Corbett v Nysir UK Ltd

This is an application by Mr Corbett for the court to appoint Robert Kelly and Charles King of Ernst & Young as administrators of NYSIR UK. Mr Corbett contends that he is a creditor of NYSIR UK in the sum of £668,508. He contends that NYSIR UK is insolvent and that there is a real prospect that an administration order will further one or more of the objectives contained in paragraph 3(1) of Schedule B1 of the Insolvency Act 1986. His application is supported by 3 creditors with debts of the order of £700,000. All of these debts arise out of a share sale agreement under which Mr Corbett and the supporting creditors sold shares in OPERON. Accordingly he submits that as a matter of discretion the Court should make an administration order.

NYSIR UK opposes the application. Whilst it accepts that loan notes have not been repaid it contends that it has a set off and cross-claim against Mr Corbett based on breach of warranty and fraudulent misrepresentation inducing the share sale agreement. It values the cross-claim in the sum of £9.2 million. Thus it substantially exceeds the claim. It does not accept that it is insolvent. It does accept that there is a real prospect that an administration would achieve a better result for creditors than if NYSIR UK were wound up. It does not accept that it is appropriate for an administration order to be made. Landsbanki who funded the purchase of the OPERON shares and have security over them are creditors in the sum of £18 million oppose the petition.

Mr Corbett is represented by Mr Hugo Groves instructed by Irwin Mitchell of Leeds. NYSIR UK is represented by Mr Hugh Jory instructed by Schofield Sweeney of Bradford. Both produced skeleton arguments and I am very grateful to them.

Witness statements have been provided by Mr Corbett on his own behalf and Messers Jonsson, Crowley, Fairley and Staton on behalf of NYSIR UK.

There is considerable debate over the law. Fortunately there is a valuable and full discussion of the relevant law in the judgment of Warren J in Hammonds v Pro-fit USA [2007] EWHC 1998. Both Counsel have taken me through the judgment in detail. Mr Groves submits that Warren J was correct on all points. Mr Jory submits that in a number of respects I should not follow the decision.

Administration is dealt with in Schedule B1 Insolvency Act 1986. The purpose of an administration is to be found in paragraph 3 which, so far as material, reads as follows:

“3(1) The administrator of a company must perform his functions with the objectives of rescuing the company as a going concern, or

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

realising property in order to make a distribution to one or more secured or preferential creditors

There are then two conditions which must be fulfilled before the court may make an administration order. There are found in paragraph 11 which reads as follows:

“11.

The court may make an administration order in relation to a company only if satisfied –

that the company is or is likely to become able to pay its debts, and

that the administration order is reasonably likely to achieve the purpose of administration.”

An application for an administration order may only be made by one or more of the persons specified in paragraph 12(1). This includes, at paragraph (c), “one or more creditors of the company”. There is no definition of “creditor”.

This is a central area of debate both before me and Warren J. In paragraph 53 of his judgment Warren J concluded:

I shall not repeat his reasoning. Mr Jory submitted that I should not follow it in so far as it relates to disputed debts. I cannot accept that submission. I prefer the views of Oliver LJ and Lord Denning in Claybridge to those of Buckley and Nourse LJ in Stonegate v Gregory. In my view in agreement with Warren J there is jurisdiction to wind up a company where there is a disputed debt even though it is settled practice not to do so save in exceptional cases.

I consider that a similar test applies with regard to paragraph 12(1)(c) with the result that there is jurisdiction to make an administration order even though the debt is disputed.

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

Thus, focusing on sections 123(1)(e) and 123(2), it has to be proved to the satisfaction of the court that the company is unable to pay its debts as they fall due or that the value of its assets is less than its liabilities. In carrying out that assessment, the debt (where it is disputed or subject to a cross-claim) of an applicant is in no different a position from any other debt which is disputed or subject to a cross-claim. The court will have to form a view on the basis of all the evidence before it whether it is satisfied as required by either of those sections. There is this difference however. The court may, in the exercise of its discretion, require the dispute (about the debt or the cross-claim) to be decided before making an order, either requiring the matter to be determined in a separate action or by deciding the issue itself. In such a case, of course, the court would not need to make a determination about solvency unless and until the dispute had been resolved.

There is a well established practice in the case of winding up orders that the court will not make a winding up order where there is a disputed debt. Warren J refused to follow that practice in the case of administrations. Relying on observations of Saville LJ in MIT Trading as to the differences between administrations and windings up he said (at paragraphs 49 to 51):

Mr Corbett is a founder of Integrated Building Services Engineering Consultants Ltd which trades as OPERON. OPERON provides facilities management catering and other services to local and central government clients.

Mr Corbett originally held 12.9% of shares in OPERON. On 29^th September 2006 Mr Corbett and other shareholders sold 69% of the shares in OPERON to NYSIR UK, a subsidiary of NYSIR HF (an Icelandic Company). The moneys payable to Mr Corbett under the contract with NYSIR UK totalled £4.837 million. £3.5 million was payable on completion leaving £1.33 m payable by loan notes over 2 years. Payments were guaranteed by NYSIR HF. In turn NYSIR HF was funded by Landsbanki. Mr Corbett (the MD of OPERON) remained as MD after the share sale.

The Group Structure is complex and can be seen as part of the rule 2.2 report on page 291

Aberdeen

Yorkshire

Ruthin

OPERON

The Loan Note payable to Mr Corbett on 1^st March 2008 in the sum of £334,254 was not paid. The loan notes to other shareholders were paid. There is correspondence under which Mr Corbett was asked and agreed to defer his entitlement. The grounds put forward were cash flow problems caused by the devaluation of the Icelandic kroner. Mr Corbett was assured that NYSIR UK had funds to pay. Mr Corbett was also informed that NYSIR UK was being refinanced by the Bank and the refinancing was taking longer than expected. There was no suggestion of any dispute at that time.

The first suggestion of a complaint by NYSIR UK was a letter dated 27^th August 2008 addressed to all the shareholders. The letter alleged a breach of the agreement and that enquiries were continuing . The letter alleged losses of £17 million and that payments under the loan notes would be suspended.

Mr Corbett was also informed that his employment was suspended pending a full investigation.

NYSIR UK failed to pay any of the sums due under the loan notes on 1^st September 2008. Mr Corbett was owed a further £334,254. The total sums unpaid at that stage amounted to approximately £1.38 million.

Mr Corbett did not accept that the suspension was valid. On 4^th September 2008 he duly attended for work and was summarily dismissed.

On 3^rd September 2008 Mr Corbett answered the letters of 27^th August. He refuted the allegations of breach of warranty and alleged that they were manufactured in order to avoid payment the loan notes which NYSIR UK were not in a position to pay.

On 12^th September 2008 demands were sent under the loan notes. These have not been satisfied.

On 10^th October 2008 Mr Corbett made this application. It was supported by a witness statement exhibiting amongst other documents a report from the proposed administrators. It was opposed by evidence from 2 of the directors of NYSIR UK and a director of OPERON. Their evidence dated 22^nd October 2008 was the first time that the detailed allegations were made against Mr Corbett and the other holders of the loan notes. Mr Corbett sought to refute the allegations in his second witness statement dated 24^th October 2008.

In the course of his submissions Mr Groves accepted that the cross claims raised triable issues though he made a number of comments about them. In those circumstances it is not necessary to deal with them in detail. In summary it is alleged that there were breaches of warranty in relation to the unprofitable FM contracts entered into by OPERON; it is further alleged that Mr Corbett was in breach of warranty and fraudulent in relation to the Bangor contract. The main criticism of Mr Corbett is that he wrongly stated that there was a subcontract with Seddons in relation to the building elements of the scheme with the result that Seddons would take on the full risk of the building element of the scheme. In fact although there were negotiations with Seddons there was no final contract.

As I have noted Mr Corbett denies the allegations. In his skeleton argument Mr Groves made a number of points about them – see paragraph 15, but he accepted that they raised triable issues.

Mr Jory argued that these claims amounted to equitable set offs against Mr Corbett claims under the loan notes. For reasons I have given I do not think prevents Mr Corbett from being a creditor for the purpose of paragraph 12(1)(c) of Schedule B of the Act.

The evidence of insolvency relied on by Mr Corbett comprises the following:

The failure to pay the Loan Note Holders the sums due on 1^st March and September 2008. The sums involved amounted to over £790k.

The correspondence between NYSIR UK and Mr Corbett in February and March 2008 in relation to the deferment of the loan note payable in March. That correspondence shows that NYSIR UK was unable to pay its debts as they fell due in February. It also indicates that NYSIR UK was considering re-financing. That re-financing has not taken place.

The balance sheet as at 31^st December 2007 shows net liabilities of in excess of £3.1 million. No evidence has been filed by NYSIR UK updating that position or giving any indication that it has improved.

According to the Joint Administrators report NYSIR UK has defaulted on repayments of the £16 million loan from Landsbanki for the purchase of shares in OPERON.

Within the Aberdeen project NYSIR UK has signed a subscription agreement under which it has purchased loan notes from its subsidiary Aberdeen. It holds loan notes to the extent of £4.5 million and has contracted to purchase more. The commitment to Aberdeen is set out in Appendix H (373) of the report includes substantial payments due between now and the end of the year.

On 24^th October 2008 PIHL served on Aberdeen a notice of intention to suspend due to the failure to make payment under the invoice dated 8^th October 2008.

The group accounts suggest that NYSIR HF has net current liabilities of £61 million. It has publicly stated that it needs to undergo a restructuring process. In its 2007 report there was a comment that if the restructuring did not materialise this could cause material uncertainty about NYSIR HF’s future.

NYSIR UK also owes OPERON £887k plus £40k interest and Landsbanki £4.5 million in respect of the Ruthin project.

Mr Jory concedes that NYSIR UK is insolvent but for the claims against Mr Corbett and the other loan note holders. However those claims will not materialise for a considerable time. It is, to my mind perfectly plain that NYSIR UK cannot pay its debts as they fall due. It is, or is likely to be insolvent within the meaning of paragraph 11 of Schedule B1.

The purpose of the administration is to be found in various places in the Administrator’s report.

In paragraph 5.1.5 it is said that the primary objective of the Administration would be to preserve value in the Aberdeen project and enable value in NYSIR UK’s investment and loan notes to be maintained.

A number of points are made:

The receivership of Landsbanki creates uncertainty about the future funding of the project. It is imperative that insolvency procedure allows NYSIR UK to engage in the negotiations for a restructuring of the project.

As NYSIR UK cannot meet its obligations under the subscription agreement and NYSIR HF cannot honour its guarantee this could lead to a call on the guarantee provided by PIHL. Furthermore OPERON will not be able to sustain the likely losses from the contract with PIHL. PIHL thus has an interest to negotiate

An administration would, it is said enable the Administrators to assess the current funding position of the Aberdeen project and attempt to secure ongoing funding to enable value to be maintained. In a liquidation all of the assets would have to be realised which risk losing the inherent value of the Aberdeen project.

In paragraph 5.4.5 of the report there is a discussion of the advantages of an administration in the context of a 69% shareholding in OPERON. It is pointed out that the contract with PIHL will need to be renegotiated. It may be that the shareholding could be sold to realise property for Landsbanki. The appointment of an administrator could allow the Yorkshire project and the Neptune project to be sold. This might generate income which might be invested in OPERON with the consent of creditors.

A number of comments can be made about the proposals:

The proposals are extremely vague. In effect all that is being said that the Administrator should be involved in ongoing negotiations in order to protect the value of NYSIR UK’s assets. They do not make clear what the administrators can bring to the negotiations that cannot be achieved by the current management of NYSIR UK.

The proposals do not give any indication of how the administration is to be funded. In his reply, however, Mr Groves pointed out that there are funds due NYSIR UK from both Yorkshire, and Ruthin that there are funds coming in to NYSIR UK which could provide funds.

It has to be remembered that NYSIR UK is a non trading holding company. The proposals appear to assume that as a shareholder the Administrator will be able to control how any relevant subsidiary (the most important of which is Aberdeen) conducts any negotiations in which it is involved. This may not be quite as straightforward as has been assumed. Procedures under the Companies Acts take time and time may be very critical in the negotiations.

In his second witness statement Mr Jonsson sets out the current position in relation to the Aberdeen project. It is plain that there are serious problems with the project. As a result NYSIR UK is taking steps to exit from the contract save that OPERON would remain as electrical and mechanical contractor. Mr Jonsson has exhibited a number of documents in relation to the proposed exit:

On 18^th August 2008 DIF and PIHL made an offer to acquire 100% of capital of Aberdeen for £4.58 million. The offer was subject to a number of conditions including the consent of Aberdeen City Council and due diligence. The letter suggests that payment would be made to NYSIR HF. However in his third witness statement Mr Jonsson says that this is a mistake and that payment will in fact be made to NYSIR UK.

On 2^nd September 2008 the offer was increased to £4.99 million. Following some clarification on 28^th October 2008 Mr Jonsson sent an e-mail confirming a commercial agreement that he would proceed exclusively with DIF/PIHL.

Plainly matters are not concluded. The insolvency of Landsbanki has no doubt complicated the position and there is scope for the deal to go wrong. However it can be said that the management are addressing the problems of the Aberdeen project.

On 30^th October 2008 Mr Staton the partner with Schofield & Sweeney with conduct of the case for the NYSIR UK filed a witness statement containing the following:

on 29^th October documentation was sent to Nationwide Building Society to explore the possibility of refinancing the Aberdeen project.

an Administration order would be an act of default under the subscription agreement. That would allow Aberdeen to serve an Acceleration Notice which would make £5 million payable. This would put in jeopardy the proposed sale to PIHL/DIF

There is a meeting with Aberdeen Council on 29^th October 2008 to discuss the problems caused by the insolvency of Landsbanki. There is hope of a replacement funder.

As already noted on 24^th October PIHL served on Aberdeen a notice of intention to suspend under the contract because of the failure to pay the invoice dated 8^th October 2008. According to Mr Staton this notice was given as a result of the insolvency of Landsbanki and did not affect the ongoing negotiations between NYSIR UK, PIHL/DIF.

For reasons already given I consider that Mr Corbett is a creditor of NYSIR UK and that NYSIR UK is or is likely to become insolvent. In the course of argument Mr Jory conceded that there was a realistic prospect that an administration order would achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration). In those circumstances there is a discretion to make an administration order.

In Hammonds Warren J refused to hold that the practices developed in relation to winding up should be imported into administration. He did however in paragraph 50 acknowledge that

He held that the discretion was at large subject to the factors he had mentioned. He discusses the exercise of the discretion further in paragraphs 332 to 333 of the judgment. The crucial passages are :

Mr Groves relied on a number of matters in his submissions. He said that an administrator was needed to assist in the negotiations. He said that NYSIR UK had been negotiating a refinance for a considerable time apparently without success. He drew my attention to the possibility of a conflict of interest between NYSIR UK and NYSIR HF. He made the point that the negotiations for the sale of Aberdeen were by no means concluded and drew my attention to a number of features which might prove to be an obstacle. He criticised the speed with which the current directors were negotiating. He said that this was a company that was clearly insolvent and that an administration order should be made.

A number of factors seem to me to be relevant in the exercise of my discretion:

Mr Corbett’s claim and the claim of the supporting 3 creditors are disputed on substantial grounds. I agree with Warren J that this is a most important matter to be taken into account.

Landsbanki who are owed in excess of £18 million oppose the application. Whilst it is true that Landsbanki have security. The security is the value of OPERON shares and there must be considerable doubt as to whether in this climate and in the light of the allegations made by NYSIR UK as to the value of OPERON they are worth £18 million. There is thus a real possibility that Landsbanki is a substantial unsecured creditor of NYSIR UK. Furthermore as Landsbanki are likely to be involved in any future negotiations I regard their views as being important.

The proposals of the Administrator are vague and imprecise. The Administrator will have to apprise himself of the financial position and (so far as he is able) enter the negotiations. It is not in fact clear how far he will be able to negotiate.

The Directors of NYSIR UK and NYSIR HF are already involved in negotiations. There is no reason to believe that their negotiating skills are significantly worse than those of the Administrator. If they are allowed to continue the negotiations the substantial costs of the administration will be avoided. It is important to bear in mind that NYSIR UK is not a trading company.

Thus, there is, to my mind therefore no compelling reason for an administration before the issues that are raised by NYSIR UK as a cross claim or defence have been determined.

In all the circumstances despite the cogent arguments of Mr Groves I have decided against making an Administration Order.