Needwood Managed Services Ltd , Re (Rev 1)

Needwood Managed Services Limited (“the Company”) went into administration on 12^th September of this year. The appointment was made by its only director, Mr Michael Barry Stone (“Mr Stone”), who was also a shareholder. His wife Susan Stone (“Mrs Stone”) was the other shareholder and the company secretary. Mr Andrew Fender of Sanderlings LLP (“Mr Fender”) was appointed as administrator.

The Applicant, Norman ICT Limited (“Norman”) is a creditor of the Company claiming to be owed £102,017.82 excluding the costs of earlier proceedings between Norman and the Company. In those earlier proceedings, the Company applied to set aside a statutory demand. Norman undertook not to present a petition while the statutory demand was under challenge. The Company eventually abandoned its claim to set aside the statutory demand, but not until after Mr Fender had been appointed. The effect of the abortive attempt to set aside the statutory demand was, therefore, to prevent Norman from petitioning to wind the Company up. The intervening administration had the same effect. Norman felt that the Court’s procedures had been misused, and viewed Mr Fender (as the chosen appointee of the sole director) with suspicion.

The matter came before me in the following circumstances: a creditors’ meeting was convened by Mr Fender for 6^th November 2007 to consider his proposals. Norman had sought advance confirmation from the administrator that its debt would be admitted for voting purposes in full. This confirmation was not forthcoming and Norman feared that a sale at an undervalue to Mr and Mrs Stone would, following the meeting, be effected following the approval of the administrator’s proposals (and possibly the appointment of a creditors’ committee) based on the wrongful rejection of its proof and before its right of appeal could effectively be exercised. A series of undertakings were sought by Norman’s solicitors on Friday 2^nd November but were not offered in an acceptable form. An application was therefore made to me on very short notice on the morning of Monday 5^th November, seeking directions that Mr Fender should not (in summary) sell the company’s business or assets, dissolve the company or otherwise exit from administration, or settle claims against the shareholders, without (in any such case) the leave of the Court or the sanction of a properly constituted creditors’ committee, after first allowing for an appeal from any rejection of Norman’s proof to be heard.

There was insufficient Court time available for that application to be heard effectively on 5^th November, and the administrator needed time to put in evidence in any event. Mr Najib, who appeared for Mr Fender on that day, briefly submitted that it was inappropriate for me to give any directions. However, Mr Robins, who appeared for Norman, persuaded me that he had a sufficiently arguable case and I made an Order over a short period (until Thursday 8^th November) to the effect sought by Norman.

At the creditors’ meeting, Mr Fender accepted Norman’s proof in an amount sufficient for the proposals to be defeated. After the meeting, modified proposals (emanating from Norman) were considered by Mr Fender the effect of which was to replace Mr Fender with Norman’s choice of administrators, namely Mr Courtman and Mr Exley of Cooper Parry LLP. Mr Fender agreed with Norman that he would, in reporting the rejection of his proposals to the Court under paragraph 55 of Schedule B1 to the Insolvency Act 1986, request the Court to agree the modified proposals by way of Order under paragraph 55(2)(e) of Schedule B1. I duly approved the modified proposals at the hearing on 8^th November 2007.

The modified proposals also contained the following provisions:

“(b)

The liability for and payment of legal costs of [Mr Fender] and [Norman] of and incidental to the application by [Norman] shall be determined by the Judge unless otherwise agreed.

(c)

The remuneration of [Mr Fender] be fixed by reference to the time properly given by him and his staff in attending to matters arising during the Administration at the usual charge out rate applied from time to time for work of this nature, subject to the quantum being agreed with the replacement Administrator, save that he shall be entitled to no remuneration for his or his staff’s time spent in dealing with the application by [Norman] unless otherwise ordered by the Court.”

The costs and remuneration issues were not agreed, so, under the modified proposals approved under paragraph 55(2)(e) of Schedule B1, it falls for me to determine those issues.

Costs ordinarily follow the event, but in this case the event was never put to the test as the creditors’ meeting resolved matters in a way which made the directions sought no longer appropriate. It does not follow from this that the directions were inappropriate when sought.

Norman contends that its application was necessary to protect its interests because of the conduct (actual and threatened) of Mr Fender. Accordingly, Mr Fender should pay their costs and be disallowed his own.

Norman’s application was based upon its perception that Mr Fender was determined to effect a sale at an undervalue to Mr and Mrs Stone. There is no doubt that Mr Fender saw the shareholders as likely buyers, as indeed they were. Moreover, the Company’s business was significantly dependent on one customer who was likely to take its business away if Mr and Mrs Stones and another key employee were no longer involved. That made it a real possibility that Mr and Mrs Stones (or a new company established by them) would be the only buyer. In the events which happened, they were the only party to make an offer during Mr Fender’s period of office.

Norman’s suspicions were increased by the events of the administration: As I have mentioned, Mr Fender declined (though asked) to confirm that the Applicant’s claimed indebtedness would be recognised in the administration in the full amount. Moreover, his solicitors intimated that they would advise him to admit Norman’s indebtedness for voting purposes only in the sum of £3,000 (being the lowest amount which, on the Company’s abandoned case, would arguably have been appropriate). The significance of this stance was that admitted unconnected debts amounted to no more than approximately £25,000, so that Norman’s debt, if admitted in anything approaching its claimed amount, would have been more than enough to ensure that any proposals submitted by Mr Fender to the creditors for approval would be defeated.

Mr Fender’s report and proposals to creditors in accordance with paragraph 49 to Schedule B1 of the Insolvency Act 1986 were circulated on 17^th October 2007, and a creditors’ meeting was convened (as I have said) for 6^th November 2007 at 11.30 am.

The report disclosed that during the course of the earlier proceedings between the Company and the Applicant, Mr Fender’s firm had been approached for advice. The report stated that Mr Fender gave advice as to how to deal with Norman’s claim and that Counsel advised, following a Consultation on 5^th September 2007, that the company was “at risk” and that his recommendation was to go into administration. Mr Fender’s firm was contacted again on the same day. Following further advice, an offer was made to Norman to pay £10,000 in full and final settlement. Following the refusal of that offer, the report recorded “…once again weoffered the £10,000 which was again refused” (emphasis supplied). The use of the word “we”, and indeed the tone of the report, suggested an identification of Mr Fender with the interests of the Company and Mr and Mrs Stone. A later passage in the report which merely records that the directors had rejected Norman’s claim, without further comment, likewise suggested (at least to Norman) an absence of true independence on Mr Fender’s part.

It also seems likely that the report, in saying merely that the company was “at risk”, understated the full purport of Counsel’s advice given on 5^th September 2007. Mrs Stone has stated in a witness statement in the earlier proceedings that the effect of Counsel’s advice was that “[the Company] owed [Norman] some of the debt”. She went on to say that “it was clear that [the Company] would have difficulty paying what it was advised it would beliable to pay” (emphasis supplied) and that this advice was immediately discussed with Mr Fender.

Neither Mrs Stone nor Mrs Fender reveal in terms precisely what the company was advised it was liable to pay, but it is clear that it was significantly more than the £3,000 referred to in paragraph 11 of this judgment, as that figure was reached on the basis of the company’s best case. Anything as promising as that was rejected by Counsel on 5^th September.

In those circumstances I consider that it was unacceptable of Mr Fender to allow his solicitors (who were not privy to the earlier advice) to advance the suggestion that the proof might only be admitted in the sum of £3,000. Insofar as he did not know of this suggestion before it was made, he ought to have instructed his solicitors to withdraw it as soon as it came to his attention. The suggestion never was withdrawn until the creditors’meeting itself, when Norman’s proof was admitted in full but marked as objected to. It was however emphasised by Mr Fender’s solicitors in the correspondence that the decision would (and according to them could only) be taken at the meeting itself.

Concern regarding Mr Fender’s position is increased by consideration of the Form 2.2B that he completed on his appointment. This contained the statement that Mr Fender had not had any prior professional relationship with the Company. This was incorrect. As his report to creditors confirmed, he had given advice in relation to the earlier litigation. Mr Najib for Mr Fender says that this was insolvency advice but I do not think that matters. The prior relationship should in my judgment have been disclosed. It is common for insolvency practitioners prior to their appointment to give general advice on how to proceed in an insolvency situation and that advice often leads to their appointment, whether as administrator or in some other capacity. There is nothing improper in that but the fact of the prior relationship does need to be disclosed. It may be relevant for the creditors or the Court to know this, especially if there is any suggestion of wrongdoing on the part of the directors in which the insolvency practitioner’s firm may wittingly or unwittingly have become involved.

Mr Najib argued that my approach to the completion of Form 2.2B means that an appointee would always have to disclose a prior relationship as the appointee has to satisfy himself (and declare in the same Form) that the administration purpose is reasonably likely to be achieved. This requires some prior contact with the Company, yet the same Form contemplates that the appointee may properly declare that he has not had any prior professional relationship with the company. I agree with Mr Najib that if the extent of the appointee’s prior involvement is merely to satisfy himself that the administration purpose can be achieved in response to an invitation to accept an appointment as administrator, that does not create a professional relationship requiring disclosure. The present case is clearly different, however, as Mr Fender’s firm was giving general advice (no doubt from an insolvency perspective) in relation to the earlier litigation.

Mr Robins for Norman contends that Mr Fender should never have accepted his appointment because of his prior connection with the earlier litigation. I do not agree. In my judgment, Mr Fender should have disclosed the prior relationship in the Form 2.2B, but I do not think this disqualified him from accepting the appointment. He did disclose the prior relationship in the report to creditors. Moreover, the application before me was not an application to remove Mr Fender from office; nor was it an application to determine the administration in favour of a winding-up. The only application before me was an application for directions, so the question of whether or not Mr Fender should have accepted the appointment is strictly irrelevant.

There are a number of other points which Mr Robins has directed my attention to in support of the contention that Mr Fender was acting in the interests of Mr and Mrs Stone. He complains of Mr Fender’s allegedly inadequate attempts to market the business. However, the assets were independently valued and Mr Fender advertised the business in the Financial Times. The interest shown was limited, which may not be surprising given the importance of the shareholders’ connection with the largest customer.

It is said that Mr Fender imposed an unreasonable deadline for offers, and that his stated reason for doing so (that the Company’s limited funds would be exhausted) did not stand up to serious examination. There may well be something in the point that there was no real need for a firm deadline, but that was really a matter for Mr Fender’s commercial judgment. He points out (correctly) that the deadline was made more acute in the case of Norman because of their delay (for which he was not responsible) of nearly 3 weeks in returning confidentiality undertakings, without which he was unwilling to release the sales information. Some but not all of that delay may have been attributable to postal difficulties. Be that as it may, the deadline point was irrelevant by the time the matter came before me, as Mr Fender had by then made it plain through his solicitors that he was open to an offer from Norman despite the expiry of the deadline.

Norman complained that it could not make an offer as it did not have sufficient information to enable it to make a proper judgment of the value of the business. It had asked for additional employee details which were withheld, both as to the identity of the persons whose connection with the main customer was said to be vital, and as to employment rights generally which might be transferred. Mr Fender accepts that he was cautious in releasing information as he doubted whether Norman was a genuine bidder and did not wish to risk any interference with the contract with the main customer. I do feel some unease that Mr Fender’s caution may have been influenced by his closeness to Mr and Mrs Stone. Nevertheless, the assessment of a potential bidder’s genuineness is pre-eminently a matter for the judgment of the administrator and it would be wrong for me to impose my own views, unless clearly satisfied that Mr Fender could not have taken the view he did.

Mr Fender also points out that included with his report to creditors was an abstract of receipts and payments including payments to employees from which Norman could have formed a reasonable idea of the likely liabilities it might be taking on in relation to employees. Further, as Norman had a long-standing relationship with the Company, it must have been obvious that the key contacts with the main customer would have included Mr and Mrs Stone. Whether that is so or not is not something I can decide, save to observe that if it was so obvious, I am surprised that it could not be stated openly. Moreover, there was another key employee whose identity is not said to be obvious.

Criticism is also directed towards Mr Fender on the grounds that he did not until late in the day verify with the main customer what he was being told by Mr and Mrs Stone about the likelihood of the business being lost if the key personnel did not remain. Now that it has been verified, the threat appears to relate to future, not existing, business. Mr Fender’s explanation is that he was cautious about approaching the customer, as the customer might become nervous. I find this a little strange, but again do not feel it right to impose my own views, as the matter must be one for commercial judgment.

Mr Robins contends that Mr Fender’s conduct gave rise to a reasonable suspicion that he was determined to force through his proposals and act on them in a manner which was likely to prejudice the Company’s creditors (which I take to mean selling the business at an undervalue, which was the constant complaint raised in the correspondence). I think this is putting matters too high. I do consider that Mr Fender’s conduct gave rise to a reasonable suspicion of partiality, but do not consider that the conclusion can justifiably be reached that he was proposing to sell at an undervalue, or that he was determined to force his proposals through in the face of creditors’ opposition.

Had Mr Fender wished to push ahead with a sale to Mr and Mrs Stones, he had power to do so in advance of a creditors’ meeting: ReTransbus International Ltd [2004] 1 W.L.R. 2654. He did not do so. Moreover, by the time the application was made, Mr Fender through his solicitors had offered undertakings that he would not sell the business until the matter was discussed at the creditors’meeting and even then would not complete a sale of the business without giving the Respondent 24 hours’ notice and not for less than a price which Norman considered to be proper.

These undertakings were in my judgment more than enough to protect Norman’s legitimate concerns. It is said that the 24 hours’ period of notice following the meeting was inadequate, as there would not have been enough time to get to Court in the 24 hour period. I do not agree. The correspondence on 2^nd November lasted until the evening. Norman was before me with a fully-prepared application on Monday morning. The fear was that Norman’s proof would not be admitted for voting purposes beyond the sum of £3,000. However, Norman provided on 2^nd November additional evidence, including Mrs Stone’s witness statement accepting that she was wrong to dispute the whole of the indebtedness. I have already stated that I think Mr Fender should have corrected his solicitor, so I understand Norman’s concerns. However, Mr Fender was not himself available on November 2^nd and he was going to have to approach the matter on the basis of the available evidence at the meeting, which included the additional evidence of Mrs Stone. Had he, in the light of that evidence, limited the proof for voting purposes to £3,000, it would have been relatively straightforward to demonstrate that Mr Fender was acting improperly, and the matter could have been brought before the Court immediately, if the 24 hour deadline remained solid.

However, that did not happen. Mr Fender admitted the proof for voting purposes and the future of the administration was resolved by the revised proposals that followed the meeting. There is of course a suspicion that it was only because of the pressure that Norman was bringing to bear, including the application it made, that Mr Fender drew back from acting in the threatened manner. That is however no more than a suspicion, and I do not think it is justified. Mr Fender had retained responsible solicitors, who were likely to advise him on the available evidence on the legal issues and he had offered undertakings which he did not need to offer.

Mr Robins relied upon Mr Fender’s failure to give simple undertakings in the terms sought as a reason for ordering Mr Fender to pay the costs of the application. I do not agree. The undertakings sought would have prevented Mr Fender from selling the business or assets, exiting the administration (including by dissolution) or settling claims against the shareholders without the Court’s or the creditors’approval. Mr Fender may well have chosen to seek such approval, but the scheme of the Act does not require it. The Court must be careful not to give a direction simply because the administrator has declined to give an undertaking, when nothing adverse is threatened. I have already stated my view that the application that was made to me was unnecessary because no sale was threatened ahead of the meeting. As regards dissolution and settlement of shareholder claims, nothing at all was threatened and an undertaking was properly refused on the grounds that an undertaking would fetter Mr Fender’s powers. Moreover, if the circumstances justifying a dissolution arose, Mr Fender would have been obliged to bring about a dissolution under paragraph 84 of Schedule B1.

Mr Robins complains that the undertaking not to sell for a price less than that which Norman considered to be proper was unsatisfactory as Norman, deprived as it was of essential information, could not specify a price, and the suggested undertaking was dependent on a value being given. Assuming for present purposes that Norman could not be expected to specify a value on the information it had, I reject this complaint. I do not think Norman was entitled to this undertaking, as I regard this also as an undue fetter on Mr Fender’s powers. Moreover, once this undertaking was offered, Norman could have asked again for more information if it really needed it.

In those circumstances, I accept Mr Najib’s submission that Norman’s application was misconceived. I should not have made even the temporary order I made on 5^th November. In reaching this conclusion, I have not overlooked the concerns that I have expressed over Mr Fender’s conduct, which gave rise to a reasonable suspicion of partiality. However, I do not think that reasonable suspicion would itself have been a reason for departing from the normal rule of leaving commercial decisions to the administrator, which is a recognised policy objective of the Insolvency legislation, and is if anything even stronger after the passage of the Enterprise Act 2002: see In re T. & D. Industries PLC [2000] 1 W.L.R. 646 and Re Transbus International Ltd (above).

Although presented as an application for directions, the application before me was in substance for an injunction. In considering whether to grant such relief, the Court considers whether damages is an adequate remedy. As the threatened conduct was said to be a sale at an undervalue, the creditors would have been protected by an award of damages if Norman could ultimately prove its case. The Order sought by Norman, in requiring creditors’ approval, would have had the practical effect of requiring their (Norman’s) approval as major creditor, or the permission of the Court. This would reverse the policy of the Insolvency legislation to leave commercial matters to the judgment of the administrator and would be undesirable in principle.

In those circumstances, I consider that the proper order is for Mr Fender’s costs to be paid by Norman. I also see no justification for depriving him of his remuneration in respect of Norman’s application.