Data Power Systems Ltd & Ors v Safehosts (London) Ltd & Anor

There is before me an administration application for an order in respect of a company known as Safehosts (London) Limited (which I shall refer to as the company) to be placed in administration. The company was incorporated as recently as 31^st October 2011. Its registered office and place of business is at County House, 190 Great Dover Street, London, SE1 4YB (which I shall refer to as County House if I refer to the property again). The company’s principal business activity is data processing, hosting and related activities.

The applicants on this application are Data Power Systems Limited (DPS), Alisdair James Findlay (Mr Findlay), and Safehosts Limited (Safehosts) which is a 50 per cent shareholder in the company. The applicants all claim to be creditors of the company. Exhibited to the first witness statement made by Mr Findlay, which is dated 23^rd March 2013, is Mr Findlay’s estimated statement of affairs. As at 25^th March 2013, the company’s debt to DPS is estimated at £176,807, its debt to Safehosts is estimated at £220,377, and there is no indication of any debt being due to Mr Findlay personally unless he is intended to be one of a number of unspecified trade creditors whose aggregate debts are estimated at about £50,000.

The company was formed as a joint venture vehicle to set up and operate a data centre facility from County House. The company has not created any fixed or floating charges over its assets. At the time of issue of this application it was not subject to any insolvency proceedings and these proceedings are main proceedings for the purposes of Article 3 of the EC Regulation. As to the company’s trading, it appears from the evidence that installation of the data centre is not complete, however it is unclear from the evidence to what extent trading has been or, indeed, could be conducted. By the estimated statement of affairs prepared by Mr Findlay, the company has fixed assets in the form of leasehold improvements and plant and machinery said to have cost in the order of £1 million and estimated to realise £100,000, trade debtors (which suggests some trading activity) of £20,000, all of which are estimated to be good for every penny in the pound, and cash also estimated at £20,000.

There are no secured creditors. The unsecured creditors are estimated by Mr Findlay as : finance lease £24,000, trade creditors £50,000, business rates £10,000, DPS £176,807, Safehosts £220,377, Mr Pearlman £1,115,711, and Wandslore Pension Scheme (WPS) £87,500. For a reason which not entirely clear, the estimates in relation to Mr Pearlman and WPS are estimates as at 14^th November last year. In aggregate these come to a total of almost £1.7 million and so there is a very material shortfall or deficiency of assets.

Mr Pearlman is a director of the company. He is also a joint trustee of WPS, which owns the freehold to County House and is a pension scheme for his and his wife’s benefit. In his own right, and according to Mr Findlay’s evidence, Mr Pearlman is by far the largest creditor of the company. Indeed, it was part of the joint venture arrangement that, in the words of Mr Findlay in his witness statement, Mr Pearlman would be providing the bulk of the funding for the project with an initial budget of £1 million.

Mr Pearlman seeks to intervene in this application. He entirely agrees that the company is insolvent and he has prepared a balance sheet of the company as at 10^th April this year which, in summary, is broadly similar to that prepared by Mr Findlay but paints a slightly more complete picture of the company’s liabilities. The fixed assets are also shown as being essentially leasehold improvements and plant and machinery and are said to have a book value at cost of £1.45 million. The current assets are estimated to be debtors of £48,000, cash of £28,000, prepayments of £9,000 and HMRC in respect of VAT, which must be a refund due as it is an asset, of £38,000. In respect of liabilities, these are trade creditors estimated at £156,000, HMRC in respect of PAYE £2,000, a finance lease £90,000, not the £24,000 estimated by Mr Findlay, Mr Pearlman’s own director’s loan at £1.246 million, another director’s loan £5,000, and Safehosts Cheltenham, rather than Safehosts (here I observe that the relationship or distinction between Safehosts and Safehosts Cheltenham is not clear) £374,000. The total liabilities come to almost £1.9 million and there are net current liabilities in the order of £1.75 million. Thus, there is a net deficit on Mr Pearlman’s balance sheet of some £300,000.

There is no evidence that this company has ever traded at a profit or, indeed, that it has conducted much trade at all. The reason for Mr Pearlman’s intervention is that although he agrees that the court should appoint an administrator or administrators of the company and, therefore, that the company should go into administration, he is nevertheless of the view that different insolvency practitioners to the person proposed by Mr Findlay should be appointed as joint administrators.

The court’s jurisdiction to make an administration order is conferred by paragraph 11 of Schedule B1 to the Insolvency Act 1986 (the Act) which provides that :

Here it is important to note that subject to performing his functions as quickly and efficiently as reasonably practicable, an administrator’s duty under the Schedule and, therefore, under statute is to perform his functions in the interests of the creditors as a whole.

The court’s powers on the hearing of an application for an administration order are set out at paragraph 13 of Schedule B1 and are that the court may -

Having regard to the breadth of section 125 as adopted into the statutory regime governing administration applications at paragraph 13(1)(e) of Schedule B1, it seems to me that an ‘other order’ that a court might, if it ‘thinks fit’, make is to invoke and exercise the powers pursuant to section 135 of the Act to appoint a provisional liquidator. In such a case, the court would confer functions on the provisional liquidator (section 135(4)) and may specify powers which would be set out in and limited by the order making the appointment (section 135(5)).

Returning to the facts of this application, as I see it, what is, in effect, going on is a turf war between two factions within the company who are, or claim to be, creditors and who are interested, directly or indirectly, in the company as shareholders.

As to making an order to place the company in administration, the court must be satisfied that there is a reasonable likelihood that the purpose of administration will be achieved if an order is made. The court is not required to be satisfied as to the likely outcome of an administration on the balance of probabilities; rather the court must be satisfied only that there is a reasonable likelihood of such an outcome. For this to occur, a party seeking an administration order must present sufficiently cogent credible evidence that such an outcome is a realistic prospect so that the court can proclaim itself satisfied pursuant to paragraph 11(b) of Schedule B1 that an administration order is reasonably likely to achieve that purpose.

For a company to be rescued as a going concern (the first objective under paragraph 3 of Schedule B1) there must be sufficiently cogent credible evidence before the court either that it is capable of being returned to being a going concern or, in a case like the present, where the company has not traded or where the company has not established itself as a going concern, that in some configuration it is capable of becoming a going concern.

I have asked both Mr Dean, who appears today for the Applicants, and Mr Rivett, who appears for Mr Pearlman, to direct me to the evidence that is before the court which would enable me to be so satisfied. In this context, I remind myself that the application was issued as long ago as 23^rd March of this year and that there has already been one hearing before me, on 7^th May, when the matter was adjourned to today; so, there has been ample time for any appropriate evidence to enable the court to conclude that its jurisdiction is engaged on this basis to have been put before the court.

Mr Dean referred me to a statement made by Mr Findlay at the conclusion of his first witness statement where he says it is his belief that an administration is reasonably likely to achieve the rescue of the company as a going concern, or in the event that that is not achievable that it will be reasonably likely to 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 following the re-entry of the company’s premises by the landlord. There is no explained basis for Mr Findlay’s expressed belief as to going concern and this belief is plainly qualified because he posits in the alternative a better result for creditors. At best, Mr Findlay’s statement is merely an assertion.

Mr Dean has also referred me to a letter from a company with whom the company has been in discussions. That is a company called TVCatchup, which streams television programmes after they have been screened live and does not engage in real time screening of television programmes; but, that letter is about a possible business venture, is undated, and is written on the express basis that TVCatchup’s interest will subsist so long as the company does not go into administration (emphasis added).

I have also been referred to a forecast apparently prepared by, or at any rate submitted by, Mr Findlay who is an experienced insolvency practitioner. That forecast on its face predicted turnover for the year to 30^th April 2013 at more than £1 million. On enquiry as to how this level of turnover could have been forecast given that the company has not been trading, at least not to any appreciable extent, I was told this was a misdating and that it is intended to be a forecast the year to 30^th April 2014. However, when the forecast is compared on this basis with the cash flow forecast for the corresponding period, it is completely irreconcilable. There are no assumptions stated in relation to the forecast profit and loss account or in relation to the forecast for cash flow, no guidance is given at all, and I regret that the conclusion I reach is that the forecasts are merely numbers on a piece of paper and of no greater evidential value than that.

Mr Dean also pointed to Mr Pearlman’s second witness statement and an administration strategy prepared by the administrators proposed by Mr Pearlman. The strategy is, with all due respect, no more than an outline of the sort of tasks that administrators would be focusing upon in any administration, it does not appear to be tailored in any way to the particular position of the company and although, of course, it is supported by the usual statement from the proposed administrators, it is difficult to attach much weight to that evidence.

Alternatively, if the company cannot be rescued as a going concern, next in priority I should look to see whether there is a reasonable likelihood of a better result being achieved for the creditors as a whole than if the company were to proceed straight to liquidation.

Mr Dean pointed to Mr Pearlman’s statement in his first witness statement to the effect that the administration would be in the best interests of the company’s creditors and likely to achieve a better outcome for the creditors. That appears at paragraphs 7 and 26 of his first witness statement; however, it is not explained and is an assertion rather than evidence. There is no evidence before me that the creditors are at all likely to benefit either from a rescue or from any dividend in the event that the company is placed in administration.

Indeed, there is a statement in the evidence to the effect that the cost of an administration will absorb whatever assets are or become available to the administrators. On Mr Findlay’s estimate of realisable values, this is a credible statement and a likely outcome. Thus, on the evidence before me, the likelihood is that once the costs of an administrator are taken into account, there will be nothing left for the unsecured creditors. On the available material, I conclude that it is difficult to see how the creditors as a whole will be affected to their advantage depending on whether the company enters administration or goes into liquidation.

As already noted in this judgment, there are no secured creditors and the position of any preferential creditor, and none have been identified in the evidence, will be no better than that of any unsecured creditor – in other words, there is no evidence that there will be anything of value for a preferential creditor. Accordingly, the third objective under paragraph 3 of Schedule B1 is also not engaged.

On this basis, the conclusion that I am driven to is that the Court cannot be satisfied on the evidence that paragraph 11(b) of Schedule B1 is met. I accept entirely Mr Dean’s submission that the threshold is not a high one; it is simply not crossed. The circumstances of this case serve as a reminder that insolvency alone is not sufficient to engage the jurisdiction for an administration order to be made, and further that the requirement of paragraph 11(b) of Schedule B1 is not a mere formality capable of being satisfied by assertion unsupported by cogent credible evidence sufficient to enable the Court to be satisfied that, if an administration order is made, the purpose of administration is reasonably likely to be achieved.

Accordingly, I have to turn to the court’s powers under paragraph 13 of Schedule B1. Clearly, the first of the possible orders that may be made, that is an administration order as sought, is not open to me. The remaining powers: dismiss the application, adjourn the hearing conditionally or unconditionally, make an interim order, treat the application as a winding up petition and make an order which the court could make under section 125, or make any other order which the court thinks appropriate are all open to me.

In the course of submissions it was proposed that I should consider adjourning the application further so that evidence of the prospect of a rescue could be formulated and put before the court. For a reason that I have already given, namely that this application is now already the best part of two months old, that is an unattractive prospect. The essence of an administration is speed and that is made clear at paragraph 4 of Schedule B1 -

The reality here is that the company is hopelessly insolvent; this is even more so if realisable value is substituted for book value of the fixed assets. Mr Pearlman in his second witness statement and towards the conclusion of his first witness statement, which is dated 2^nd May, at paragraph 26 refers to a number of final demands having been received from various energy suppliers who have threatened to cut off supplies if payment is not made immediately. Clearly, what is needed is very urgent action to salvage as much as can be salvaged from a sale of the assets for the benefit of the creditors. A further adjournment is, therefore, out of the question.

My provisional view, canvassed with counsel who are both experienced in this field, is that a course properly open to me would be to treat the application as a winding up petition, not make a winding up order today but appoint a provisional liquidator in order that there should be some neutral person to come in, take over the company, and be charged with realising its assets with a view to raising as much as realistically possible for distribution to the creditors as a whole. That is not the preferred course of either the applicants or Mr Pearlman. I understand from Mr Rivett that Mr Pearlman does not offer great resistance to this, although there is some concern about who the provisional liquidator should be. It seems to me that that is the course that is most suitable in the circumstances of this case, not least because, as I see it, this application got off to a bad start by being issued in a district registry where there is no resident chancery judge, which was really a tactical delaying ploy in a war between parties interested as creditors and also as shareholders in the company, and consequently too much time elapsed between the issue of the application and its hearing.

So, the order that I shall make is to treat the application as a winding up petition and appoint either the official receiver or one or other of the parties’ nominated representatives as provisional liquidator and then make further orders to confer functions and grant powers pursuant to section 135 of the Act.

I note the time now at half past one. I do not propose to embark upon the detail of those orders and directions at this stage and I will not announce the decision I make in relation to who should be appointed and my reasons in case the parties, over the short adjournment, are able to arrive at an agreement between themselves as to the best course. However, I do observe that I take on board Mr Rivett’s submission that appointment of the official receiver would have the disadvantage of incurring delay, although it would have the acknowledged advantage of imposing someone who is neutral to the preferences of either side. I conclude my judgment on the application at this stage and we will continue the application in relation to the appropriate functions and powers of the provisional liquidator and, of course, the appointment of the provisional liquidator after the short adjournment. (Footnote: ¹)