Coyne & Anor v DRC Distribution Ltd & Anor

This appeal is by Martin Coyne and Matthew Hardy, licensed insolvency practitioners and partners in Poppleton & Appleby (“P & A”). Their appeal is against an order requiring them to pay costs to DRC Distribution Limited (“DRC”). The order was made by His Honour Judge Purle QC on 25 September 2007 sitting as a judge of the Chancery Division. It was a joint and several order also made against Christopher Foster; and as between the appellants and Mr Foster the judge apportioned 50% liability to each. Mr Foster has not appealed the order. The appellants were represented before us, as below, by Mr Lance Ashworth QC. DRC was represented before us, as below, by Mr David Alexander QC. Mr Foster was also represented below by leading counsel. He is a respondent to the appeal but took no part in it.

The proceedings concern Ulva Limited, of which DRC is a substantial creditor. Mr Foster was its managing director. Ulva became insolvent and on 14 August 2007 Mr Foster appointed the appellants as joint administrators. On 11 September 2007 DRC issued an application for orders removing them as administrators and other relief. That application came before Judge Purle on 17 September, when it was adjourned to 25 September. In circumstances I will explain, it was by then no longer necessary for DRC to press for the substantive relief it had sought. Costs, however, remained in issue and the judge made the order under appeal. DRC’s claimed costs total some £116,000, of which the appellants have paid £35,000 on account. Although the order was made against them as administrators, it expressly imposed upon them a personal liability for which they have no right of indemnity out of Ulva’s assets (Rule 7.39 of the Insolvency Rules 1986). They have a right of contribution for half from Mr Foster, but there is a question as to what that might yield.

The thrust of the appeal is that, in ordering the appellants to pay the costs, the judge adopted a summary procedure when he should not have done. It is said he should not have considered making the findings and order that he did without first giving the appellants the opportunity of explaining their position from the witness box. DRC’s response is that there was nothing wrong with the procedure adopted by the judge and that he exercised his discretion unimpeachably.

The judge himself gave permission to appeal. He recognised that the circumstances were relatively unusual. The size of DRC’s costs bill is such that the financial consequences upon the administrators of the judge’s order are serious. In addition, the judge made critical remarks about them in his judgment which they regard as damaging to their professional reputations. The appeal is very important to them.

The primary evidence in support of DRC’s application was that of James Walker, the chairman of DRC’s parent company. The evidence in response was from Mr Hardy, one of the two administrators. The story is as follows.

In 2003 DRC and Ulva entered into a long-term supply agreement by which Ulva agreed to purchase from DRC a product called UlvaShield (a thermal insulation product) and associated products. In about October 2005, in breach of the agreement, Ulva began to source product from a Californian supplier.

Ulva’s last published accounts were those for the year ended 30 April 2006. They showed it as having: (i) net current liabilities of some £472,000 and net assets of some £39,000; (ii) acquired premises at Unit D, Hortonwood Enterprise Park, Hortonwood during the year, which at 30 April 2006 had a book value of £973,087; and (iii) plant and machinery with a book value at the year end of some £212,000 and fixtures and fittings valued at some £28,000.

In September 2006 DRC issued proceedings in the Queen’s Bench Division against Ulva for breach of contract. On 16 January 2007, at the request of Ulva’s accountants, Mr Hardy had a meeting with Mr Foster. Mr Hardy was told that Ulva had a significant tax liability to HM Revenue & Customs (“HMRC”), a debt which by July 2007 stood at some £835,000. His advice was that Ulva should either pay the debt or negotiate a payment plan. He had no further contact with Ulva until July 2007.

On 12 March 2007 Ulva’s solicitors admitted to Addleshaw Goddard (“Addleshaws”), DRC’s solicitors, that Ulva had breached the supply agreement with DRC under which it was being sued. They did not also admit liability for DRC’s claim because Ulva was contending that DRC was anyway not entitled to terminate the agreement. Various preliminary issues in the litigation were tried by Flaux J in the first week of July 2007, with his judgment being handed down in draft on 13 July and in final form on 20 July. He found liability established against Ulva and gave directions for the assessment of damages, which was due to take place in December 2007. DRC estimated its recoverable damages and costs at about £1m. In circumstances I will explain, Ulva entered into compulsory liquidation in September 2007 and DRC later agreed its claim for damages and costs with the liquidator at £800,000.

In the meantime, following Ulva’s admission of its breach of the supply agreement and before its entry into administration, Mr Foster carried out various actions to the detriment of Ulva. They were in the nature of an asset-stripping exercise directed at enabling him to carry on its business through another company with a similar name. The story was as follows.

Mr Foster procured Ulva Holdings Limited, a dormant company he owned, to change its name to Ulva International Limited (“UI”). The change was achieved on 2 April 2007. He then obtained a valuation dated 25 April of Unit D at £810,000 from Andrew Dixon & Company; and a valuation dated 16 May from Bache Treharne of Ulva’s plant and machinery at £121,000. On 25 May he caused Ulva’s plant and machinery to be sold to UI for £121,000. That price (which UI did not pay) matched the recent valuation but is to be compared with the £212,000 book value shown in the 2006 accounts, which Mr Foster had signed on 15 May, the day before the Bache Treharne valuation. The administrators, subsequently appointed on 14 August, could find no documents evidencing the sale, but Mr Foster produced two documents between 17 and 25 September, the dates of the hearings before Judge Purle. The first was an invoice dated 25 May from UI to Ulva for £121,000 plus VAT of £21,175. That, of course, was the wrong way round. The second was an invoice of the same date from Ulva to UI. That difference apart, both invoices were identical and included a reservation of title provision until payment was made in full, a matter of which the administrators were ignorant until they saw these documents. Mr Foster’s solicitors explained the position to Addleshaws on 20 September, saying that Mr Foster:

“… has arranged for an invoice to be issued correctly as it should have been on 25^th May 2007. We enclose copies of those documents. We appreciate that ULVA Limited as of today’s date is not able to invoice in this form, but this is no more than a rectification towards the original intention. For the avoidance of doubt, [UI] considers that invoice to be a debt which it will satisfy at some time in the future.”

On 1 June Ulva transferred Unit D, its business premises, to Mr Foster for a price of £810,000 stated to have been paid, and he was registered as proprietor on 4 July. On 1 June he charged Unit D to HSBC Bank Plc, a transaction which amounted to taking over Ulva’s mortgage and accounted for the bulk of the £810,000 purchase price, and he debited his Ulva loan account with the balance of £150,000. Unit D had been given a year-end book value in Ulva’s 2006 accounts at the rather higher figure of £973,000, but before signing those accounts on 15 May 2007 Mr Foster had obtained the lower £810,000 valuation. On the same day as the transfer, he leased the property back to Ulva for 10 years at a rent of £60,000 a year subject to review.

Ulva ceased trading on 29 June and at about the same time UI commenced the same business. It traded from Unit D, using Ulva’s employees who all switched to UI. None of this was mentioned to Flaux J at the hearing in early July. By 16 July Mr Foster was taking steps to transfer Ulva’s trade mark “ULVA” to UI for £10, the necessary assignment being executed on 23 July and the mark being registered in UI’s name on 15 August. At the same time he applied to have the “ULVAShield” trade mark registered in UI’s name, one that had not previously been registered at all but had been used by Ulva. By then UI’s registered office was at Unit D. It is not apparent that UI made or offered any payment to Ulva for the ULVAShield mark. Another noteworthy transaction occurred on 12 and 15 July when Ulva paid £300,000 to UI. It is said that the money was due from Ulva to overseas agents and that UI was taking on the liability in its place. There was no novation with the agents, so that UI assumed no enforceable liability at the suit of the agents and Ulva was not released from its own liability. It was a misappropriation of Ulva’s assets, for which Ulva received nothing in exchange.

On 23 July Mr Foster had a meeting with Mr Hardy to discuss insolvency procedures for Ulva. Mr Hardy’s evidence summarised what Mr Foster told him. It included that Ulva was facing pressure from HMRC over its debt (some £835,000) and foresaw the presentation by HMRC of a winding-up petition; that Ulva expected to face a substantial damages award (some £750,000, including costs) in the DRC litigation; and that Ulva could not pay its debts. Mr Hardy advised that Ulva would have to enter a form of insolvency procedure. Mr Foster told him that he (meaning UI) wanted to purchase the business and assets of Ulva and proposed a so-called “pre-pack” (a pre-administration sale commitment) but Mr Hardy advised that this “would be inappropriate in light of the possibility of interest from third parties, namely DRC”. Mr Hardy does not explain how he knew that DRC would have any such interest. His witness statement records that:

“22.6

There was uncertainty as to the current ownership and control of the key trading assets in light of the fact that Mr Foster asserted that the plant and machinery had been transferred to [UI] and [UI] had commenced trading some weeks earlier.

22.7

It was suggested that the plant and machinery of [Ulva] had been sold to [UI] and was being leased back to [Ulva]. It appeared that [UI] had not yet paid for the transfer of the equipment. The stock was of a specialist nature and it was reported that the suppliers were unlikely to want it back. It appeared, at that time, that the intellectual property was personal to Mr Foster and there was no discussion of trademarks at the meeting.”

Mr Hardy made brief notes of that meeting on a single sheet of paper. It concluded:

“MVL [Members Voluntary Liquidation] – can’t be used to pay debts

MH [Mr Hardy] advised admin [administration] but what is Stat [statutory] purpose?

‘buy assets’ already TRF [transferred] + goodwill

Stock – would not want it back

Property – mortgage 750/Value 750”

The note reflects that Mr Hardy was told there had already been a disposal of Ulva’s assets. He knew at least that the plant and machinery had been transferred to UI. He had been told that UI had commenced trading some weeks earlier. He knew that the Ulva employees had gone to UI. He must have known that Ulva was no longer trading. Was UI using the plant and machinery? If so, on what basis? Where was it trading from? Had it taken over Unit D, which by then was owned by Mr Foster and leased by Ulva? If so, on what basis? It appears that Mr Hardy knew that Ulva had a lease of Unit D, because he referred to it in a passage in his evidence I am about to quote. These, and more, were obvious questions that it does not appear that Mr Hardy asked. Despite having been given what was probably an incomplete -- and thoroughly suspicious -- picture, which ought to have rung alarm bells as to what had been going on, he said in his evidence that at the end of that meeting: “In view of the interest expressed in [Ulva], a sale of the business and assets seemed a real possibility, therefore administration appeared to be the most efficient method of facilitating a sale and thereby realising the assets of [Ulva] most advantageously for the benefit of creditors.” This was even though he had apparently questioned what the statutory purpose could be. Of course the only statutory purpose is that set out in paragraph 3(1) of Schedule B1 to the Insolvency Act 1986. What Mr Hardy must have meant was how, in the light of Mr Foster’s activities, it could be achieved. But he explained in his evidence why he believed administration was appropriate:

“22.9.1

It provided an opportunity to negotiate a sale of the business and assets whilst [Ulva] was in a position to remain at Unit D under its lease. It would provide an opportunity for Mr Foster to make a competitive offer for the business and assets of [Ulva] and to explore whether DRC would seriously be an interested party.

22.9.2

Whilst offers were explored, [Ulva] would require the protection from the threat of the winding up petition to be presented by HMRC. This would be required given that investigation into [Ulva’s] position and ownership of the assets would be required before a sale could be fully negotiated.

22.9.3

In any event, a compulsory winding up would take weeks or possibly months to achieve.

22.9.4

In that period, the gap between [Ulva] and [UI] could become wider and the ownership of the assets and the opportunity to extract value from them would become increasingly difficult.

22.9.5

I considered that a winding up petition and the compulsory liquidation of [Ulva] would devalue the business and assets (in particular the brand where I still perceive the majority of the value in [Ulva] lies).

22.9.6

Administration would be appropriate to protect and extract that value from [Ulva]. This is reflected in the offers which have now been negotiated.

22.9.7

The only viable alternative to administration would be a CVL. That would have at least a 3 week delay before a liquidator was appointed. In that CVL, it may have been possible to get some of the assets back but the sale would then have to be negotiated. I believed with the passage of time it would be increasingly difficult to obtain a value for the goodwill to the level that we have achieved in the administration.

22.9.8

HMRC would, in any event, possibly have continued to seek compulsory liquidation notwithstanding the CVL.

22.10

It was made clear to Mr Foster at that meeting that I would act independently as an administrator of [Ulva] and would seek to investigate all the actions that had taken place immediately prior to the insolvency of [Ulva], including any loans to Mr Foster and any antecedent transactions with either Mr Foster or [UI].”

Those paragraphs do not reflect that any demand had been made upon Mr Foster for an immediate unravelling of the transactions as a pre-condition of administration and it appears that none was. Paragraph 22.9.2 does, however, at least reflect that Mr Hardy recognised that he could not engage in any “full” negotiation of any sale of the assets and business without an investigation into Ulva’s “position and ownership of the assets.” They also reflect his view that Ulva’s main value lay in its “brand” despite (a) his understanding from the meeting that “the intellectual property was personal to Mr Foster” and (b) that there was “no discussion of trademarks at the meeting.” He does not explain how he formed this view. What he at that stage thought that any administrators could sell is unclear. Mr Ashworth’s answer to that question from the court was “whatever was left”. Just so, but what was it? Mr Hardy’s thought in paragraph 22.9.8 was, I suspect, absolutely right. Once HMRC had so much of a sniff of what Mr Foster had been up to, they would not have hesitated to present a winding up petition so that the fullest investigation of his activities could be made. Other notable examples of these were that during July and early August he reduced a sum of £750,000 standing to Ulva’s credit to £4,000, including by substantial payments to UI.

There was a further meeting with Mr Hardy on 25 July, of which he made a fuller note, but it does not for the most part deal with whether there was any justification for an administration. The meeting should, however, have raised more concerns in Mr Hardy’s mind when he learnt that, in addition to his breaches of duty as a director of Ulva, Mr Foster had been on the edge of prosecution for what Mr Ashworth tactfully described as tax irregularities. Page 3 recorded that UI was “now up and trading”. It also asked, but did not answer, two pertinent questions: “What is there to buy? Does Chris [Mr Foster] need to buy anything from us?” The answer was no, he did not, or at least not much: he had already taken the lot, or at least most. There was little or nothing to sell to him or UI; and, until such time, if ever, as the transactions were unravelled, there was no business and few or no assets to sell to anyone else. Had Mr Foster made an application to the court (under paragraph 12 of Schedule B1) for an administration order, supporting his application with evidence of how busy he had been stripping Ulva of its business and assets, the court would probably have checked the diary to see that it was not 1 April. Having devoted himself so assiduously to the complete destruction of Ulva and its business, Mr Foster could not have been expecting the administrators to rescue it as a going concern; and any thought that they could achieve a better result for creditors than would be likely if the company were first wound up was equally improbable. Perhaps they could if there had been an immediate restoration of the status quo ante. But that was no part of Mr Foster’s agenda nor, it seems, of the proposed administrators. Mr Hardy’s advice, however, was that if Ulva could not negotiate a settlement with HMRC, administration would be appropriate. On his own evidence, that was surprising.

On 3 August 2007 Mr Foster signed a notice of intention to appoint Mr Hardy and Mr Coyne as administrators. The notice was filed at court on 6 August. On 14 August Mr Foster appointed the appellants as administrators. On that day, or purportedly so, each administrator signed a consent to act, with statements that they were of the opinion that the purpose of administration was reasonably likely to be achieved. We were told that, as Mr Hardy was due to go on holiday on 14 August, he signed his consent before he went and post-dated it. The administrators retained HBJ Gateley Wareing LLP (“Wareings”) as their solicitors and on 15 August they notified Addleshaws of the appointment. The main purpose of that appears to have been to point out that DRC could not continue the proceedings against Ulva without the consent of the administrators or the leave of the court.

On 15 August Addleshaws told Wareings of DRC’s concerns about the movement of Ulva’s assets, of which DRC had acquired some knowledge. On 16 August there was a meeting between Mr Walker, Mr Ingram (of KPMG, advisers to DRC), Mr Coyne and Mr Beighton (a P & A manager). Mr Walker’s evidence was that he and Mr Ingram were told that Mr Hardy was on holiday until 21 August; that Ulva had ceased to trade at the end of June; that Ulva’s cash reserves of £750,000 as at 30 June had been reduced as I have said; that Mr Foster owed Ulva at least £350,000; that, in advance of the administration, all Ulva’s raw materials, finished goods, work in progress, plant, equipment, customers, goodwill and intellectual property had been transferred from Ulva to UI for no consideration; that its employees had transferred to UI; and that UI was carrying its business from Unit D, even though Mr Foster’s lease back had been to Ulva, not to UI, so that UI had no right of occupation. Mr Coyne explained that the administrators would take immediate steps to secure and recover Ulva’s property, if necessary by court proceedings against Mr Foster, including any necessary applications for injunctive relief. He explained that the administrators were in funds, having received £60,000 worth of debts. In the event the administrators never recovered any of Ulva’s assets and took no proceedings to that end. At the meeting, Mr Coyne gave leave to DRC to continue its proceedings against Ulva.

At 6.33 pm on the evening of 16 August, before also going on holiday, Mr Beighton emailed Mr Foster for details as to what had happened to Ulva’s business. This was at DRC’s request. The email sought details of the assets transferred to UI and of “the price paid for these assets and confirmation/evidence that this has actually been paid (where applicable) and the mortgage to HSBC was discharged.” He also wanted details of the transfer of Unit D to Mr Foster, the basis on which the consideration was agreed, how the mortgage to HSBC was discharged, a copy of the lease to Ulva and details of any rights of occupation by UI. Mr Foster’s emailed reply at 10.23 pm the same day was to the effect that he would provide a copy of the valuation of the plant and machinery; that UI owed money to Ulva for it, which would be paid “in due course”; that UI “already owned its own rights that are relevant all of [sic] the registered trade marks etc and has for some time.” He said the mortgage “was fully discharged by the HSBC over to myself some months ago and I personally own the building” and that he would be providing a copy of the valuation. He said UI was not the tenant and that “Ulva ltd paid the rent to me personally up to August as from then onwards the building is free to rent to whoever.” He appears, therefore, to have been of the view that Ulva’s entry into administration had brought its lease to an end.

Mr Walker had a further meeting on 21 August, this time with Mr Hardy, now back from holiday. The meeting was also attended by Mr Ingram, Mr Monaghan (a P & A manager standing in for Mr Beighton), and Mr McGeever of Wareings. Mr Walker’s evidence was that at this meeting DRC learnt of the £300,000 payment that Ulva had made to UI in mid-July; that the administrators explained that Ulva had paid some £940,000 in commissions during the current year and that Mr Hardy explained that, prior to their appointment, Mr Foster had sought to get them to agree to a “pre-pack” sale of Ulva’s business to Mr Foster once Ulva was in administration but that Mr Hardy had declined to agree to this. Mr Walker discussed the possible sale of Ulva’s business by the administrators, meaning, he said, the business prior to the antecedent disposals. He indicated that DRC would be interested in acquiring it. Mr Hardy’s evidence was that he made it clear to Mr Walker that the administrators would only sell “such right and title as we had to [Ulva’s] assets.” He also said it was made clear to Mr Walker at that meeting, and repeated subsequently, that Mr Foster “had purported to transfer the plant and machinery and trademarks of [Ulva] to [UI].”

Mr Hardy arranged a meeting with Mr Foster on 23 August. Mr Hardy said its purpose was “to determine what the current position of [Ulva] and [UI] was and to demand that [Mr Foster] redeliver to us the assets of [Ulva].” He had already instructed solicitors and leading counsel (Mr Ashworth) to be ready to make an immediate application to the court for injunctive relief restraining Mr Foster from entering Unit D, dealing with or disposing of Ulva’s assets and a re-delivery of its assets. A hearing had been fixed for the afternoon of 23 August before Her Honour Judge Alton in Birmingham.

The meeting with Mr Foster was attended also by Mr Singh of Hammonds (for Mr Foster), Mr Monaghan (P & A), and Ms Taylor and Mr McGeever (Wareings). Mr Hardy told Mr Foster that he required access to Unit D and the immediate return of Ulva’s assets. He said in his evidence that “[i]n addition, I informed Mr Foster that I would be taking immediate steps to recover the property of [Ulva] unless Mr Foster was willing to offer true value for [Ulva’s] property.” He told him that other purchasers were interested in purchasing the business so that any offer from him had to represent “a highly competitive offer given the alternative interest in the business.” Mr Foster responded that he would be making an offer for Ulva’s business and assets and would grant immediate access to Unit D. Mr Hardy concluded that, now that access had been offered and Mr Foster was proposing to make an offer, there was no need to proceed with the proposed application to Judge Alton. He was also of the view that it was unlikely that any injunction would be granted. He sent members of his staff to Unit D who changed the locks; and he engaged a security firm to be on site 24 hours a day. UI continued to trade there, which Mr Hardy monitored.

On the afternoon of 23 August Mr Hardy emailed Mr Walker, with copies to Mr Ingram and Mr McGeever, informing them of the engagement of the security company in relation to Unit D and that it and P & A would be the sole key holders. Mr Hardy was going to permit the work force to continue manufacturing at Unit D since he was “mindful that suspending the trading activities or jeopardising delivery of customer orders represents a risk to the value of the business.” He said he had excluded Mr Foster from the premises. The “business” referred to was, by then, not Ulva’s business: it had been purportedly acquired by UI, a company of which Mr Hardy was not an administrator; and Mr Hardy appears to have abandoned any intention of seeking to recover the business for the benefit of Ulva, of which he was an administrator.

Despite these obvious problems, Mr Hardy’s email continued:

“I believe it is in the interests of all creditors to seek a timely sale of the business. During our meeting on Tuesday [21 August] you confirmed your interest in the business. I understand you have had a subsequent telephone conversation with Brendan McGeever and have discussed further your interest in the business. In order to progress this matter I am minded to seek best and final offers from the two parties involved to be submitted to me, together with proof of funding, by 12 noon on 28^th August. I will contact both parties under separate cover in this regard.

I trust this addresses the concerns you expressed during our earlier telephone conversation and your subsequent email in so far as the trading premises, tangible assets and intellectual property have been secured and Mr Foster has been excluded from the premises”

As for the second quoted paragraph, all that the administrators had done was to assume physical control of a building apparently occupied by a company – UI -- which had no title to occupy it and of which they were not administrators; and to assume, without any right, a monitoring operation over UI’s activities. It may be that they had prevented the tangible assets (formerly owned by Ulva but now, as they understood it, owned by UI) from going elsewhere. But they had done nothing to secure the intellectual property, which UI could have disposed of the next day. What in fact happened on the next day, 24 August, was that Mr Hardy sent a further email to Mr Walker and Mr Foster saying that it was desirable to seek an early sale of the business and assets of Ulva and he invited them to submit their best and final offers “for the business and the assets” by 5.00 pm on 28 August.

Since Mr Hardy had abandoned the proposal to recover Ulva’s assets from Mr Foster and UI, it is obscure what he thought he could offer DRC. In practice it could only be a right to sue Mr Foster and/or UI, which was hardly an attractive proposition. For practical purposes Mr Hardy’s change of stance on 23 August reduced the market to a single bidder, namely UI, though it is also difficult to understand what UI would be bidding for. Would it include what it had already got or be confined to what it had not; and what, if anything, did Ulva retain? Despite what he said in paragraph 22.9.2 in his witness statement as to the need to make an investigation into Ulva’s position and ownership and assets before “fully” negotiating a sale, Mr Hardy had apparently done little or nothing to that end beyond deciding not to press for the return of Ulva’s assets. Mr Ashworth acknowledged that, with the benefit of hindsight, Mr Hardy could, and perhaps should, have pressed for a re-transfer to Ulva of its assets. No hindsight is required for that judgment. It was obvious on 23 August that, if Mr Hardy intended to offer the business and assets to interested parties with a view to obtaining offers from them on a level playing field, he first had to get them back so that he was in a position not just to offer them, but also to deliver them.

On 28 August UI offered £500,000 for all Ulva’s assets, with an immediate payment of £120,000 and the balance in instalments, to be secured by a debenture over all UI’s assets. The offer did not explain whether the £500,000 was in addition to, or in substitution for, such financial commitments (for example, in relation to the plant and machinery) as UI had already purportedly assumed. DRC also made an offer for the business and assets (with certain exceptions, including Unit D). The offer was £100,000 up front, with royalty payments of up to £1,110,000 payable in instalments over five years, but subject to termination upon the payment of Ulva’s creditors in full. On 3 September DRC made a revised offer under which DRC would guarantee a payment “to enable a distribution to bona fide creditors to be made that is 1p in £1 more than would otherwise be available on the date of completion if the Joint Administrators chose to complete the transaction with Mr Foster.”

Mr Walker said that it then became apparent that it was unclear what the administrators were able to sell. This is reflected in a letter Addleshaws wrote to the administrators on 4 September in some degree of courteous fury. They expressed DRC’s concerns at the administrators’ stance with regard to matters of title and said that at the meeting on 21 August Mr Hardy:

“… indicated that you had or would have control of [Ulva’s] assets and would seek injunctive relief, if necessary, to ensure that you obtained any assets that had purported to be transferred to [UI] which you maintained had not transferred as far as you were concerned – this included intellectual property rights including trade marks relating to ULVA brand/product. Now you are suggesting that do not have right or title in various of [Ulva’s] Business and Assets.”

Addleshaws referred to the expense DRC had incurred in putting its offer together at short notice and asserted that if the position was that the administrators had no right or title to the assets, DRC believed “it makes your appointment and your actions since appointment seem little more than a sham. Accordingly, if this is the case, our client invites you to stand aside to allow for [Ulva] to be put in liquidation which it believes would have been the correct step in the first place.” Addleshaws said that, as the largest stakeholder in relation to Ulva, there was no way that DRC would countenance a transfer of Ulva’s business and assets to Mr Foster or anyone connected with him. Despite the uncertainty as to the administrators’ title to the assets, DRC’s offer was not withdrawn.

On the same day, 4 September, Mr Hardy sent an email to Mr Ingram, who was advising DRC. They had had a recent conversation and Mr Hardy confirmed that:

“… certain of the assets used previously in the business of [Ulva] do not appear to be in the ownership of [UI]. This is primarily a result of transfers in ownership, which occurred prior to my instructions in this matter, together with an application for first registration of a brand name used by [Ulva] as a trade mark by [UI].

Whilst the Joint Administrators can sell such right, title and interest as [Ulva] may have in these assets, further steps would have to be taken to set aside the transfer of the assets where appropriate in order to vest complete ownership with the successful purchaser.”

I suspect that the “not” in the first sentence was intended to be “now”. The email was as discouraging to a potential purchaser as they come. Mr Hardy was saying that, in material respects, he could not deliver what he was offering. On 5 September there was a conversation between Mr Hardy and Mr Ingram, whose essence was summarised by Mr Ingram in his email to Mr Hardy, which he had in the meantime relayed to Mr Walker. It repeated that there was a title problem. It added that the administrators were also “concerned that access to the premises may be denied by the landlord (Mr Foster) and also therefore draw the (potential) purchaser’s attention to this fact.”

On 4 September Mr Foster increased his offer to one under which £150,000 was payable on completion, £300,000 was payable in instalments over 12 months, plus royalty payments at 5% of turnover over 24 months capped at £200,000. Security was offered in respect of the deferred element other than the royalties. On 11 September he increased his offer to one of £150,000 payable immediately, £350,000 payable in instalments over 12 months, plus royalty payments of at least £200,000 in the first two years and at most £100,000 in the third. The deferred consideration was to be secured by a guarantee from Mr Foster, a charge over his house jointly owned with his wife and a debenture over the assets and undertaking of UI.

On the same day, having learnt that the administrators were disposed in principle to deal with Mr Foster, DRC issued its application for their removal. They sought that order pursuant to paragraph 81 of Schedule B1 to the Insolvency Act 1986, a paragraph requiring the allegation of an improper motive on the part of Mr Foster in appointing them. Alternatively, they relied on paragraph 88, which simply empowers the court to remove an administrator from office. If such an order were made, DRC asked for the appointment of substitute administrators in their place. Alternatively, they asked for relief under paragraph 74. That applies where the administrator has acted, is acting or is proposing to act in a way which will unfairly harm the applicant and, if the case is made out, the court has a discretion to make a variety of orders, including the removal of the administrators. Alternatively, they sought relief for restrictions on the sale by the administrators of Ulva’s assets save on certain conditions. Mr Foster was also a respondent to the application.

Mr Walker’s evidence explained the justification for this application. He asserted that Mr Foster did not make the appointment of the administrators with a view to achieving any of the purposes of administration. By the time of the appointment Ulva had ceased trading and disposed of its assets and employees. He invited the inference that the appointment was made for a collateral purpose, which he described as “one step in a carefully thought out plan to (1) transfer all the assets out of Ulva to [UI] and (2) enable Mr Foster to choose the office holders with whom he would then try to negotiate so as best to preserve the business formerly in Ulva for himself and/or ensure that he could forestall any action against [UI] for as long as possible in support of this.” He supported this by referring to the history of the whole saga as he knew it. He referred to the administrators’ omission to take any action, whether by proceedings or otherwise, to secure and recover Ulva’s assets. This was, he said, despite their assurances of immediate action. He elaborated why the administrators’ delay in these respects was potentially injurious to DRC and other creditors. They had allowed UI to carry on its business from Ulva’s premises and now proposed to sell the business and assets to Mr Foster in advance of any meeting of creditors. There was no suggestion that any such sale was urgent and nor had the administrators identified what they were proposing to sell to Mr Foster so that others could bid for it. He asserted that it was contrary to the interests of Ulva’s creditors for there not to be a proper sale process.

Mr Hardy said in his witness statement that neither he nor Mr Coyne had acted as stooges for Mr Foster. They had acted in what they believed to be the best interests of the creditors as a whole. He said DRC was plainly motivated by a wish to prevent any sale to Mr Foster or any associate of his. It was for Mr Foster to deal with the allegation that the appointment of the administrators was made with an improper motive. Mr Hardy said they had no prior professional relationship with Mr Foster other than in January 2007 and in the giving of advice prior to their appointment, a reference to the July advice. The relevant question was whether the purpose of administration could still be achieved. If so, the administration should continue. He said that none of the orders sought against the administrators was appropriate. They had successfully negotiated an offer for the sale of Ulva’s business and assets which reflected a good return for the creditors and had preserved the position as regards any claims in respect of Mr Foster’s and Ulva’s actions which may be available to any liquidators of Ulva. He said the administrators proposed to complete a sale of the business and assets under whichever offer was in the creditors’ best interests. Ulva would then be placed in liquidation.

Mr Hardy referred to the offers he had received from DRC and from Mr Foster. He explained the terms of the DRC offer and expressed his concern that it was wholly reliant on successful trading of the business over a period of six years. He foresaw a number of difficulties in DRC’s way. These included that DRC would be likely to be in direct competition with Mr Foster. It was likely that there would be arguments between DRC and UI/Mr Foster as to what assets were owned by Ulva (and so acquired by DRC). Mr Foster, as the landlord of Unit D, would be unlikely to consent to DRC’s occupation of Unit D. DRC’s ability to deliver its offered payments in years 1 to 6 was therefore in question, and it was offering no guarantees. Mr Hardy said that DRC’s “reluctance to provide the guarantee led me to question their own confidence in meeting the commitment. I accept that this may well be because of the uncertainties as to what they were getting” (my emphasis). Mr Hardy’s conclusion was that whilst, on a best case scenario, DRC’s offer was the better one, Mr Foster’s offer provided a better return to creditors as a whole, and he explained why. He had not, however, committed the administrators to accepting it at the date of his witness statement. There was still a good deal of negotiating to do, but Mr Ashworth explained that in principle the administrators regarded a deal with UI as a possible one and, moreover, one that would yield more for the creditors than one with DRC.

Mr Hardy explained the creditor position of Ulva. On his assessment, HMRC was the major creditor, with a debt in excess of £1m, their position being that they did not object to the administrators remaining in office. His assessment of DRC’s claim was that it was less than DRC claimed and was in the order of £650,000, inclusive of costs. He asserted that the administrators had been intimidated by Mr Walker and Addleshaws in an attempt to compel them to accept the DRC offer and said their issue of the application immediately following the indication that the Foster offer would be accepted was to frustrate the achieving of the purpose of administration. He said he intended to complete a sale of the remaining assets of Ulva.

DRC’s application came before Judge Purle on 17 September. The administrators were ready to oppose it, although paragraph 6 of Mr Ashworth’s skeleton argument asserted that the court could not rule in DRC’s favour on the relief claimed in three paragraphs of the application notice without first hearing oral evidence. There was, however, no substantive hearing on 17 September. Instead, the application was adjourned until 25 September so that Mr Foster could make a witness statement, which he did, and so that Mr Walker could make a statement in reply to Mr Hardy, which he also did. There is no need to refer to Mr Foster’s statement. As for Mr Walker, he made it clear that DRC was frustrated and disappointed by the actions carried out by Mr Foster before the appointment of the administrators, by the fact that Ulva was placed in administration rather than liquidation and by the conduct of the administrators, including their failure take all necessary steps to recover the business and assets. He admitted that he objected to any sale to Mr Foster. He asserted that any sale should be conducted on the basis that any bidder was on a level playing field with Mr Foster, who should not benefit from his wrongful acts. He denied that DRC had frustrated the achievement of the purpose of administration. He said this was not a case for administration at all. He denied that at the meeting on 21 August Mr Hardy had said that the administrators would only sell such right, title and interest as they had in Ulva’s assets. He said his clear understanding at that meeting was that the administrators proposed to get back the assets and that they were inviting offers for the assets as they were before Mr Foster’s wrongful acts.

Mr Hardy also made a further statement on 24 September, the eve of the adjourned hearing. He explained that Wareings had written to Hammonds on 21 September asking for confirmation by 4.00 pm that day as to whether UI intended to proceed with its offer, adding that, if it did, the terms must be agreed by midnight on Monday 24 September. I comment that that deadline was obviously influenced by the hearing on 25 September: the administrators wanted to be able to tell the judge that they had agreed terms for a sale. It was also probably absurdly tight: how, for example, was it thought that over that weekend Mrs Foster could obtain independent advice as to whether she should or might agree to her jointly owned property being charged to secure UI’s commitment? And what, other than the wish to be able to present a fait accompli to Judge Purle on 25 September, was the reason for the urgency?

The response on the same day was that UI was not prepared to proceed with its offer. That was said to be because Hammonds had learnt from a telephone conversation earlier that day that the administrators’ attitude was that acceptance of UI’s offer was not to prevent the administrators making claims against Mr Foster and UI in respect of the prior transactions in relation to Ulva’s assets, whereas Mr Foster and UI’s stance was that the deal would, in effect, draw a line under the previous history; and they were only prepared to continue with their offer if that remained the deal. Wareings’ response, on the same day, was that it had always been the administrators’ position that a sale to UI would not preclude the making of claims in respect of the prior transactions. That difference between both sides marked the end of the administrators’ negotiations with Mr Foster and UI.

Against that background, Mr Hardy concluded that the purpose of administration could not now be achieved. DRC’s position, as explained in Mr Walker’s evidence, was that once the uncertainty as to what the administrators could offer and deliver had emerged by the beginning of September, it had become “impossible for there to be any sensible bid”. Mr Hardy’s position, as explained in his further statement of 24 September, was that, given UI’s stance, it was “no longer possible to achieve a better realisation of the assets of [Ulva] than would be achieved in a liquidation.” He was also of the view that DRC’s offer did not reflect “what would be the true value of the business had the assets and goodwill not already been taken by [UI].” His point appears to be that DRC had not offered enough for assets that he could not deliver: and he had himself earlier acknowledged that the fact that DRC’s offer was not better may have been because of the title problems. Mr Hardy said he believed it was now appropriate for Ulva to enter liquidation as soon as possible. To that end the administrators issued an application returnable before Judge Purle on 25 September for an order for their appointment to cease to have effect and for the making of a compulsory winding up order in respect of Ulva..

The two applications (by DRC and the administrators) came before Judge Purle on 25 September. The judge dealt first with the administrators’ application and made the orders sought, including an order for the compulsory winding up of Ulva on a petition that he ordered the administrators to present. He delivered a short judgment explaining those orders. He recorded that the administrators had been seeking to sell Ulva’s assets, a sale complicated by the fact that many of the assets had been purportedly disposed of prior to the administration. He recorded that they had been dealing with Mr Foster and that whilst he was apparently under the impression that any deal would cure any defect in the title of the assets he had, the administrators’ position was that they had never offered any such thing. The administrators were not prepared to deal with Mr Foster on his terms but had concluded that Ulva “is better off in liquidation, and I agree with them.” He recorded that the administrators’ application had been “brought on for entirely proper reasons very speedily ….” The judgment reflects that the judge recognised there had been a change of circumstances justifying the administrators’ application. I record that, following the entry of Ulva into compulsory liquidation, the liquidator promptly recovered its assets from UI in October 2007 and sold them to DRC.

The judge then proceeded to deal with the DRC application. As a result of the order just made, in particular that terminating the administrators’ appointment, nothing remained in it save the question of costs. DRC’s submission was that it had in substance achieved the result it had sought in its application (namely, the end of the administration and the avoidance of any sale to Mr Foster) and that, had it pursued its application for the removal of the administrators, it would have succeeded. DRC therefore sought an order for costs against the administrators and Mr Foster. Mr Foster opposed that order. So did the administrators, who asked that DRC should pay their costs. The judge made the costs orders that were sought.

The judge had read the evidence but had not had any cross-examination. He was sensitive to that, recognising there were factual disputes on the witness statements. He said, however (in paragraph 5 of his judgment), that the matter was an insolvency application and that such applications should “be dealt with speedily and with due regard to such evidence as there is.” He was satisfied (paragraph 6) that there was strong prima facie evidence of an improper motive on the part of Mr Foster in appointing the administrators. Mr Foster had not been motivated by a wish to achieve the statutory purpose of administration. Rather, he had the “motive of protecting his own business and reputation, his own business being the business which he had extracted from the company.” That finding (in paragraph 7) was directly inspired, and plainly justified, by what Mr Foster had said in paragraph 26 of his witness statement, Mr Foster’s attitude being that Ulva’s business was his own business. The judge said it was “impossible not to feel some sense of at least provisional outrage when one is taken through the schedule of events as Mr Alexander did at great length this morning.” In paragraphs 7 to 15 the judge summarised the transactions in which Mr Foster had engaged. All of that part of the judgment was directed exclusively at Mr Foster, not at the administrators. They related to events that pre-dated the administration.

The judge then said that as a result of the meeting on 23 July, the decision was made to appoint administrators. He referred to Mr Hardy’s evidence that he had made it plain to Mr Foster that he, Mr Hardy, would investigate all the pre-administration transactions that had taken place and the judge accepted that such a warning was given. What concerned the judge, however, was what statutory purpose was hoped to be achieved by the administration, and he referred to Mr Hardy’s attendance note asking, but not answering, this question.

In paragraph 18 he described Mr Hardy’s evidence as being to the effect that Mr Hardy was persuaded that an administration could achieve a better result for creditors because there were two potential bidders for the business, UI and DRC. He remarked that Mr Hardy had not explained how Ulva could realise the value of its brand without the trade marks, which had been transferred away, and he referred to the fact that Mr Hardy’s evidence was that he believed that the trade marks were personal to Mr Foster and were not even discussed at the meeting. The judge’s inference was that Mr Hardy could only have reached the view he did as regards the realisation of Ulva’s assets on the basis that the brand rights were first secured.

In paragraph 19 the judge referred to an attempt to persuade him:

“… that there might still be a lot of plant and machinery lying around which had not been transferred [to UI], but when I looked at the evidence again the clear tenor of the evidence, both of Mr Hardy and Mr Foster, is that all the plant and machinery had been sold or had been transferred purportedly out of the company to [UI], and indeed the valuation that is produced in evidence of the machinery in question justifying the price of £121,000, contained no indication so far as I can see that only part of the plant and machinery was sold. Instead, the valuers were given access to the premises for the purposes of valuing the machinery and business assets generally, which I take to be all of them.”

The judge referred in paragraph 20 to Mr Hardy’s knowledge at the date of the appointment of the administrators. He had not been given full information by Mr Foster. The judge did not think he knew what had happened in relation to the trade marks and “he certainly had not seen the invoice with the retention of title clause” [a reference to the two invoices for the plant and machinery which had only recently produced by Mr Foster.] He did, however, know that a number of assets had purportedly been transferred, which is why he gave the warning I have mentioned.” In paragraph 21, the judge was critical of Mr Hardy for saying on the form consenting to his appointment that he had not had any prior professional relationship with Ulva, when he had advised Ulva both in January and July 2007. It made no difference that the latter advice was sought at the stage where the decision was taken to go down the administration route: it ought to have been disclosed. Even though Mr Coyne had not had a like prior professional relationship, the judge was also critical of him for not referring to his firm’s prior relationship in the form that he signed. The judge then said, in paragraph 23:

“In those circumstances I am bound to say that I can place only limited, if any, reliance upon the paragraph of the form which says ‘I am of the opinion that the purpose of administration is likely to be achieved’ because the care and attention paid to the filling in of this form seems to me to be slight, to put it at its highest.”

The judge then referred to Mr Hardy’s absence on holiday until 21 August during which time nothing other than the collection of some books and records on 20 August seems to have happened. He referred to the meeting with Mr Foster on 23 August, which I have summarised. He said the proposed application before Judge Alton was not pursued, “apparently because of doubts as to how far the Court might go at that early stage.” He said the only step taken thereafter by the administrators was to send members of staff to change the locks and secure Unit D. In the meantime, UI had carried on business there, as it continued to do. The judge said that was fine as far as it went, because it did preserve the business so that the administrators could claim it back, but that did not happen.

The judge referred next to the offers for the business that were invited on 24 August. He said that “In the light of the background discussions that had taken place that clearly was an invitation to make an offer for the assets including the assets to which [UI] might be claiming title. It seems to be predicated on the assumption that the assets would be coming back, as indeed had been threatened the day before.” He referred to Mr Foster’s offer as being for various assets including plant and machinery, the significance of it being that his offer clearly embraced items that had already been transferred “and therefore Mr Foster was approaching it on the basis that this would be the final piece in the [UI] jigsaw, perfecting his title to the assets it already had and also to any other assets that might be worth acquiring.” He also said that it was plain from the correspondence that Mr Foster’s and UI’s approach all along was that any offer they put forward would, once accepted, cure the past. I record that that can only have been a reference to the recent correspondence of 21 September. The judge said that the administrators at no stage said in writing that they would preserve claims for assets that had been wrongly taken out of the company; and the judge observed that it was difficult to see how they could do so in relation to the transfer of the plant and machinery on the terms of a retention of title clause, although of course they had only just seen the invoices including such a provision. The judge had earlier accepted that Mr Hardy had given Mr Foster a pre-administration warning that he would investigate all the transactions that had taken place.

The judge referred to the DRC offer, saying in paragraph 30:

“The offer it made really did not get anywhere for the simple reason that they were wholly unclear as to what assets they were able to buy. Of course it is quite common for administrators to sell only such title and right to assets as they have, but that is in a rather different situation where it is known that there might be for example ROT clauses, or hire purchase arrangements, something of that nature, and where moreover the purchaser may have an opportunity to investigate the matter. But here where [UI] was set up and running, and no attempt was in fact made by the administrators to get the assets back for the purpose of the sale, the practical result was, as must have been self-evident (and indeed was evident to the administrators because we see what their attitude was at the meeting of 23^rd August) that there was inevitably only one person in the market for these assets and that was Mr Foster and [UI] who could pick the assets up for whatever they chose to offer, as long as the administrators were still able to persuade themselves, as Mr Hardy says they had, that this would produce a better result that a liquidation.”

In paragraph 31 the judge added to this that Mr Hardy had so persuaded himself on the basis that the liquidator could always come in and mop up some more; but he said that “of course that was not the way Mr Foster was approaching it.” He was working on the basis that any sale to him would cure the antecedent transactions.

Having reviewed the case thus far, the judge said (in paragraphs 33 and 34) that, but for the earlier order he had made, he would have been sufficiently satisfied that Mr Foster had been motivated by an improper motive in appointing the administrators to cause him to exercise the jurisdiction under paragraph 81 of Schedule B1 to remove the administrators and bring the administration to an end. He would have done so despite the administrators’ claimed conviction that the path they proposed was likely to achieve a better result for creditors as a whole. Against that had to be weighed the fact that any sale to Mr Foster would have enabled him to achieve his purpose in the face of section 216 of the Insolvency Act 1986 (a section limiting the right of a director of a company that has gone into insolvent liquidation to act as a director of a company with a “prohibited name”); and whilst the judge recognised that Mr Foster was probably unaware of that provision, his view was that the court ought not to countenance behaviour of that sort. In his view, this was a case in which “[t]he proper course always was for the company to go into insolvent liquidation. It would then be for Mr Foster (if so advised) to make such application as he considered to be appropriate under the provisions of the Insolvency Act for the leave of the Court to use a prohibited name.”

The judge said that anyway the evidence now showed, and it was conceded, that the purpose of administration could not be achieved; and in his judgment it never could have been achieved unless the administrators had taken steps to recover the assets, including the trade marks upon which the Ulva brand was dependent. Otherwise it could only have been achieved if there had been “an overwhelmingly good offer” from Mr Foster. But the only offer he had made was one that depended on the abandonment of existing claims against him, which the administrators had rightly recognised was not acceptable. That was something, the judge said, that the administrators ought to have made “crystal clear” to Mr Foster at the outset, and before they formed any opinion that the purpose of administration could be achieved. Having said that, the judge said this in paragraph 36 and then expressed his conclusions in paragraphs 37 and 38 as follows:

“36.

True it is they warned Mr Foster that past conduct would be looked at but at no stage until the last week was it ever spelt out by the administrators that any deal they did would leave any complaints in relation to antecedent transactions entirely open. In my judgment, the administrators have behaved very sloppily in that respect and have not adhered to the standards of competency that one is entitled to expect from people who take these appointments as officers of the court, or indeed as serious professional insolvency practitioners.

37.

In these circumstances I find that the application that was before me and in respect of which I have to decide the costs issues, was properly founded and would have succeeded. That is on paragraph 1 alone. So far as the other paragraphs are concerned, I would have removed the administrators had I needed to act under paragraph 88 on the basis that the purpose of administration was unlikely to be achieved, and on the basis that the administrators did, in my judgment, fail to take the steps they should have taken and which they themselves threatened they would take before offering the company for sale. They did not act expeditiously and with the robustness of purpose that one would have hoped for and which one is entitled to expect. Moreover, they must, had they thought about it properly, have concluded that the administration purpose was unlikely to be achieved so long as past transactions remained unscrambled. The decision was taken on 23^rd August not to seek interlocutory relief. Yet the next day they sought offers while making no attempt to unscramble past transactions. I take on board the caveat that one must be careful about hindsight, and I should proceed cautiously in this area, not least because of the impact of any removal on the administrators’ professional standing. Nevertheless, administrators are highly qualified and respected professionals and, whilst their honesty is not in question – and I certainly do not question their honesty – the exercise of their functions comes at a cost, and one is entitled to expect those who carry on business in the highly specialised field of insolvency to show conscientious and competent standards of behaviour. Here I regret that they have fallen short of that and so I would have acted, if necessary, under paragraph 88. Whether I would then have needed to act under paragraph 74 is doubtful but it seems to me that the terms would be engaged because the effect of completing the transaction with Mr Foster and [UI], which was threatened and which they might well have done without the cure issue ever being properly addressed, was potentially very harmful to the interests of all creditors, including the applicant. In the circumstances, as I would have removed them, I would not have needed to give directions beyond the directions I gave this morning to place the company in liquidation.

38.

As I have made findings in this case which, albeit as regards Mr Foster are on a strong prima facie case basis, and as against the administrators are without the benefit of cross-examination but nonetheless after an examination of their detailed explanations and attendance notes, I do not consider it right that the applicant should bear any part of the costs of these proceedings as one of the substantial creditors, which in all probability they are, depending of course upon what the judgment sum is ultimately qualified at. Any order that the costs come out of the administration would mean that to a substantial extent they come out of the applicant’s pocket. The applicant had to come to Court to prevent the proposed sale to [UI], and succeeded in its objective. In my judgment this is a proper case in the light of my findings for the costs to be paid by the respondents jointly and severally on the standard basis.”

For the appellants, Mr Ashworth submitted that the judge fell into error at almost every point and arrived at an indefensible decision. Once the administrators had determined by 21 September that it was no longer possible to achieve the purpose of administration, they made (as the judge accepted) a proper application pursuant to paragraph 79(2)(a) of Schedule B1 for the termination of their appointment, and the judge made the order sought. That had the consequence of removing the need for DRC to press for the substantive relief sought on its own application. It did not, however, resolve the question of costs on DRC’s application, for which DRC did wish to press. Mr Ashworth’s stance on that was that the judge was faced with a choice between two alternatives. First, he could simply have said that, now that the administration was at an end, DRC’s application could be disposed of on the basis that there would be no order as to costs (the effect of that would have been that DRC would have borne its own costs, and the administrators’ costs would have come out of Ulva’s assets, with the consequential reduction in the dividend ultimately payable to the creditors, including DRC). Alternatively, if the question of costs was to be argued, it could only fairly be argued after hearing oral evidence, in particular from Mr Hardy. This was a case in which there were at least some conflicts of fact on the witness statements, which could not be resolved without such evidence. Moreover, Mr Ashworth submitted that the judge’s judgment shows how he had been apparently been influenced about matters that he said Mr Hardy had been given no opportunity to explain. He said this showed the unfairness of the summary procedure that the judge chose to adopt. The end result was, as regards costs, the worst possible result for the administrators, one arrived at after an unfair, summary process.

As regards the need for oral evidence, Mr Ashworth reminded us that it is well-settled practice that if a court finds itself faced with conflicting statements on affidavit evidence, it is usually in no position to resolve them, and to make findings as to the disputed facts, without first having the benefit of the cross-examination of the witnesses. Nor will it ordinarily attempt to do so. The basic principle is that, until there has been such cross-examination, it is ordinarily not possible for the court to disbelieve the word of the witness in his affidavit and it will not do so. This is not an inflexible principle: it may in certain circumstances be open to the court to reject an untested piece of such evidence on the basis that it is manifestly incredible, either because it is inherently so or because it is shown to be so by other facts that are admitted or by reliable documents. Mr Ashworth referred us in support to Re Hopes (Heathrow) Ltd, Secretary of State for Trade and Industry v. Dyer and others [2001] 1 BCLC 575, at 581 to 582 (Neuberger J). He also referred us to paragraphs 17 and 18 of the judgment of Mummery LJ in Doncaster Pharmaceuticals Group Ltd and Others v. The Bolton Pharmaceutical Company 100 Ltd [2006] EWCA Civ 661, which provides a reminder of the caution the court should exercise in granting summary judgment in cases in which there are conflicts of fact which have to be resolved before judgment can be given. Mr Ashworth said that these principles apply equally to the case in which the evidence is given by witness statement rather than by affidavit, and I agree. I said as much in my summary of the principles in Long v. Farrer & Co and Farrer [2004] EWHC 1774 (Ch); [2004] BPIR 1218, at paragraphs 57 to 61.

Mr Ashworth also emphasised that an adverse costs order against the administrators following the delivery of a critical judgment against them would inevitably reflect upon their professional competence and reputation, and he said this too was a consideration that pointed to their right to explain themselves orally before they were condemned. He referred us to a passage supporting this in the judgment of Warner J in Turner v. Fenton and Others [1982] 1 WLR 52, at 64; and, for more recent support, to Wrexham Association Football Club Ltd. v. Crucialmove Ltd [2006] EWCA Civ 237, in which the President of the Queen’s Bench Division said, at paragraph 57:

“I do not underestimate the importance of a finding adverse to the integrity to one of the parties. In itself, the risk of such a finding may provide a compelling reason for allowing a case to proceed to full oral hearing, notwithstanding the apparent strength of the claim on paper, and the confident expectation, based on the papers, that the apparently overwhelming cases of fraud and dishonesty somehow inexplicably disintegrate. In short, oral testimony may show that some such cases are only tissue paper strong. As Lord Steyn observed in Medcalf v. Weatherill [2003] 1 AC 120, at paragraph 42, when considering wasted costs orders:

‘The law reports are replete with cases which were thought to be hopeless before investigation but were decided the other way after the Court had allowed the matter to be tried.”

Turning to the judge’s judgment, Mr Ashworth criticised it in several respects. He referred first to the penultimate sentence of paragraph 38, which I have quoted. He said it reflected an error that also underlay DRC’s argument. DRC had not “succeeded in its objective” of preventing the proposed sale to UI. The sale had been abandoned not because of a successful application by DRC, but because the negotiations between the administrators and Mr Foster had come to an end. Had they still been alive on 25 September, the picture before the judge would or might have been very different. The events as they in fact happened did not represent any volte face by the administrators, any folding of their tent or any throwing in of their towel.

Turning to the earlier parts of the judgment, Mr Ashworth said the judge’s remark in paragraph 18 that Mr Hardy was persuaded that the statutory purpose could be achieved reflected an unfair assessment of Mr Hardy’s actual view on the point. The points made by the judge in paragraphs 20 to 23 in criticism of the forms of consent that the administrators signed were unjustified and unfair. The judge’s conclusion in paragraph 23 that he could only place “limited, if any, reliance” on the paragraph in it as to the administrators’ opinion as to the likelihood of the purpose of administration being achieved was particularly so. No such point had been taken in argument in relation to that statement and, if the administrators were to be criticised on this basis, they ought to have been forewarned and given the chance to answer it. Mr Ashworth made a like point on the judge’s comment in relation to Mr Hardy’s unanswered question in his attendance note of 23 July of “what is the statutory purpose?” The note had been exhibited to Mr Walker’s evidence in reply.

Mr Ashworth also criticised the judge for making the point he did in reference to section 216 of the Insolvency Act 1986, one that was raised only by the judge himself and (so far as Mr Ashworth could recall) hardly discussed, if at all, in argument. Mr Ashworth further criticised the judge for saying that it was not until 21 September that the administrators had “spelt out” to Mr Foster that they were keeping their rights open as regards antecedent transactions. The judge had earlier accepted that the administrators had given Mr Foster a warning as to that at the outset. Mr Ashworth criticised the judge’s remark in paragraph 37 to the effect that “had [the administrators] thought about it properly” they must have concluded that the purpose of administration could not be achieved without first unscrambling the prior transactions. He said the judge was there saying that they had not thought about it properly, a point echoing a like comment in paragraph 35, where the judge referred to the forming by the administrators “insofar as they ever did” of a view that the administration purpose was likely to be achieved. On what were these remarks based? Why was Mr Hardy not given the chance to explain that he had thought about it properly? Mr Ashworth emphasised that the administrators’ duty was to achieve a better realisation for creditors than would have been achieved had Ulva been wound up. Their belief was that they were negotiating a deal with UI that would achieve that. For reasons given, that deal collapsed. But that was their view. The fact that they might, with hindsight, have handled matters differently did not justify the judge’s conclusion. The judge could, and should, have stopped with his finding that Mr Foster had procured the administration for an improper motive and could, and should, have made an order that he alone should pay DRC’s costs. As there was no suggestion of any collusion between Mr Foster and the administrators, he could also have ordered him to pay the administrators’ costs.

Mr Alexander, for DRC, submitted that there was nothing unusual in the judge’s decision to determine the question of costs in circumstances in which, in the events that had happened, DRC could no longer pursue its substantive claim. He referred to this court’s decision in Brawley v. Marczynski and another (Nos 1 and 2) [2002] EWCA Civ 756; [2002] EWCA Civ 1453; [2003] 1 WLR 813. That affirmed that where litigation has been settled save as to costs, there was no convention that there should be no order as to costs. In paragraph 18 of his judgment, Longmore LJ referred to this court’s decision in R v. Holderness Borough Council, Ex p James Robert Developments Ltd (1992) 66 P & CR 46. Butler Sloss LJ and Simon Brown LJ there made observations to the effect that an outstanding issue of costs may alone keep the litigation alive and have to be resolved by the court, with the former saying (at 56 to 57) that “[t]he court is not in a position to assess the correct costs order without an evaluation of the prospects of success had the application for judicial review been heard and determined”; and the latter saying (at 52) that the determination of the question of costs did not require the litigation of the substantive issues, it required “an altogether broader approach ….” That was the approach that had been adopted by Laddie J in the case under appeal in Brawley, one which the court upheld. In paragraph 21 Longmore LJ cited with approval the principles earlier set out by Scott Baker J in R (Boxall) v. Waltham Forest London Borough Council (unreported), 21 December 2000. Those principles are:

“(i)

The court has power to make a costs order when the substantive proceedings have been resolved without a trial but the parties have not agreed about costs. (ii) It will ordinarily be irrelevant that the claimant is legally aided. (iii) The overriding objective is to do justice between the parties without incurring unnecessary court time and consequently additional cost. (iv) At each end of the spectrum there will be cases where it is obvious which side would have won had the substantive issues been fought to a conclusion. In between, the position will, in differing degrees, be less clear. How far the court will be prepared to look into the previously unresolved substantive issues will depend on the circumstances of the particular case, not least the amount of costs at stake and the conduct of the parties. (v) In the absence of a good reason to make any other order the fall back is to make no order as to costs. (vi) The court should take care to ensure that it does not discourage parties from settling judicial review proceedings for example by a local authority making a concession at an early stage.”

In the present case, therefore, Mr Alexander submitted that Judge Purle was not only entitled, but required, to embark upon a determination as to the fair costs order to make, and he cannot be criticised for doing so in the essentially summary way he did. In particular, he cannot be criticised for not directing what would, in effect, have been a trial of the substantive issues by directing the adducing of oral evidence and cross-examination. Reported examples of the court embarking summarily upon costs issues alone once the substantive issue had disappeared are Re AMF International Ltd, Chontow v. Elles [1995] 2 BCLC 529 (Ferris J); and Shepheard v. Lamey [2001] BPIR 939 (Jacob J).

Mr Alexander then submitted that, having correctly embarked upon a relatively summary inquiry as to what order as to costs he should make, the judge concluded in paragraph 37 that DRC’s application under paragraph 88 of Schedule B1 for the removal of the administrators would have succeeded. His essential reasoning for that was, or included, that the administrators had failed to act with the expedition, robustness of purpose and competence that was reasonably to be expected of them and the judge explained in paragraph 37 why he had arrived at that view. That conclusion as to their conduct of the administration amounted to sufficient cause to remove them, and Mr Alexander referred us to Warren J’s decision in Sisu Capital Fund Limited v. Tucker [2005] EWHC 2170 (Ch); [2005] EWHC 2321; [2006] BPIR 154, at paragraphs 82 to 90, in which the judge referred to the guidance in the authorities as to the considerations that will amount to such cause. In particular, Warren J cited from AMP Music Box Enterprises Ltd v. Hoffman [2002] EWHC 1989 (Ch); [2003] BPIR 11, in which Neuberger J said at paragraph 23:

“In an application such as this, the court may have to carry out a difficult balancing exercise. On the one hand the court expects any liquidator, whether in a compulsory winding-up or a voluntary winding-up, to be efficient and vigorous and unbiased in his conduct of the liquidation, and it should have no hesitation in removing a liquidator if satisfied that he has failed to live up to those standards at least unless it can be reasonable confident that he will live up to those requirements in the future.”

Like principles must apply to the removal of an administrator.

Mr Alexander submitted that in this case the judge’s view that the administrators had not acted with the efficiency and vigour properly to be expected of them was fully justified and was apparent from the undisputed evidence. What was obvious was that the wheels came off the administration on 23 August when Mr Hardy decided not to take any steps towards recovering the assets from Mr Foster and UI. Mr Alexander said that getting in Ulva’s assets was their primary duty but it is one which, having initially said they would perform, they then chose not to. They nevertheless then invited offers from DRC for a business and assets that they could not deliver, and in effect limited the market to one bidder. For practical purposes, when the title problems became apparent in early September there was never any question of a deal with DRC and the deal with UI ultimately collapsed. The gravamen of the complaint against the administrators is that they had sealed their own eventual fate on 23 August by deciding not to press Mr Foster and UI for the return of the assets so that they could enable a sale to take place on a level playing field for the benefit of the creditors. That was an indefensible, and inexplicable, stance that justified the judge in concluding that he could and would have removed them as administrators.

All that being so, the costs order the judge made was properly within the discretionary range open to him in accordance with the guidance provided by CPR Part 44.3. Mr Alexander reminded us that this court should not interfere with, or be prepared to review, his order unless it could be shown that the judge had erred in principle in his approach, or had either left out of account, or taken into account, some feature he should or should not have considered. Those principles are familiar, but Mr Alexander referred us by way of express, relatively recent, support for them to Adamson v. Halifax plc [2002] EWCA 1134; [2003] 1 WLR 60, in particular to paragraph 16 of the judgment of Sir Murray Stuart-Smith.

As for Mr Ashworth’s point that the judge could not fairly have arrived at the conclusion he did without cross-examination, Mr Alexander said there was nothing in it. The factual conflicts were minimal or collateral and did not require to be resolved in order to make a fair determination of the costs issue. The case against the administrators was apparent from the documents and their own evidence. As regards the purpose of administration and the likelihood as to its being achieved, Mr Hardy had every opportunity of explaining in his witness statements as to why an administration was appropriate and he had sought to do so. The course of events during the relatively brief history of the administration was clear, essentially undisputed and there for all to see on the face of the administrators’ own evidence and on the documents before the court. A consideration of that evidence justified the judge in making the order.

I accept Mr Alexander’s submission that, although the administrators’ successful application to Judge Purle had the consequence of removing the substantive basis of DRC’s application, DRC was still entitled to ask the court to rule on its application for costs against Mr Foster and the administrators. This is shown by the Brawley case, which also shows that the administrators had no right to insist that, before deciding the costs question, the judge should hear oral evidence from, and cross-examination of, the witnesses. He was in principle entitled to embark on an assessment of the incidence of costs in a more summary way than Mr Ashworth submitted. He was not required to adopt the sort of procedure that might perhaps have been appropriate if he had been deciding the substantive issues in DRC’s application. The judge had read the evidence and heard full argument from counsel; and his conclusion was that all he had read and heard pointed to the conclusion that he should make the costs order he did.

By way of a statement of the obvious, I add that it does not follow that in every case in which a judge embarks upon a summary determination of a “costs only” issue it will always be appropriate for him to conclude that he should make what might be called a hostile order. All cases will fall somewhere within the spectrum identified by Scott Baker J in the Waltham Forest case. In some cases it will be obvious that a costs order of some nature ought fairly to be made against a party; or perhaps against more than one party. In other cases it may be clear that the fair order to make will be no order. In yet others it may be apparent that the unresolved factual disputes between the parties that would have been the subject of investigation at the trial are such that it is impossible to make a safe summary assessment that either or any party should be ordered to pay costs to another. In such a case the court may consider that all it can fairly do will be to make no order. But it does not follow that the court would be compelled to do so. If, for example, the costs in question are very considerable, and the court were to conclude that it would be accordingly proportionate to direct oral evidence on such factual issues as would enable it to resolve the costs issues, it might regard it as consistent with the overriding objective to give an appropriate direction. But the adoption of such a course is likely to be exceptional.

In the present case, the judge appears to have had no doubts about the position. The heart of his decision is in paragraph 37, where he summarised why he would have removed the administrators and why he made the costs order. I say straight away that I am satisfied that those considerations properly justified him in concluding that, had the substantive issues on DRC’s application remained alive, he could and would have removed the administrators under paragraph 88 of Schedule B1; and I am also satisfied that they justified him in making the costs order he did. Whatever one’s view as to whether the administrators should have accepted the appointment in the first place, it appears to me obvious that, in the circumstances in which they found themselves by 23 August, they should not have entertained any thought of an attempted sale of the business and assets at that stage. They should instead first have focused exclusively on the recovery from Mr Foster and UI of the entirety of Ulva’s business and assets. Only then would they be in a position to invite offers from interested parties on a level playing field and to deliver the business and assets to the winning bidder. Before then they could at most hope to do a deal with Mr Foster; but if they were to attempt to treat with him alone they also needed (a) to ascertain from him exactly what it was that UI was offering to buy and at what price (it had, after all, already purportedly acquired the plant, machinery, trade marks and employees and was now carrying on the business); and (b) subject to that, to spell out what claims they would in any event be pursuing personally against Mr Foster and/or UI in respect of the antecedent transactions. In my view the latter part of that did need to be spelt out expressly and in writing so that Mr Foster knew exactly where he stood. As for the administrators’ invitation to DRC to make an offer for the assets and business, that had, with respect, an element of farce about it. They were asking DRC to bid for a business and assets that they could not deliver and it is no surprise that discussions with DRC promptly fizzled out. The judge was, in my judgment, entitled to conclude that the administrators’ decision on 23 August with regard to the recovery of Ulva’s assets represented a fatal wrong turn in the administration that they never attempted to correct.

With rather more reservation, I consider that he was also entitled to conclude that, without an unscrambling of the transactions, the purpose of the administration could not be achieved, and nor was it. That was not an exercise of judgment based on hindsight. The administrators were attempting to negotiate with someone, Mr Foster, whom they knew to be bereft of the basic instincts of commercial morality. He was not to be trusted. If they were disposed to deal with such a man, they should, as I have said, at least have had the commercial foresight and prudence to spell out to him in writing the basis on which they might consider dealing with him and the extent to which they would anyway wish to pursue claims against him. In the event, it ultimately turned out that they had apparently been negotiating at cross-purposes; but the administrators should not have allowed that situation to arise. Although they also had a serious, interested, purchaser in DRC, they were not in practice able to deal with DRC because they had nothing to sell it and chose to do nothing to achieve a position in which they could deal with DRC. Mr Hardy himself admitted that the DRC offer was perhaps not as good as it might have been because of the title uncertainties. The administrators’ conduct of this administration as from 23 August had the potential for disaster written all over it; and disaster is what happened. Their own application before Judge Purle was based on their assertion that the purpose of the administration could not be achieved. The appointment had therefore proved to be a fundamental mistake, the administrators having failed to take the elementary steps which ought to have been taken in an attempt to make it a success. As the judge said, they “did not act expeditiously and with the robustness of purpose that one would have hoped for and which one is entitled to expect.” That conclusion was one that he was entitled to arrive at, and it justified the costs order he made.

As regards Mr Ashworth’s criticisms of the judge’s judgment, I do not regard any of them as undermining the integrity of his decision. As for the point that the judge’s comment in the penultimate sentence of paragraph 38 reflected a fallacious misunderstanding that the administrators had thrown the towel in, I have no doubt that the judge had forgotten nothing of the detail of what had happened. That was that, during their flurry of activity between 17 and 24 September and following the breakdown of the negotiations with Mr Foster, the administrators had applied for, and on the morning of 25 September obtained, the termination of their appointment. The judge cannot be read in paragraph 38 as reflecting that DRC’s application had directly achieved that result, since in paragraph 37 he had just given his reasons for his conclusion that DRC would have achieved that result had the matter been fought out. It may be that that is all he was saying again in paragraph 38, albeit that he did not put it quite in those terms. Alternatively, it may be that he was in fact taking the broader view that it was the issue of DRC’s application that had in fact led to the administrators’ own application on 25 September. One thing is, after all, plain: that is that, but for the DRC application, the administrators would not have been rushing around trying to tie things up with Mr Foster by midnight on 24 September.

As for Mr Ashworth’s other criticisms of the judge’s judgment, I have sympathy with certain of them. I consider the judge may have been less than charitable to Mr Hardy when he said in paragraph 18 that he was “persuaded” that the statutory purpose could be achieved. That appears to reflect the judge’s surprise about the formation of such a view. I have to say that I share that surprise, although I would not question that, at the outset, Mr Hardy formed a genuine view that the purpose could be achieved. Likewise, I consider that the judge was perhaps less than fair to the administrators in saying in paragraph 23 that he placed “limited, if any, reliance” on their opinions expressed in the consent forms. That point had not been taken in argument; and I also have reservations as to whether it was fair for the judge also to bring section 216 of the Insolvency Act 1986 into account, another point that he alone raised. But although I consider that in these, and also certain other, respects the judge was perhaps more critical of the administrators than they fairly deserved, I do not regard these elements of his judgment as undermining his ultimate decision. If the matter were before me to consider afresh, I would have arrived at the same decision on the question of costs as the judge did.

For these reasons, whilst recording my own indebtedness to Mr Ashworth for his able, sustained and comprehensive argument as to why the judge’s decision was wrong, I would dismiss the appeal.

I agree.

I also agree.