RC Brewery Ltd v HM Revenue and Customs

This is an application by RC Brewery Ltd (“the Company”) for a validation order (of limited scope) under section 127 Companies Act 1985. It is made in the context of a winding-up petition (“the Petition”) presented on 11 April 2013 and served on 16 April 2013. The petitioning creditor (“HMRC”) is the respondent to an application to restrain advertisement of the Petition to which I come in a moment. The petition debt relates to unpaid beer duty and penalties in a sum well in excess of £2m although the actual amount outstanding has been reduced to £1.485m since presentation of the Petition.

The petition debt was not disputed and it was not asserted that the presentation of the Petition was in any way improper. However, the Company put certain proposals to HMRC for payment of the outstanding amounts over a period of time. HMRC rejected the proposal and refused to postpone advertisement of the Petition.

The Company then applied for an order restraining advertisement which I heard on two occasions last week. The first was on 24 April before notice had been given to HMRC and the second was on 26 April when HMRC attended. I delivered judgment on Monday 29 April dismissing the application.

Although there was and is no application notice, the Company asked, at the second hearing, for a validation order under section 127 Companies Act 1985 in respect of the fees paid to its solicitors (including Counsel’s fees as a disbursement). The amount was £20,000. There were two payments of £10,000, one on 24 and one on 25 April. A further payment of £2,500 was made over the following weekend. [I mention in passing that, since the section 127 application was tagged on at the end of the main application, the heading above this judgment reflects the heading of the application notice for the main application.] HMRC make no objection to the absence of a formal application. I will treat the application as made within the application to restrain advertisement of the Petition.

Counsel for Bibby was in Court on 29 April when I finished delivering my judgment. He informed me that Bibby, which is the holder of a qualifying floating charge, had filed notice of intent to appoint an administrator as required by paragraph 15 Schedule B1 Insolvency Act 1986. If an administrator is appointed, the effect of paragraph 40(1)(b) is to suspend the Petition while the Company is in administration. This turn of events of course has an impact on the advertisement of the Petition which will, I imagine, have been postponed. An appeal from my judgment would then seem rather pointless. Nonetheless, the informal application for a validation order in respect of legal fees relates not only to the amounts which I have already mentioned and which have already been paid, but seeks validation of future payments up to a further £27,750 ie £50,000 in total.

Notwithstanding the likely administration (or perhaps, as I write this judgment, an actual administration), the Company seeks a validation order in case a winding-up order is eventually made on the Petition. HMRC does not object to the application being dealt with. I think that I should deal with it.

If a winding-up order is made, the Company will be unable to meet all of its debts. To grant the order sought will result in a reduction of amounts payable to other creditors. Although, in theory and even if a validation order were granted, an order could be made on the Petition throwing these costs representing the fees already paid by the Company’s solicitors onto a third party (see Hoffmann J in Crossmore Electrical and Civil Engineering Ltd (1989) 5 BCC 37 referring to Re Bathampton Properties Ltd [1976] 1 WLR 168), that is a possibility in the present case, which in my view, is so remote as to reach almost vanishing point.

As a general rule, validation orders will only be made where there is no serious risk to creditors or where the court is satisfied that the company is likely to improve the position of creditors by trading at a profit: see for instance Harman J in Re McGuinness Bros (UK) Ltd (1987) 3 BCC 571 at p74 col 1. In the case of a petition to which the company has a genuine defence which it wishes to raise, for instance where there is a bona fide dispute about the debt, it may be right to grant a validation order to enable the payment of lawyers to raise the defence. As Hoffmann J put it in the Crossmore case:

“In the case of an ordinary petition by some wholly unrelated creditor it would I think be in the ordinary course of the company's business for it to pay solicitors to defend itself against such a petition and therefore such payments should fall within the scope of a validation order under sec. 127.”

In the present case, there is no dispute about the petition debt. HMRC have a clear right to payment and were entitled to present the Petition. Had there been time for the Company to seek a validation order before incurring costs in relation to the application for the order to restrain advertisement, the Court would have wanted to know the outline of the case which was eventually presented to me. I would not have granted an order because I would have seen the arguments as very weak (as I did on the first hearing). I do not think that it would be right to make such an order now. That is so in relation to the fees which have already been paid. It is even more the case where the fees relate to an appeal for which I see no prospect of success (which is why I refused permission to appeal). Further, it must be very doubtful that such fees would be incurred in the ordinary course of business.

Of course, some cost would have had to be incurred in investigating whether there was an argument at all which the Company could present in support of the making a validation order. It might be said, therefore, that the Company should be entitled to an order at least to the extent of the cost of obtaining the necessary preliminary advice. I do not agree with that suggestion. It is one thing to allow a company to fund a genuine defence to a petition which, if successful, would show that the petition should never have been brought in the first place. It is quite another to allow the Company to fund an application designed to buy time to pay off its liability to HMRC.

Accordingly, I refuse to make a validation order under section 127. I only add, for completeness and because it was raised at the hearing, that Mr Dusanj has agreed to discharge the fees of the Company’s solicitors. That has not formed any part of my reasoning in, or justification for, reaching the decision which I have.