Ace Telecom Ltd, Re

There are two applications before me in respect of two companies, N2J Limited and Ace Telecom Limited (“the companies”) for an administration order. The applications are opposed by Hassan Khan & Co, the companies’ former solicitors, who are owed £68,000. They have issued winding up petitions in respect of both companies. They are supported in their opposition by a further firm of former solicitors of the companies who are owed some £38,000. The petitions have had a number of adjournments and are currently listed to be heard on 25^th July. Both parties agree that the two applications raise identical issues and can be deal with together.

There were a number of adjournments of the winding up petitions to enable discussions to take place. The petitioners complain that, after the last adjournment, the company went to fresh solicitors and issued the present application without warning. In my view, nothing turns on that, as the question I have to decide is on the evidence before me as to whether or not to make an administration order in respect of such company.

The grounds are set out in paragraph 3.1 of schedule B1 to the 1986 Act, namely that the administrator of a company must perform his function with the objective of (a) rescuing the company as a going concern; or (b) achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up without first being in administration. Objective (c) does not apply.

Both applications are supported by witness statements of Mr Neil Purcell and Mr Anthony Hyams. The former of those is a director of each of the companies and Mr Hyams is one of the proposed administrators. The evidence in opposition is that of a witness statement by Brenda Harris.

Mr Winfield, who appears for the companies, submits that the threshold on the evidence is that I must be satisfied that it is more probable than not that the company is unable to pay its debts and that there is a real prospect that the administration’s purpose can be achieved, referring me to the case of AA Mutual Insurance Co Limited [2005] BCLC 8 at paragraph 21 per Lewison J. There is no doubt about the first point as each company admits it is unable to pay its debt.

I should say something about the companies. Both of them trade in the market of the import and sale of mobile phones and related products. They operate in what is called the grey market. This involves an import of a large volume of mobile phones and a quick sale on for a modest profit. That is shown by the latest accounts to 12^th May 2006. If one takes N2J Limited for example, it had sales of £44,143,494.50 against purchases of £42,144,309.70, yielding a net profit on the turnover of the telephones of £1,932,863.58. The balance sheet as at the same date shows that it has debtors of £23,606,670.23, a VAT refund of £2,893,480.29, but creditors of £25,123,754.06, giving a net assets position of £1,332,863.58. Neither company has traded since February of this year. Each company’s solvency, as can be shown from that snapshot balance sheet, depends entirely on obtaining the large VAT figure which each company contends is due to it as a refund.

It is proposed to trade each company for a year. It envisaged that that trading will generate profits of £40,000, out of that it is proposed that the administrators will take fees of £27,500, leaving profits available for the objectives referred to above, of £12,500 for each company. That is based on a cash flow forecast appended to Mr Hyams' witness statement. As Mr Shivji pointed out (he appears for the petitioning creditors) there are a number of matters about that cash flow projection which are concerning. First, it is proposed that the company will spend £15,840,000 on buying telephones to sell them on for £16,500,000. The trading therefore will involve the company recommencing trade and incurring large potential creditor liability. The figures for themselves make no provision for payment of tax and national insurance. Third, the cash flow projection envisages that from August the directors would take £28,250 per month.

The figures are based on a gross profit margin of 4 per cent. There is evidence which shows that the gross profit margin could go down to 3 per cent, but equally there is evidence which shows it could go up to 5 per cent. None of these figures, in my view, will create a better return for creditors in an administration as opposed to a winding up, whether voluntary or compulsory for the creditors, nor will it enable the company business to be rescued by the trading. The trading simply is not going to generate enough income to pay any of the creditors as exist at the moment.

Further, there is in my view a serious risk, given the narrow margins that the failure of any debtor to pay on time, or any unforeseen expenditure, will mean that the trading will not make the modest profits envisaged and might make losses at the expense of the present creditors. One example for that is the cost of recovering the VAT funds which I shall refer to further in this judgment.

As I said, the only realistic way of saving each company is by obtaining repayment of the VAT sums which the companies contend are due to them. This involves a two stage questioning process. First, is there credible testimony that the company has a real prospect of recovering the VAT payment? That is the test because that is the test that is required to be satisfied that the administration proposals will succeed, and second, even if the VAT repayment is recoverable, is it more likely to be recoverable on an administration as opposed to a winding up in the sense that will it achieve a better return for the creditors as a whole.

There is no doubt that the repayment, if repayable, will be payable by HMRC whether the company is in administration or in liquidation. I have to assess the position on the evidence before me at this stage. In my view, when one analyses the evidence, it cannot be said that there is any credible prospect that any of these funds is recoverable. HMRC has disallowed the refunds on the grounds that the companies were taking part in fraudulent evasion of VAT. That is part of the missing trader schemes with which these courts are familiar. When HMRC disallows the refund, it is up to the company to challenge that in the VAT tribunal. The total amount disallowed, according to page 188 of the bundle, appears to be as much as £33 million. I have had evidence that there is one appeal before a tribunal. It might be that that is being used as a lead case on the assumption that, if there is a success on that, all the others will follow, but I simply do not know. Mr Winfield told me on instructions that that hearing was part heard, possibly from February or March. It looks like that it has been adjourned to early September, based on a letter from Dass Solicitors, who are the solicitors retained by the companies to prosecute their appeal.

Whilst HMRC has indicated in correspondence that it will repay some of the freighting VAT elements, and indeed has paid some of those, they are relatively modest amounts. The evidence before me does not lead me to conclude that there is any real prospect at this stage of the companies recovering successfully the VAT payment. If that is the correct conclusion, then neither ground for making an administration order can possibly succeed.

Second Mr Shivji submits also that, even if I am wrong in that, there is at the second stage no evidence to show that the administration will achieve a better result for creditors as opposed to liquidation. Mr Winfield does not point to any other benefit than the possibility of a charge of £100,000 that will be payable if the VAT refund is made when the company is compulsorily wound up. As I understand it, when there is a repayment, this charge applies on a compulsory winding up at 17.5 per cent of the refund, up to £100,000. It follows, therefore, in rough terms if the refund is £500,000 or more, the £100,000 ceiling will be triggered.

That can be avoided if there is an administration order, and it can be avoided if there is a voluntary winding up. Mr Shivji submits that, therefore, as it can be saved on a voluntary winding up, this saving is not relevant for the purposes of using it to conclude that there will be a better result for the creditors as a whole.

He also submits that there are questions over a number of payments made to the directors in the last twelve months of bonuses and remuneration. These amount to £1.8 million. Those are large sums and he submits that, in exercising my discretion, I should refuse to make an order because those are matters which the Official Receiver should investigate. He was not suggesting that the proposed administrators would not investigate the matter if an administration order was made. Given that concession, it seems to me this point is irrelevant. I have no evidence to show that the administrators will not discharge their duties properly if they are appointed as office holders, whether as administrators or liquidators. The powers of investigation and duties of investigation are the same, whether the office holder is the official receiver or a liquidator or an administrator. The sanctions that creditors can seek if any officer holder fails to discharge their duties are identical.

In my view, Mr Shivji is simply suggesting there ought to be an aura of independence when in fact there is no evidence to show that either proposed administrator will not properly discharge their functions (a) in investigating the affairs of the company as they are required to do; and (b) responding to any representations a creditor might make to them about the need to investigate. Therefore, I reject that as a factor which I should take into account in whether or not to make an administration order. I will say something further about that, about where the affairs of the company proceed.

Mr Winfield produced evidence today which shows that Ace Telecom had been trading in the last few months through a subsidiary. Mr Shivji did not object to this late production of documents, but in reality it does not help the companies’ application because it shows, contrary to the evidence put forward by the company, that traders will deal with an entity other than these two particular companies.

My conclusions, therefore, are as follows. There is no credible evidence that either of the proposed objectives can be achieved. The VAT refund is likely to be contested, and I can see no clear evidence which shows that there is any realistic prospect of either company receiving those refunds. I note that the directors offered to fund the administration, including the recovery, but the funding proposal is weak. First, as Mr Shivji points out, it is not a binding commitment; it is merely a statement in a witness statement. Second, there has been no evaluation of the ability of the directors to fund and no evaluation of the likely costs of that exercise. However, if the matter is going to be contested with HMRC, it is likely to be a costly exercise. It is also, given the fact that any hearing before the tribunal in September might be delayed while a judgment is delivered and further delayed if there are appeals, that any contested VAT repayment is likely to stretch into months if not years. Therefore, absent any realistic proposals which show that that refund is available, it seems to me it would be quite wrong to embark on the trading of the company, because I can see neither objective capable of being successful.

In my view, the best way forward is for the companies to go into liquidation and its two major assets realised. Those assets are the trade debtors and the VAT refund. I do not see that the company needs to be in administration to recover either of those assets. It is a matter of recovering past liabilities and it is quite capable of being done in liquidation as opposed to administration.

In my view, given the stance of the petitioning creditors, Mr Winfield’s submission about the £100,000 is correct, because Mr Shivji is, when I dismissed the applications, going to seek an immediate winding up order. If not, he is certainly going to seek to preserve the winding up petitions which are listed for 25^th July. Therefore, given the realities that the alternatives are either administration or compulsory winding up, the administration will achieve £100,000 more than a compulsory liquidation. The parties can, however, address that. It can be addressed by the companies going into voluntary as opposed to compulsory liquidation. That is, of course, a matter for first, the members and second for the creditors. There will have to be meetings for those. I would have thought that, if the creditors approached the matter from a commercial point of view, there is merit in the proposed administrators being appointed liquidators on a voluntary liquidation.

However, that is merely a thought from the Bench. It is nothing more than that and I wish to make it quite clear that first there is no obligation on either the members or creditors to vote for a voluntary liquidation and there is no obligation as to the acceptance or rejection of any particular proposed administrator. If there is a voluntary liquidation before the hearing on 25^th July, then no doubt that will have to be canvassed if the petitioning creditors persist in their winding up petition.

We know regularly that that kind of petition is often used to try and remove a voluntary liquidator who is already in place because they do not like them, but I would expect that if the parties are sensible about this, subject to the creditors’ meeting, a way can be avoided whereby a compulsory liquidation takes place.

But for present purposes, all that is before me at this stage is an application in each company for an administration order, and I dismiss those applications.