiely invites the court to dismiss it and to make a costs award against Mr Nelson personally.
15. Mr Nelson addresses that evidence in his second witness statement. Mr Nelson points out that Mr Kiely has chosen to evidence what he says is the true inter-company position between the Respondent and Applicant by obtaining a schedule of the position from his accountants, Hardy & Co. However, he has not supported that schedule with any documents from the Respondent's accounts. Mr Nelson does not accept that the court can simply adopt the schedule produced by Hardy & Co as being a necessarily accurate picture of the inter-company position in circumstances where only one half of the equation - payments purportedly made by the Respondent to or on behalf of the Applicant - has been set out, and where very few of the entries on the schedule have been evidenced.
16. Mr Nelson reiterates that he had made it clear that he required the Respondent to prove its alleged claims against the Applicant, or the alleged deductions which it is said ought to be made; but even if credit were given for all of those, he says that the Applicant remains a significant creditor of the company, in sums exceeding £1 million. Mr Nelson says that he had considered the relationship between the entities when making the application to the extent that such a relationship was evident from the books and records of the Applicant or from assertions contained within correspondence from the Respondent.
17. Mr Nelson addresses Mr Kiely's evidence in detail. In the course of doing so, at paragraph 27c, Mr Nelson indicates that sale proceeds from properties at Kandel Court were not paid to the Applicant as they should have been but rather to the Respondent. The net sum is said to be £897,251. From a review of Walkers' files for Kandel Court, Mr Nelson has established that sum, and there is no evidence that those sums were ever paid over by the Respondent to the Applicant.
18. As regards the Kandel Court site, Mr Nelson reiterates that he has already given credit for £1.5 million, which was the sum previously said to have been outstanding by the Respondent in its correspondence with the Applicant's solicitors. In relation to the Springbank site, Mr Nelson indicates that he has already given credit for the amount which had been previously invoiced, and that the present claim for a little over a further £1 million had never been indicated during the course of the correspondence between the parties. The most that had been said in that regard was towards the end of a letter from the Respondent of 10 March 2017 (at pages 170 to 175 of exhibit DAN1) where it was said in terms that the balance owing on Springbank Gardens was £120,000 for works carried out on account, which the Respondent had initially written-off given the winding-up petition.
19. Mr Nelson sets out what he says are the problems with the schedule produced by Hardy & Co at paragraph 46 of his second witness statement. For the reasons there set out, he suggests that the court simply cannot treat the Hardy & Co schedule as an accurate picture of the inter-company position. He says that, by contrast, he has calculated the Applicant's claims against the Respondent by reference to the signed-off statutory accounts of the Applicant, together with bank statements showing payments between the two parties. He has sought to give credit to the company for the claims advanced in correspondence by the Respondent, notwithstanding that he does accept that such claims are necessarily valid.
20. Despite that credit, in his first statement he says he was able to demonstrate that the Respondent owed the Applicant over £1.1 million. That ignored the £897,000 odd which the Respondent had received directly from the sale of Kandel Court properties of which Mr Nelson had been previously unaware. Adding those sums back in, the true inter-company position was more like a £2 million debt owed by the Respondent to the Applicant. Even giving credit for the increased figures claimed for Kandel Court and Springbank, it is said still to leave a substantial sum due and owing from the Respondent to the Applicant.
21. For all those reasons, Mr Nelson maintains that the Applicant is a creditor of the Respondent, that the Respondent is insolvent, and that an administration order is appropriate and ought to be made. That, in summary, is the evidence on this application.
22. I turn to consider the legal background. Administration is dealt with in Schedule B1 to the Insolvency Act 1986 (as amended). The statutory purpose of an administration is to be found in paragraph 3 which, so far as material, provides that:

'3 (1) The administrator of a company must perform his functions with the objective of—

(a) rescuing the company as a going concern, or

(b) achieving a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being in administration), or

(c) realising property in order to make a distribution to one or more secured or preferential creditors'.

23. In contrast with the position under the old law, where it was necessary to identify which purposes of an administration would be fulfilled, the current provisions refer to a single purpose. Whilst not spelt out, that purpose is clearly a reference back to the objectives set out in paragraph 3(1). Each of those three purposes is to be applied in turn. The conditions of the making of an administration order are set out in paragraph 11. As far as material:

'11. The court may make an administration order in relation to a company 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'.

That purpose being that hierarchy of purposes set out in paragraph 3(1).

24. Unlike the position the case of a winding-up petition, it is not necessary to show a present inability to pay debts. It is enough to show that the company is likely to become insolvent. In this context, 'likely' means more probable than not. In a case such as the present, where there has been no statutory demand or unsatisfied judgment debt, section 123(1)(e) of the Insolvency Act 1986 deems the company to be unable to pay its debts 'if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due'. By section 123(2), 'a company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities,' a test which can loosely be referred to as 'balance-sheet insolvency'.
25. Those provisions apply for the purposes of paragraph 11(a), not only in determining whether a company is unable to pay its debts, but also in determining whether a company is likely to become unable to pay its debts. What is required for the purposes of paragraph 11(b) is for the court to be satisfied that there is a real prospect that the purpose of the administration will be achieved.
26. An application for an administration order may only be made by one or more of the persons specified in paragraph 12(1). That includes (at paragraph (c)), 'one or more creditors of the company'. In the context of winding-up petitions, there is a well-established line of authority concerning disputed debts and cross-claims. The authorities show that the court has jurisdiction to allow a petition to proceed even where the debt is disputed on bona fide and substantial grounds; but it does not follow from that that the court has jurisdiction actually to make a winding-up order whilst the dispute remains unresolved.
27. As far as disputed debts are concerned, the practice in winding-up is not to allow the insolvency regime to be used as a method of debt collection where there is a bona fide and substantial dispute as to the debt. Save in exceptional cases, the court will dismiss a petition based on such a debt, usually with an indemnity costs order against the petitioner.
28. The question whether that established practice in relation to winding-up petitions is the practice which applies, or is one which should be adopted, in relation to administration applications was considered by Warren J in Hammonds (a firm) v Pro-Fit USA Ltd [2007] EWHC 1998 (Ch) at paragraphs 27 through to 55. I was taken to those paragraphs. Warren J's conclusion was that there was no established practice in relation to administration applications similar to that which applied in relation to winding-up petitions. Warren J considered it not appropriate to create such a practice. He considered that there was no prima facie reason for importing into administration the practices developed in relation to winding-up.
29. However, at paragraph 50 Warren J went on to say that:

'That is not to say that some of the factors which have led to the practice in relation to winding-up petitions will not also play an important part in the exercise of the discretion relating to applications for administration orders. In particular, there is force in the proposition that the administration procedure is inappropriate for the resolution of disputes about debts or disputes about cross-claims which might exceed undisputed debts, just as it is inappropriate in the context of the winding-up procedure'.

30. However, Warren J did not:

'… consider that that proposition, even if it is accepted without qualification, leads to the conclusion that the winding-up practice should apply...it is self-evident that before the court will bring the company to an end, it will have to be satisfied, save perhaps in an exceptional case, that the person seeking to achieve that objective has the requisite status to petition the court. It is therefore necessary to decide, in the case of a creditor's petition whether the petitioner is in fact a creditor (unless the case is exceptional). And a similar rule applies as a matter of practice to cross-claims'.

31. At paragraph 52, Warren J considered:

'…that there is nothing to suggest that the court has no option but to refuse to make an administration order save in exceptional circumstances when facts arise which indicate that the applicant may not fall within the classes of paragraph 12(1) of Schedule B1 because his debt is disputed or where there is a cross-claim. In my judgment, the court's discretion is at large and is not constrained by any practice similar to that adopted in relation to winding-up petitions. In particular, in the case of a cross-claim where there can be no argument about jurisdiction, it may be that the facts indicated quite clearly that an administration order would be desirable; in such a case, there would seem to me to be no reason for requiring that a creditor – who clearly has locus standi to make an application – should be forced to defeat the cross-claim as a pre-condition of obtaining an order.

53. Further, in my judgment, a person is a "creditor" within paragraph 12(1)(c) Schedule B1 so long as he has a good arguable case that a debt of a sufficient amount is owing to him… Thus, even in the case of a disputed debt, such a person may make an application for an administration order. It is then a matter for the discretion of the court whether actually to make an administration order. The court has jurisdiction to deal with the application without having to resolve the dispute about the debt'.

32. However, at paragraph 54 Warren J went on to say that:

'Of course, that is not the end of the story. The court can only make an administration order if it is satisfied, in accordance with paragraph 11 of Schedule B1, that the company is or is likely to become unable to pay its debts for which purpose it is necessary to refer back to section 123. It does not necessarily follow from the fact that an applicant for an administration order whose debt is disputed is a creditor for the purposes of locus standi to make an application that he is a creditor for the purposes of section 123(1)(a) or that the amount of his alleged debt is a debt or liability for the purposes of sections 123(1)(e) or (2). The point here is that the mere fact that, on the evidence before it, the court is satisfied that a petitioner has a claim which is sufficient to give him the status of a creditor for the purposes of locus standi does not necessarily mean that that same evidence is sufficient to persuade the court that his purported debt should be taken into account in assessing solvency for the purposes of section 123'.

33. Thus, focusing on sections 123(1)(e) and 123(2), it had to be proved to the satisfaction of the court that the company was unable to pay its debts as they fell due or that the value of its assets was less than its liabilities. In carrying out that assessment, the debt, where it was disputed or subject to a cross-claim, of an Applicant was in no different a position from any other debt which was disputed or subject to a cross-claim. The court would have to form a view, on the basis of all the evidence before it, whether it was satisfied as required by either of those sections. There was said to be this difference however: the court might, in the exercise of its discretion, require the dispute (about the debt or the cross-claim) to be decided before making an order, either requiring the matter to be determined in a separate action or by deciding the issue itself. In such a case, of course, the court would not need to make a determination about solvency unless and until the dispute had been resolved.
34. That decision was referred to, and applied, by Nugee J in the later case of Fieldfisher LLP v Pennyfeathers Limited [2016] EWHC 566 (Ch,) reported at [2016] BCC697. At paragraph 11, Nugee J cited Warren J's observations at paragraph 53 of his judgment. At paragraph 12, Nugee J said that there was no doubt, in his view, that the evidence disclosed that there was a good arguable case that the Applicant was owed large sums and was therefore a creditor, within the meaning of paragraph 53 of Warren J's judgment, with sufficient status to apply for an administration order.
35. At paragraph 13, Nugee J said that the second question was whether paragraph 11(a) of Schedule B1 was satisfied. There were two limbs to that paragraph. The court had to be satisfied that the company either was unable to pay its debts, or was likely to become unable to do so. Nugee J dealt firstly with the first limb. He said that counsel relied on the company's failure to pay the Applicant, and the lack of any apparent means to do so.
36. The company's answer to that was that the liability was disputed. That, by itself, was said to be no reason to refuse an administration order. Nugee J reiterated the sharp distinction between winding-up and administration orders, and he referred to Warren J's decision declining to import into administration orders the practice applicable to winding-up orders, where, as a general rule, the court would not allow a company to be wound-up on the application of a creditor whose debt was bone fida disputed on substantial grounds or subject to a bona fide and substantial cross-claim.
37. Mr Tindall, in the course of his oral submissions, contended that the Hammonds v Pro-Fit case was very much in the Respondent's favour, both in terms of principle, and in the actual exercise of the court's discretion. In that case, Warren J would have refused to make an administration order, even though there was a prospect of rescuing the company, provided a particular intellectual property licence were surrendered. Mr Tindall sought to draw a distinction between cases where the purpose of an administration order was the rescue, or survival, of the company, and those in which the second and third of the hierarchy of statutory purposes was in view, namely achieving a better result for the creditors as a whole or for secured creditors. Mr Tindall submitted that the fact that a debt was disputed was an important factor in the exercise of the court's discretion to make an administration order, particularly in a case (such as the present) where there was no prospect of rescuing the company.
38. In my judgement, the effect of the authorities I have cited is that there is standing to apply for the making of an administration order as a creditor even where a debt is disputed; the court has the jurisdiction to deal with the application without having to resolve the dispute about the debt. It is then a matter for the discretion of the court whether actually to make an administration order. In a case such as the present, however, where the alleged debt which is said to give the Applicant the necessary standing to apply for an administration order is also relied upon as evidence of insolvency sufficient to satisfy the condition in paragraph 11(a) of Schedule B1 that the company is, or is likely to become, unable to pay its debts, it seems to me clear that the debt must be proved on the balance of probabilities. That is because in such a case, unless the debt is proved on a balance of probabilities, the Applicant has not shown that the company is, or is likely to become, unable to pay its debts in the sense required by the Insolvency Act.
39. Contrary to Mr Tindall's submission, the particular purpose of administration is, in my judgement, irrelevant. As Mr Weaver pointed out, there is now no need to distinguish between the different statutory purposes of administration. In the present case, I am satisfied that even if the debts asserted by the Applicant are disputed, there is the necessary standing for the Applicant to apply for an administration order; but the Applicant has to prove, on a balance of probabilities, that the Respondent company is, or is likely to become, unable to pay its debts.
40. Therefore, the court, when considering the alleged debts for the purposes of establishing the Respondent's insolvency, is required to determine that the debt is established on a balance of probabilities. If a debt is established, then the Respondent's refusal to pay is sufficient to establish insolvency. Since the balance sheet produced for the Respondent shows net assets (ignoring the Applicant's claims) of £332,589, the court must be satisfied on a balance of probabilities that a debt in excess of that figure is due and owing to the Applicant before the court can be satisfied that the Respondent is balance-sheet insolvent.
41. Mr Weaver submits that, in circumstances where it is the Respondent that is alleging that the inter-company balance demonstrated by the liquidator ought to be reduced and ultimately extinguished, the evidential burden of proof of that rests firmly on the Respondent. He submits that the statutory accounts are not open to dispute, that the bank statements show that payments were made by the Applicant to the Respondent, and therefore the evidential burden must shift to the Respondent of proving the credits or cross-claims. That it seems to me is correct.
42. The statutory accounts were abbreviated, unaudited accounts. They were approved by the directors, having been prepared by Hardy & Co. In my judgement, they form a proper starting-point. Mr Nelson has analysed the bank statements for the company and he has identified a particular position, having netted-off payments from the Respondent to the Applicant against payments by the Applicant to the Respondent. Taken together with the two further matters identified in Mr Nelson's first witness statement - the net sale proceeds of 3 and 5 Springbank Gardens - that shows an indebtedness of the Respondent to the Applicant of £4,971,806. Mr Nelson has then deducted the amounts that were claimed in correspondence as credits, cross-claims or set-offs in favour of the Respondent in a total sum of £3,790,000. That has produced a balance due to the Applicant from the Respondent of £1,181,806.
43. At paragraph 27 of his second witness statement, Mr Nelson asserts that there is a further £897,251 outstanding from the sale proceeds of properties comprised within Kandel Court. Mr Kiely in his witness statement asserts that there is a further sum due from the Applicant to the Respondent in respect of Kandel Court of £365,450. That sum was never mentioned in the extensive pre-action correspondence. There was a pre-action protocol letter from the Applicant's solicitors, Fraser Brown, dated 12 January 2017, to which a detailed response was made by the Respondent by letter dated 10 February 2017. Fraser Brown replied on 23 February 2017, and there was a further response from the Respondent by letter dated 10 March 2017. Those letters can be found at pages 150 to 175 of exhibit DAN1. I have re-read them in the course of preparing this judgment. There is no sum said to be due in respect of Kandel Court over and above the £1.5 million. The only further sums said to be outstanding in respect of Springbank Gardens is the £120,000 mentioned towards the end of the Respondent's letter of 10 March 2017 (at page 175).
44. I cannot accept that there is a sum over £1 million due and outstanding in respect of Springbank Gardens. If there were, that sum, rather than £120,000, would have been mentioned. I am prepared to give the Respondent credit for that further £120,000 against the balance of £1,181,006; but that simply reduces the indebtedness to the Applicant to a sum of just over £1 million.
45. As far as the asserted claim for damages for loss of profit in relation to Springbank Gardens is concerned, it seems to me that that is supported by no real evidence. It is a claim that I regard as tenuous and entirely speculative. In my judgement, it does not fall to be considered. One then has to look at the schedule prepared by Hardy & Co. The schedule is addressed in Mr Nelson's second witness statement. Mr Weaver submits that the schedule is of no assistance at all, and ought properly to be ignored by the court, for the reasons which he sets out at paragraph 35 of his skeleton.
46. First, Mr Weaver says that the entries in the schedule are almost entirely unsupported by evidence, or even explanation, of any kind. The entries in the schedule are not verified by supporting documents. At paragraph 10 of his witness statement, Mr Kiely says that he had paid his accountants to produce a schedule of the position as it stood between the two companies. There is no evidence whatsoever from anyone from Hardy & Co as to the basis upon which the schedule was produced. There is no indication of what documentation was relied upon in producing the schedule.
47. I share Mr Weaver's bafflement at the lack of any supporting documentation, or explanation, for the vast majority of the entries. In a letter dated 8 December 2017 (which is exhibited to Mr Kiely's witness statement at pages 18 to 19 of exhibit HK1), the Applicant's solicitors, Fraser Brown, had indicated that the liquidators of the Applicant company expected the Respondent's evidence to include copies of the full accounts in respect of the accounting periods up to and including the year end of 30 April 2015, together with the supporting documents relating to the transactions with the company.
48. In the light that letter, the omission of such supporting documents I find incredible. At paragraph 7 of his witness statement, Mr Kiely asserted that he was under no obligation to disclose sensitive accounts to the Applicant when it had no right to see them; but that misses the point. What the Applicant was inviting the Respondent to do was to support its assertion of the inter-company position by relevant documentation. Mr Kiely has not taken the opportunity to do that. The Respondent has not provided any meaningful documentation to evidence its assertions.
49. Secondly, Mr Weaver makes the point that there is a summary sheet, and a list of entries to the credit of the Respondent, but the other side of the analysis, namely the entries to be credited to the Applicant, is missing. Thirdly, Mr Weaver points out that some of the entries are incorrect. An entry shows credit for sale proceeds of Plot 27 Kandel Court. That is incorrect given that the Respondent was never entitled to those sale proceeds, so cannot claim the credit for the sale. Likewise, entries for sums said to have been paid by the Respondent to Lancashire Mortgage Corporation, as secured creditor, are incorrect since those payments were made directly upon the completion of each sale by the Applicant company.
50. Mr Weaver, in his opening address, pointed to three entries towards the bottom of page 90 of exhibit HK1, amounting to £244,263, which were wholly unexplained. The annotation refers to Commissions and JV interest, DLA and JV legal costs. Those entries are wholly unexplained. Taking those three entries, totalling £244,263, together with the £18,748 for Plot 27 Kandel Court, and the sums totalling £182,250 credited by way of payments to Lancashire Mortgage Corporation, they come to £445,261. Moreover, in his second witness statement Mr Nelson identified a further £897,251 from the sale of Kandel Court properties. Logically, that sum must also form part of the payments to be included in any proper schedule of payments due to the Applicant. My understanding from Mr Tindall's submissions is that those payments have been included in the reconciliation but it is not possible to identify them from the schedules that have been produced.
51. Fourthly, Mr Weaver points out that although the Respondent is relying on the findings and conclusions of its accountants to confirm the true inter-company position, neither the Applicant nor the court have been told what instructions the accountants had been given by the Respondent; what documents they had been shown; how they had satisfied themselves that the payments referred to were made or the credits properly applied; whether the entries were bona fide liabilities of the Applicant to be credited in favour of the Respondent; and/or whether the Respondent had made the payments reclaimed in the first place.
52. In short, it is said to be utterly unclear on what basis the schedule was produced and how accurate it might be. Mr Weaver submitted that the schedule raised more questions than it answered. I am not satisfied that the Respondent, on whom, in my judgement, the evidential burden lies, has produced sufficient satisfactory evidence to show that there is no sum owing from the Respondent to the Applicant, or that any sum owing from the Respondent to the Applicant is less than the critical figure of £332,589 that constitutes the net asset figure for the Respondent.
53. I am satisfied that the Applicant, after making all due allowance for the credits, cross-claims and set-offs originally intimated by the Respondent, has demonstrated that there is a balance due to the Applicant in excess of £1 million. I am not satisfied that the evidence produced by the Respondent has, on a balance of probabilities, reduced that balance below the critical amount of £332,589. I am therefore satisfied, on a balance of probabilities, that the Respondent company is indeed unable to pay its debts. I am satisfied, on the basis of what is said by Mr Nelson at paragraphs 31 through to 35, that there is a real prospect that the administration order is reasonably likely to achieve the purpose of administration. Indeed, the contrary is not suggested by Mr Kiely in his evidence; and Mr Tindall advanced no submissions to the contrary.
54. In the course of his submissions, Mr Tindall contended that the Applicant was pursuing an administration application for tactical reasons, as a cheaper alternative to litigation, which they had previously regarded as necessary. He pointed to the claims advanced in the pre-action protocol correspondence. He points to the fact that in the initial pre-action protocol letter of 12 January 2017, the assertion of a debt owed by the Respondent to the Applicant only featured at paragraph 70. He submits that, on a proper analysis, the matters relied on by the Applicant, if proved, would give rise to a claim under sections 238 to 241 of the 1986 Act; and that unless and until any order is made pursuant to those provisions, there is no liability on the part of the Respondent to the Applicant.
55. He submits that if the liquidators maintain that what they say is excess consideration was a loan, then they must demonstrate that it was intended by the parties to be such, and that it was intended to be repayable on demand. In his skeleton argument, Mr Tindall submitted that on the level of the controlling minds of the companies concerned, not only was there no evidence of the necessary intention, but it was difficult to make sense of the idea that the Applicant was deliberately overpaying, but on the basis that the amounts overpaid constituted a loan. Mr Tindal even went so far as to suggest that the tenor of the Applicant's evidence pointed in the opposite direction, in that the picture they seemed to be painting was of Mr Kiely's father's company (the Applicant) preferring to transfer money to its son's company (the Respondent) rather than see it go to the creditors of the Applicant in a liquidation. That is said to be a matter which would fall squarely within sections 238 to 241 of the Act.
56. I have looked carefully at Mr Kiely's witness statement. There is no suggestion of any element of bounty or gift in any of the dealings between the two companies, which seem to have proceeded on an entirely commercial basis. Mr Weaver pointed out that at paragraph 16 of his written statement, Mr Kiely talked in terms of a balance of inter-company loans. I am entirely satisfied that the balance – which, on the evidence, and on the balance of probabilities, I find should be struck in favour of the Applicant in terms of monies owed by the Respondent - was entirely one of creditor and debtor.
57. Therefore, for the reasons I have given, I am satisfied that the conditions for making an administration order in paragraph 11 of Schedule B1 are satisfied. Of course, the court retains a discretion as to whether to make an administration order; but in the light of my findings, I see no reason not to exercise my discretion in favour of making an administration order in circumstances where I am satisfied, on the balance of probabilities, that the Applicant is a creditor, that the Respondent company is insolvent, and that there is a real prospect that the making of the administration order will achieve the second in the hierarchy of purposes, namely of achieving a better result for the creditors than would be the case if the company were go into liquidation without having first being put into administration.
58. Therefore, I am satisfied that an administration order should be made. Mr Kiely has raised concerns about the appointment of Mr Nelson as one of the joint administrators. He has pointed to the obvious conflict of interest that will exist in the situation where the administrators will have to adjudicate upon the precise indebtedness of the Respondent company to the Applicant, where one of the joint administrators is one of the joint liquidators of the Applicant company. Mr Weaver submits that the apparent objections taken to the intended joint administrators in Mr Kiely's witness statement amount to nothing. He says that, whilst it is perfectly usual for joint administrators to exercise their powers jointly and severally, so as to cater for absences of one or other of the office-holders at any particular time, it is also a matter for them to determine and resolve any conflicts of interest. He submits that the court will be familiar with office-holders dividing responsibilities between them so as to cater for any conflicts of interest. That is said to be a professional matter for the insolvency office-holders, which Mr Nelson has confirmed he is aware of and will ensure is addressed properly.
59. I raised those concerns with Mr Weaver in the course of his submissions. He indicated that the Applicant would be content for Miss Wallace to be appointed as sole administrator. However, he submitted that there were considerable advantages in Mr Nelson being appointed, because of his existing knowledge of the inter-company relationship between the Applicant and the Respondent. I note that in his witness statement - even in his second witness statement, after the point had been raised by Mr Kiely - Mr Nelson does not suggest any particular advantage, still less any need, for him to act as joint administrator with Miss Wallace. The two are from different insolvency practices.
60. It seems to me that it can only add to the costs of the administration if both are appointed. Given the inevitable conflicts of interest, it would seem to be me to be desirable for Mr Nelson not to be included in the appointment. I would therefore propose to appoint Miss Wallace, either alone or, if she so wishes, and the necessary consent to act is produced, Miss Wallace together with another member of her insolvency practice, as administrator or joint administrators of the Respondent company. Therefore, for those reasons, I make an administration order at 11.57am on 14 February.
End of Judgment