Business Dream Ltd, Re Insolvency Act 1986

Introduction

This is an application by Christopher Brooksbank purporting to act as the Liquidator of Business Dream Ltd (“the Company”) under section 166 of the Insolvency Act 1986 (“the 1986 Act”) for the sanction of the sale of various assets of the Company to a new company (“NewCo”) formed by one of the Directors –John Cussins and for the sanction of the disclaimer of leases held by the Company.

Questions arise as to the validity of the Liquidator’s appointment and as to the proper exercise of the court’s discretion under section 166 of the 1986 Act.

The facts

The Company traded as a furniture retailer from five leasehold premises in Yorkshire under the name of John Peters. There are substantial liabilities under the leases. There are currently rental arrears of £1.4 million and an ongoing rental liability of £3,000 per day. In addition there are insurance and other liabilities totalling £2,500 per day.

On any view the Company is insolvent. In addition to the monies due under the leases, a sum in excess of £800,000 is owed to a debenture holder Elavon Financial Services Ltd (“Elavon”). Furthermore substantial sums are due to HMRC. According to a winding up petition presented by HMRC £475,392 is due in respect of NIC, PAYE and VAT.

The five stores have been closed. The only realisable assets are said to be stock and fixtures and fittings. There is no formal valuation of these items. However there is exhibited to the witness statement of Mr Brooksbank what appears to be an unsigned letter from Mark Hodgson who does not identify his qualifications or experience but who is described by Mr Brooksbank as “My agents”. The letter may be summarised:

The stock comprises various display beds, dining room furnishings lounge furnishings. The cost value is £689,249. After deducting r.o.t the net stock of free title cost £460,707.

The items have been on site for some time and shows signs of wear and tear. In his opinion the display stocks have a market value of between 15% and 20% of cost which would equate to between £69,000 and £92,000.

The fixtures and fittings and intellectual property in the shops are worth £5,000.

On 11^th October 2011 HMRC presented a winding up petition alleging a debt of £475,392. It is not clear when the Petition was served on the Company. I was, however, told by Ms Jackson that it was served within the last few days.

On 26^th October 2011 at a Directors’ meeting attended by John and Nicholas Cussins it was resolved (amongst other things):

That the Directors file a notice pursuant to paragraph 22(2) of Schedule B1 of the 1986 Act of an intention to appoint Mr Brooksbank as Administrator of the Company.

That Mr Brooksbank be appointed as Administrator of the Company.

At approximately 11.35 a.m on 26^th October 2011 a Notice of Intention to Appoint an Administrator in Form 2.8B was duly filed in the Leeds District Registry. The notice stated (wrongly) in paragraph 4 that no petition for winding up had been presented. It also stated (in paragraph 2) that the notice would be served on Elavon.

Sometime after the meeting on 26^th October 2011 the Company changed its mind. It may be that this was as a result of the potential liability of an administrator for liability for rent. In any event on 28^th October 2011 at an EGM of the Company the Members passed a resolution for a creditor’s voluntary liquidation of the Company and the appointment of Mr Brooksbank as the Liquidator of the Company.

On the same day a notice convening a meeting of creditors on 4^th November 2011 pursuant to section 98 of the 1986 Act was sent to creditors.

The Liquidator has received an offer from NewCo of £80,000 for the stock and £5,000 for the fixtures and fittings. In his view the ongoing liabilities under the leases amounting to £5,500 per day make it essential to dispose of the assets as quickly as possible. If he accepts the offer no further costs will be involved as the assets would be removed from the company premises or would come to an arrangement with the landlord as to its use.

According to the Liquidator there will be no return for unsecured creditors. Elavon are secured under the debenture and are owed over £800,000. Elavon are said to consent to the order.

The appointment of the Liquidator

As is well known the Administration procedure is governed by Schedule B1 of the 1986 Act. For the purposes of this application it is necessary to consider paragraphs 22, 25, 26, 27, 28, 42 and 44.

Paragraph 22 authorises the Company or the Directors to appoint an administrator out of court. It provides:

However under paragraph 25

The procedure for an out of court appointment is governed by paragraphs 26 and 27.

Paragraph 28 makes compliance with paragraphs 26 and 27 imperative and also provides a strict timetable for the appointment of an administrator. In effect any appointment must be made between 5 and 10 business days after the giving of the notice under paragraph 26.

Paragraphs 42 and 43 provide for a moratorium for a company in administration. These prohibitions are wide-ranging and are intended to ensure that the company’s assets and business are protected and preserved The prohibitions include:

However, under paragraph 44 the provisions of paragraph 42 are also applied for the 10 day period referred to in paragraph 28 where a notice is filed with the Court under paragraph 27

It will be recalled that on 26^th October 2011 the directors of the Company passed a resolution for the appointment of Mr Brooksbank as administrator. On the same day the relevant notice under paragraph 26 was given to Elavon, and the notice was duly filed in Court under paragraph 27.

The effect of filing the notice is that the interim moratorium under paragraph 44(4) came into effect and lasted until the 10 day period in paragraph 28(2) had expired. During that period no resolution could be passed for the winding up of the Company.

The Members purported to pass such a resolution on 28^th October 2011 which (of course) was well within the 10 day period. On this analysis, therefore, the resolution of 28^th October 2011 was invalid and the appointment of Mr Brooksbank as the Liquidator void.

Ms Jackson seeks to avoid this analysis by virtue of the presentation of the winding up petition on 11^th October 2011. Even though the petition had not been served on 26^th October 2011 she points out that as the petition had not been disposed of the Company was, under paragraph 25, prohibited from making an out of court appointment under paragraph 22. In those circumstances the filing of the notice at Court under paragraph 27 was an abuse of the process of the Court and/or a nullity. Thus she submits the moratorium in paragraph 44(4) never came into effect and the resolution of the Members of 28^th October was valid.

She accepts that this argument is something of a windfall because, as she acknowledges, the Directors had no knowledge of the petition on 26^th October 2011 when the paragraph 27 notice was filed. However she submits that the argument is correct in law and she is entitled to rely on it.

She has cited no authority in support of her argument but she told me that she had deployed it successfully in other applications before other judges in this court.

Whilst I see the force of Ms Jackson’s ingenious argument I cannot accept it for the following reasons:

I accept that the filing of a notice to appoint under paragraph 27 is capable of amounting to an abuse of the process of the court. Examples of such abuse would be where there was no genuine intention to appoint an administrator and the notice was filed simply to obtain the advantage of the moratorium. Another example could be where a company serves repeated notices and makes no appointment within any of the 10 day periods. In such circumstances I have no doubt that a Court would have an inherent power to strike out the notice so as to bring an end to the interim moratorium.

I cannot, however, accept that the circumstances of this case are within a measurable distance of amounting to such an abuse. At the time of the resolution on 26^th October 2011 the directors had no knowledge of the winding up petition and there is no reason to believe that they did not genuinely intend to appoint Mr Brooksbank as administrator. The Company complied with the necessary formalities and I cannot begin to categorise the filing of the notice under paragraph 27 as an abuse of process.

There is in fact no necessary inconsistency between the provisions. Paragraph 25 prevents an out of court appointment (other than by a floating charge holder) where there is a pending winding up petition. It does not prevent a Company from filing a notice to appoint under paragraph 27. Indeed there are a number of provisions in the Act that contemplate that there may be no appointment despite the filing of the paragraph 27 notice. One example is where a prior floating charge holder notified under paragraph 26(1) has not consented.

Of course, if the Company knows about the winding up petition when it files the paragraph 27 notice this might be evidence that the Company did not genuinely intend to appoint as it would not be able to do so. In those circumstances the notice might be vulnerable to an application to strike out. However, where, as in this case, there is no abuse I can see no reason why the interim moratorium should not take effect.

Even if, contrary to my view, there is an abuse of process in filing a paragraph 27 notice where a winding up petition has been presented unbeknown to the Company and if, as a matter of discretion the court decides to strike out the notice I have difficulty in seeing that the strike out would have retrospective effect. In this case, of course, the resolution for voluntary liquidation took place on 28^th October 2011 during the period of the moratorium. I cannot see how it can be retrospectively validated.

Equally, in my view, it is difficult to see that filing of a paragraph 27 notice is a “nullity” if a winding up petition has been presented. There is nothing in the Act which prevents it from being filed. It is a formal step. The notice must be in the prescribed form and be accompanied by a statutory declaration. It affects creditors who are prevented from enforcing securities or distraining (under paragraph 43). Furthermore if (with the court’s permission) the winding up petition is withdrawn within the 10 day period there is no reason why an appointment should not take place.

I am conscious that other judges may have come to a different conclusion on the point. However I have not seen a transcript of any judgment, nor do I know the full extent of the arguments presented to them. I have had the opportunity to consider the arguments and statutory provisions in rather more detail than can be done in a busy applications list. In those circumstances I have decided to consider the matter afresh.

It follows in my view that the interim moratorium did take effect and the resolutions of the Members on 28^th October 2011 were invalid. It follows that there is no jurisdiction to sanction the disposal of assets under section 166.

This aspect of the case does not quite end there. In paragraph 3 of the application Mr Brooksbank asks that the paragraph 27 notice be withdrawn. Just as, in an appropriate case, the court can strike out a paragraph 27 notice as an abuse of process I do not see why the court cannot, under its inherent jurisdiction, permit the Company to withdraw a paragraph 27 notice. The moratorium is for the benefit of the Company. I cannot see why it should be compelled to have a moratorium it does not want if it has genuinely formed the view that it no longer intends to appoint an administrator and wishes some other form of insolvency procedure.

In my view that is the situation in this case. The application to withdraw should, however, be made by the directors (and not Mr Brooksbank) as it was the directors who filed the original paragraph 27 notice. Subject to the passing of an appropriate resolution I would be minded to permit the application to be suitably amended and to permit the paragraph 27 notice to be withdrawn.

Once the paragraph 27 notice has been withdrawn the interim moratorium would end. This would enable the members to pass a valid resolution to enter voluntary liquidation. It would also permit the section 98 meeting of creditors to proceed on 4^th November 2011 in accordance with the notices already sent out.

Section 166(2) of the 1986 Act.

In the light of my view on the appointment of Mr Brooksbank as the Liquidator my views on the merits of the application are necessarily “obiter”. In those circumstances I shall express them only briefly.

Under section 165 of the 1986 Act the Liquidator in a creditor’s voluntary liquidator may exercise the Powers in Schedule 4 Part 1 with the sanction of the liquidation committee. He may exercise the powers in Part II and III of the Schedule without such sanction.

However under section 166(2) :

The purpose of the section is well explained in the commentary to the 14^th Edition of Sealy & Milman’s Annotated Guide to the Insolvency Legislation. For convenience I set out the commentary in full:

The powers in Part III of Schedule 4 include (paragraph 6) the power to sell any of the Company’s property and (paragraph 13) the power to do all such things as may be necessary for the winding up of the Company’s affairs. To my mind this is wide enough to include the power of disclaimer under sections 178 and 179 of the 1986 Act.

When the matter was argued before me yesterday I expressed some concern at the merits of the application. The liquidator was seeking an immediate sale of all of the assets of the Company to a new company controlled by the former director at a figure of representing 18.25% (85,000/465,707) of the cost of the items. Furthermore the valuation justifying that figure was unsigned, in very scant terms and was made by a person whose qualifications were not given. On the face of it this was just the sort of transaction that section 165(2) was designed to prevent.

Plainly there was some urgency in the matter as there are substantial continuing leasehold liabilities which Mr Brooksbank wished to reduce by disclaimer. Despite my misgivings I was told that Elavon (Footnote: ¹) consented to the sale at this price and that Elavon was, in practice, the only creditor with any interest in the outcome.

I adjourned the matter overnight, partly to enable me to consider the arguments relating to the validity of the appointment of Mr Brooksbank and partly to enable confirmation to be obtained of Elavon’s consent and the extent of other creditors.

It is plain from the commentary in Sealy & Milman that section 166(2) of the 1986 Act is inserted for the protection of the creditors prior to the holding of the section 98 meeting. If therefore the creditor with the greatest financial interest in the outcome consents to the sale it seems to me that this would be a powerful reason for me to overcome my misgivings and sanction the sale. The matter would or might be different if the creditor were in some way connected with either the old or the new company.

In the end, however, because of my views on the validity of Mr Brooksbank’s appointment I do not have to express a final view on whether to sanction the sale and I prefer not to do so.