Lune Metal Products Ltd v Getliffe & Ors

The issue raised on this appeal relates to the powers of administrators under the Insolvency Act 1986 prior to its amendment by the Enterprise Act 2002 (“the 2002 Act”). I shall refer to the Insolvency Act 1986, prior to its amendment by the 2002 Act, as “the 1986 Act”, and as amended by the 2002 Act, as “the 1986 Act as amended”.

The issue arises from the following relatively simple facts. On 16 April 2003, Mr Recorder Allen QC appointed Mr Mark Getliffe and Ms Diane Hill (“the Administrators”) as administrators of Lune Metal Products Ltd (“the Company”) for two purposes, namely (i) approving a company voluntary arrangement (“CVA”) and/or (ii) a more advantageous realisation of the Company’s assets than would be achieved on a winding up. Three months later, the Administrators’ proposals were approved at a meeting of the Company. The conduct of the administration in accordance with those proposals has been delayed owing to issues relating to VAT. However, now that all outstanding matters have been resolved, the Administrators hold a fund of £485,237 available for distribution to the creditors of the Company.

The Administrators’ proposals, as approved, envisaged the Company entering into a CVA once the assets had been realised. However, the Administrators have now concluded that it would be better for the creditors if the Administrators were to pay out the creditors early, paying the preferential creditors (as defined in section 386 of, and Schedule 6 to, the 1986 Act) in full and the unsecured creditors pari passu (i.e. on the same basis as if the payments had been made in the course of a compulsory liquidation).

On this basis, it appears that the unsecured creditors would receive 35p in the pound, whereas, if the company went into a CVA or into liquidation, the unsecured creditors would only get 31p in the pound. This difference is explained by the fact that the cost of taking the proposed course (including the costs of making the instant application) would be £40,000, whereas the cost involved if the Company first went into liquidation or into a CVA would, in each case, be £70,000.

The Administrators accordingly applied in the Liverpool District Registry of the High Court, for the proposed distribution to be sanctioned by the Court. The reason that they made this application was that it was by no means clear to those advising the Administrators that the proposed distribution, however sensible and desirable it may be, would be one which it would be open to the Administrators to make, or, indeed, open to the court to sanction under the 1986 Act.

The issue is one upon which there are a number of first instance decisions, some reported and some unreported, whose reasoning is often impossible to reconcile, even in the case of some decisions which reached the same result. The point has been put to rest for the future by the provisions of the 1986 Act as amended. Indeed, it appears that part of the purpose of the pretty sweeping amendments effected to the administration regime by the 2002 Act was to enable an administrator to make a distribution to a creditor of the company: see paragraphs 65 and 66 of Schedule B1 to the 1986 Act as amended. Unfortunately, the administration of the Company in the present instance, as in the case of many current administrations, is governed by the 1986 Act, and the amendments effected by the 2002 Act have no application.

The instant application came before His Honour Judge David Hodge QC on 8 September 2006. It was at that time simply an application by the Administrators to obtain the sanction of the court to their proposed distribution of the cash in their hands to repay the preferential creditors in full and the unsecured creditors 35p in the £.

In his clear and careful judgment, he came to the following conclusions:

Whether or not the decision is ultimately upheld in this court, I consider that Judge Hodge was entirely right to follow the decision of Rimer J. Where a first instance judge is faced with a point on which there are two previous inconsistent decisions from judges of co-ordinate jurisdiction, then the second of those decisions should be followed in the absence of cogent reasons to the contrary: see Colchester Estates (Cardiff) –v- Carlton Industries Plc [1986] Ch 80 at 84E-85H per Nourse J. The present case appears to me to be a fortiori. There were a number of inconsistent first instance decisions on the point, which Rimer J considered, and came to a clear conclusion as to which line of authority he agreed with. In those circumstances, very convincing reasons indeed would have had to have been put before Judge Hodge before he could sensibly have departed from the reasoning and conclusions of Rimer J.

It is obviously desirable that the law on any topic is as clear as reasonably possible, and that is as true in insolvency as any other field. Those administering and advising on insolvencies, and those with interests in insolvencies, need to know where they stand as certainly, cheaply and promptly as possible. Albeit that any well advised person will always be aware that a decision at first instance can be overruled by this Court, that cannot possibly justify Judges effectively ignoring decisions of their colleagues, even though they are not, of course, bound by them.

Section 8 of the 1986 Act set out the circumstances in which the Court could make an administration order in relation to a company. Four possible purposes were envisaged, as set out in section 8(3), namely:

“(a)

The survival of the company, and the whole or any part of its undertaking, as a going concern;

(b)

The approval of a [CVA];

(c)

The sanctioning under section 425 of the Companies Act of a compromise or arrangement between the company and any such persons as are mentioned in that section; and

(d)

A more advantageous realisation of the company’s assets than would be effected on a winding up”.

The subsection also required an administration order to “specify the purpose or purposes for which it is made”.

The effect of an administration order was explained in section 11 of the 1986 Act: in effect, it prevents, at least in most circumstances, rights and claims, including proprietary ones, being enforced against the company concerned.

Section 14 of the 1986 Act set out the “general powers” of administrators. Relevantly, it provided as follows:

“(1)

The administrator of a company –

(a)

may do all such things as may be necessary for the management of the affairs, business and property of the company, and

(b)

without prejudice to the generality of paragraph (a), has the powers specified in schedule 1 to this Act…

(3)

The administrator may apply to the Court for directions in relation to any particular matter arising in connection with the carrying out of his functions.”

Section 17 of the 1986 Act was concerned with “general duties”. It provided, so far as relevant, that, once proposals for the course of the administration had been approved by the creditors at a meeting (pursuant to the provisions of sections 23 and 24 of the 1986 Act) the administrator should “manage the affairs, business and property of the company… in accordance with those proposals as from time to time revised” - see sub-section (2)(b).

Section 18 of the 1986 Act provided as follows:

“(1)

The administrator… may at any time apply to the Court for the administration order to be discharged, or to be varied so as to specify an additional purpose.

…

(3)

On the hearing of an application under this section, the Court may by order discharge or vary the administration order and make such consequential provision as it thinks fit…”.

Section 20 of the 1986 Act contained provisions for the release of an administrator.

Schedule 1 to the 1986 Act was headed “Powers of Administrator…”, and they included:

“…

(2)

Power to sell or otherwise dispose of the property of the company…

(12)

Power to do all such things… as may be necessary for the realisation of the property of the company.

(13)

Power to make any payment which is necessary or incidental to the performance of his functions…

(18)

Power to make any arrangement or compromise on behalf of the company…

(21)

Power to present … a petition for the winding up of the company…

(23)

Power to do all other things incidental to the exercise of the forgoing powers.”

On behalf of the Administrators, Mr Mark Cawson QC and Mr Giles Maynard-Connor contend that the proposed payment out to the creditors could be sanctioned by the Court on a number of different bases under the provisions of the 1986 Act. It is, however, pertinent to note that they cannot rely upon any of the specific purposes set out in section 8(3) of the 1986 Act. There is no question of the Company, or any part of its undertaking, surviving, particularly “as a going concern” under paragraph (a). Similarly, paragraph (b) cannot apply: indeed, the very purpose of the administrators in proposing to make the payments is to avoid the payments having to be made under a CVA. As to paragraph (c), there is no question of section 425 of the Companies Act 1985 being in point. Paragraph (d) is concerned with “a more advantageous realisation of the company’s assets”, but the Administrators’ proposed action has nothing to do with realisation of the assets. The assets of the Company have been realised, and the course which the Court is being asked to sanction simply involves distribution of the results of the realisation among creditors of the Company: Lightman J made this point in re Powerstore (Trading) Limited [1997] 1 WLR 1280 at 1286A-B, quoted by Rimer J with approval in paragraph 16 of the Designer Room case.

Accordingly, it seems to me that, if one focuses for the moment on the four fundamental purposes for which an administration order can be made, none of them would appear to justify, as a matter of ordinary language, the Administrators taking the course which they propose to take. However, two important qualifications should be made to that preliminary conclusion.

First, even if this preliminary conclusion is correct, it certainly does not mean that an administrator acting under the 1986 Act would always be precluded from paying out any creditor. For instance, if the payments to one, some, or all of the creditors, either in full or in part, was a course which would enable, or even assist, one of the purposes set out in section 8(3) to be achieved, then, at least if that was for one of the purposes which the administration order concerned was made, it would be within the administrator’s powers, not least pursuant to the provisions of paragraph 13 of Schedule 1 to the 1986 Act. That is, as I understand it, the basis of the reasoning in two cases where the court sanctioned the administrators making payments to creditors, namely the decision of Scott J in re John Slack Ltd (1995) B.C.C. 1116, as interpreted and followed by Knox J in re WBSL Realisations 1992 Limited [1995] B.C.C. 1118. As Lightman J put it in the Powerstore case at 1285G:

“unless the order [sanctioning the payment to creditors by the administrators in the WBSL case] was made, the creditors might insist on a liquidation, and a liquidation would remove all prospect of the achievement of a substantial realisation in the future.”

Secondly, although the proposed payment out to creditors in the present case does not fall within the ambit of any of the purposes for which an administration order can be made as expressed in section 8(3) of the 1986 Act, that does not necessarily mean that there is no power in administrators to implement, or in the court to sanction, a proposal such as that put forward in the present case. That is because there may be other provisions of the 1986 Act which bestow such a power on administrators or on the court.

In that connection, one can discern from some of the first instance cases three different possible sources for the court’s power to sanction, or even to order, an administrator to make pro rata payments to creditors in circumstances such as the present. The first arises from the court’s power under section 14(3) of the 1986 Act, sometimes referred to as the court’s inherent jurisdiction. Secondly, there are the relatively wide ranging powers given to an administrator in Schedule 1 to the 1986 Act. Thirdly, there is the power of the court under section 18(3) of the 1986 Act to make “any other order it thinks fit”.

Each of those grounds appears to have been sufficient to persuade Jacob J, in re Mark One (Oxford Street) Plc [1999] 1 WLR 1445, that the court had power to sanction the making of payments in circumstances to all intents and purposes identical to those in the present case as it was before Judge Hodge.

Jacob J referred to the fact that section 14(3) of the 1986 Act had been described by Nicholls LJ, in re Atlantic Computer Systems Ltd [1992] Ch. 505 at 543, as involving the court’s “exercise of its control over an administrator as an officer of the court”. He referred to this as enabling the court to “exercise[e] its inherent jurisdiction over administrators… to make the payments of the sort sought in the application before me” (see 1448A-B). He then, at 1448C-E, went on to say that his view was confirmed by decisions of the court concerning the actions of liquidators.

As to section 18(3), Jacob J considered, at 1448F that the very broad power given to the court to make “any other order it thinks fit” was “wider than the purposes of the administration itself”, and extended to permitting the administrators to make the distribution they proposed.

Jonathan Parker J appears to have agreed with that view in re Wolsey Theatre Company Ltd [2001] B.C.C. 486, in a very short judgment. However, in that case, the administrators were applying for discharge at the same time as seeking sanction for paying out the creditors (a point of some significance as I shall mention below). We were told by counsel that a number of other first instance judges had also followed the approach of Jacob J without giving reasons (unsurprisingly).

However, in the Powerstore case (decided before the Mark One case) and the Designer Room case (decided after), Lightman J and Rimer J respectively held that none of these three statutory provisions gave administrators the power to make such distributions nor the court power to sanction, let alone order, such distributions, at least as what might be called a free-standing order (i.e. an independent order sanctioning payment of creditors, rather than such an order forming part of the terms of the administrators’ discharge). In coming to that conclusion in the latter case, Rimer J considered and agreed with, not only the decision and reasoning in the Powerstore case, but also with the decision and reasoning of Arden J in re UCT (UK) Ltd [2001] 1 WLR 436.

In the Powerstore case, Lightman J had held that section 14(3) of the 1986 Act did not give the Court power to direct or sanction a course on the part of the administrators which fell outside the ambit of the purpose of the administration as described in section 8(3). At 1286A-B he said this:

“The insuperable problem in this case, however, is that the purpose of the proposed payment is not the more advantageous realisation of the companies' assets but a more advantageous method of distribution of assets. The power conferred by paragraph 13 of Schedule 1 to the Act is accordingly inapplicable. The power conferred by section 14(1) of the Act is likewise inapplicable because the proposed direction is not necessary for the management of the affairs, business or property of the companies.”

Shortly before saying that, he had (at 1285H) referred to sections 14(3) and 18(3) but he did not consider them of any assistance, although he did suggest the possibility of the administrators paying “monies to a trustee on trust to make such distribution and payment”, where “there are sufficient reasons for doing so” (see at 1285H).

In the UCT case, that suggestion appears to have been taken up. The proposal Arden J was being asked to approve was that the company should go into voluntary liquidation, on the basis that, prior to that happening, the administrators would pay into a trust account in their own name a sum equal to the total amount owing to the preferential creditors, from which account the preferential creditors would be paid, leaving the balance of the money in the administrators’ hands to be passed on to the voluntary liquidators for distribution pro rata to the unsecured creditors. The purpose of this seemingly rather odd course was that a voluntary liquidation was the preferred exit route for the administration, but the preferential creditors would otherwise have been prejudiced by that course, as their preferential status would only arise under a compulsory liquidation.

Arden J said that section 18(3) could only be relied on to support a provision “which results directly or indirectly in the discharge of the administration order” (441E). However, she went on to say at 441G that the purpose of the administration had effectively come to an end, and that

“[A] provision is consequential even though it will have to take effect immediately before the discharge because it is a direction which is being made to the administrators and they of course will cease to hold office on discharge of the administration order. As I see it, this particular direction is necessitated by the application for discharge since there will have to be a liquidation, and voluntary liquidation is the preferred route.”

Arden J therefore considered that the Court had “power to make the proposed direction provided that the administrators have power to make proposed payments to themselves on trust” (see at 441G-H). She held that the combination of section 14 of, and paragraph 13 of Schedule 1, to the 1986 Act did enable the court to make such an order. As she explained it at 441H-442B:

“part of the function of the administrators is to bring the administration to a conclusion… in the best interests of the creditors… Under Schedule 1 the Administrators have the power to present a petition for the winding up of the company, in other words, the functions extend to bringing the administration to a conclusion and ensuring that the company is put into a position from which it can make distributions to creditors. As I see it, it is part of their function to put the company in that position and in a manner which is most advantageous to the creditors. In this particular case, this is achieved by first putting the company in a position whereby it can enter into voluntary liquidation. As I see it, the proposed payment to the administrators as trustees is a payment which will enable that process to be achieved and therefore comes within paragraph 13.”

In my view, Judge Hodge was right in the present case to conclude that he had no jurisdiction to make the order he was being asked to make. Like Lightman J in the Powerstore case, Rimer J in the Designer Room case, and (evidently) Arden J in the UCT case, it does not seem to me that, on analysis, Jacob J’s reliance on section 14(3) of the 1986 Act in the Mark One case can be justified.

Any reliance on section 14(3) seems to me to founder on the reasoning I have quoted from 1286A-B in the Powerstore case. The provision envisages the court giving an administrator “directions”, but they must be “in connection with the carrying out of his functions”. His functions, governed as they are by section 8(3) of, and Schedule 1 to, the 1986 Act, do not extend to paying out creditors. This view, which is based on the wording of those provisions, is reinforced by the contrast between the provisions of Schedule 1 and schedule 4 (which governs the powers of liquidators) to the 1986 Act. The latter schedule includes, in paragraphs 1, 2 and 13, power respectively “to pay any class of creditors in full”, “to make any compromise or arrangement with creditors…”, and “to do all such things as may be necessary for … distributing [the company’s] assets”. The absence of any such provisions from the long list of paragraphs in Schedule 1 speaks for itself.

I accept, however, that section 14(3) of the 1986 Act does extend to giving the court what might be characterised as a residual inherent jurisdiction over the actions of an administrator, which may be invoked in the same sort of circumstances as in relation to liquidators. The nature of this jurisdiction was indeed explained by Jacob J in the Mark One case at 1448C-E. In that passage, he cited cases to the effect that “a trustee in bankruptcy, also an officer of the court, should not retain money which had been paid to him purely under a mistake of law” and “a trustee in bankruptcy could not act manifestly unfairly to obtain an order for the repayment of two cheques which had been paid after the act of bankruptcy”. Those were decisions whereby an officer of the court was, to quote Jacob J “in effect made to behave like a gentleman and not to stand upon his full legal rights when it [was] not fair to do so” (1448D).

However, those sorts of cases are very much on the margin, and were not concerned so much with the extent of the powers of an officer of the court, but the way in which he should exercise those powers. In such cases, the court is sanctioning a course which, while it may not be lawfully required of one of its officers (and could indeed otherwise be complained of by creditors who would be prejudiced by the action), would nonetheless be an action which right thinking people would consider appropriate. Indeed, it would be the sort of action which could be expected of an officer of the court, namely repayment of a sum of money which ought not to have been paid to him. However, I do not consider that that can properly and fairly be said to justify the Court sanctioning a course of action which is wholly outside the ambit of an administrator’s powers.

In this connection, it is interesting to see how Nicholls LJ, in the very case relied on by Jacob J, the Atlantic Computer case, contrasted the liquidation and administration regimes. At 527G-528C he said this:

“[T]he objectives of winding up orders and administration orders are different ... In the case of winding up the company has reached the end of its life. The basic object of the winding up process, in the case of an insolvent company, is to achieve an equal distribution of the company's assets among the unsecured creditors… In contrast, an administration is intended to be only an interim and temporary regime. There is to be a breathing space while the company, under new management in the person of the administrator, seeks to achieve one or more of the purposes set out in section 8(3)… In some cases winding up will follow, in others it will not.”

I do not suggest that these observations could be decisive in the present case, but they do tend to support the conclusion that a distribution to unsecured creditors is not an action “in connection with the carrying out of [an administrator’s] functions”.

I turn to the court’s power to make such “order as it sees fit” under section 18(3) of the 1986 Act. As I see it, the problem for the Administrators, at least before Judge Hodge, was that the provision only comes into play “[o]n the hearing of an application under this section”, which, under section 18(1), is an application to discharge, vary, or add an additional purpose to, an administration order. The application before the Judge was not within those words. The “additional purpose” must be a reference to section 8(3), which takes matters no further, as already explained. The variation contemplated cannot, it seems to me, extend to sanctioning an action by an administrator which is not contemplated or permitted by some other provision of the 1986 Act. There is thus no question of a variation or additional purpose here, and therefore the section 18(3) jurisdiction could only be invoked if the Administrators had been making an application for discharge, which they were not. In this connection I agree with what Arden J said in the UCT case at 441C-E and with Rimer J in the Designer Room case (who described Arden J’s reasoning as “wholly convincing” in paragraph 23), rather than with Jacob J in the Mark One case.

Accordingly, I consider that Judge Hodge was right to dismiss the application as it was before him. The court had no power under the 1986 Act to sanction administrators paying out creditors on what I have called a free-standing application, and that was what he was being asked to do.

As the argument developed, it was suggested to Mr Cawson that the Administrators might care to consider amending their application to apply for a discharge. Accordingly, he applied to amend to add an application for an order that the administration order of 16 September 2003 be discharged, and that any such discharge be on the basis that the payments to the creditors sought to be sanctioned should first be made.

Three questions arise out of this application. The first is whether we should permit the amendment. The second is what the consequences would be, and the order we should make if we were to grant the order as now sought. The third question is whether the Administrators’ proposed distribution to creditors could properly be sanctioned under section 18(3) of the 1986 Act if it is in connection with their discharge, even though it cannot be sanctioned as a free-standing proposal.

As to the amendment, I consider that there are no procedural objections to it, and that it should therefore be allowed. Section 18(1) of the 1986 Act envisages an application for discharge being made “at any time”. Neither the 1986 Act nor the Insolvency Rules 1986 require notice of such an application being given to the creditors or to anyone else. There is no inconsistency between the proposals approved by the creditors and the making of such an application. It is not as if the making of such an order would prejudice any party. On the contrary; it would be to the benefit of the unsecured creditors if it enabled payment to be made by the Administrators, and making an order for discharge now would save the cost of a further application for that purpose. Further, the fact that the discharge of the administration would only take effect in the future is not a problem; in that connection, Mr Cawson referred to CPR 40.7 (which provides that a court order takes effect from the day it is made “or such later date as the court may specify”) and rule 7.51 of the Insolvency Rules (which applies the CPR to insolvency proceedings “except insofar as inconsistent with [those] Rules”).

The next question is the form the relief would take. In that connection, the first step we would be sanctioning, in terms of timing, would be the distribution out of the fund held by the Administrators of 100p in the £ to the preferential creditors, and of the balance pari passu to the unsecured creditors (estimated to receive 35p in the £). This would leave the Company as an empty shell. A CVA would be pointless. To require the Administrators to incur the cost (which would be at the expense of the unsecured creditors) of petitioning to wind up the company would appear unreasonable, and to be avoided if possible.

As at present advised, it seems to me that the solution lies in section 652 of the Companies Act 1985 (“section 652”), which entitles the Registrar of Companies to strike a company off if it is “not carrying on business or in operation”. Where the Registrar has “reasonable cause to believe” that a company is in that position, he may write to the company concerned, and if his belief is confirmed by a reply (or if no answer is received after a second letter), he can strike the company off (three months after advertising his intention to do so in the London Gazette).

In my judgment, at least as at present advised, section 652 would provide the appropriate exit route for the administration in this case, provided we can properly accede to the Administrators making the distribution they propose. However, I consider that, as a condition of any order made to that effect, we should require the Administrators (a) to write to the Registrar informing him of this proposed course, and asking him what, if any, assistance or costs they should provide him with in connection with it, and (b) to provide any such assistance and costs to the Registrar. As we cannot expect the Administrators to commit themselves to what could be said to amount to a blank cheque, and as the Registrar may have some observations to make on this course, the order we make should give the Administrators (and, for safety’s sake, the Registrar) liberty to apply.

The order we make should also provide for the administration to be discharged on an appropriate date, bearing in mind the steps the Administrators have to take; Mr Cawson suggested a date two months from the date of our order, and that appears reasonable. The Administrators should have the right to apply to the Liverpool District Registry to extend that period. They should also have permission to apply to the District Registry for their release pursuant to section 20 of the 1986 Act.

The final question is whether the court can sanction the proposed distribution now that the application to make the distribution is ancillary to the application for discharge of the administration order. The reason the Judge below had no power to make the order sought below no longer applies, so far as section 18(3) is concerned, because the application for an order approving the proposed distribution is being made “on the hearing of an application under this section”, i.e. section 18(1).

It seems to me that the answer to this question turns on whether Arden J was right in her analysis in the passages I have quoted in paragraphs 30 and 31 above from 441E-442C of her judgment in the UCT case. If she was, then her conclusion would, in my view, mean that we can order the Administrators to make the distribution they propose. If the ambit of section 18(3) of the 1986 Act is wide enough to permit the court to sanction administrators paying money into a trust account for distribution to a class of creditors to enable the exit to be by way of voluntary rather than compulsory liquidation, it seems to me to follow that the court must equally be able to sanction administrators paying money directly to a class of creditors (and therefore to all creditors), at least if it is to facilitate a desirable exit route. The proposed distribution would enable a CVA (or, indeed, a compulsory liquidation), with the consequential costs and delay, to be avoided, and should facilitate the achievement of the relatively simpler and cheaper section 652 exit route.

Like Rimer J in the Designer Room case, I consider that the reasoning of Arden J in the UCT case is convincing. As Rimer J put it in the Designer Room case in paragraph 25:

“[T]he joint administrators would only have a power to make the proposed payment to the preferential creditors if, on the facts of the case, such a payment can properly be regarded as necessary or incidental to the performance by the administrators of their functions as such. I have not, however, been persuaded that the payment is so necessary or incidental. This is not a case like In re UCT (UK) Ltd, in which special provision has to be made for the preferential creditors in order that, with the best interests of the creditors generally in mind, the administrators can achieve an exit from the administration by way of a voluntary winding up rather than by way of the relatively more expensive route of a compulsory winding up. It is a case where, as matters stand at present, the administrators propose to petition for the compulsory winding up of the company.”

Accordingly, my conclusions are as follows:

I agree.

I also agree.