Hotel Company 42 the Calls Ltd, Re

There are a number of applications before the court concerning Hotel Company 42 The Calls Limited (“the Hotel Company”) now in administration. The Company was put in administration in February of this year by an order of HH Judge David Cooke.

The administration order was made on the application of Shepherd Construction Limited, (“Shepherd”), who had been, if I can put it colloquially, given the run around by a company called Berners BVI Limited (“the BVI Company”) which is an associated Company of the Hotel Company, for many years. A number of judgments were obtained by Shepherd against various people, but they were not met, despite repeated promises. Eventually judgment was entered against the Hotel Company, which resulted in the administration.

The conduct of those controlling the Hotel Company and its various associates has been described in excoriating terms by Mr Justice Coulson in giving judgment as long ago as March 2010, and in granting a freezing order in respect of the BVI Company, and by Master Leslie when granting summary judgment in January 2013. Master Leslie noted: “It is very clear that … JJW Limited … has taken every opportunity to obfuscate and avoid paying or meeting its obligations”, and further stated: “Every single time there has been a promise of payment something has intervened and the creditor has gone without his money.” JJW Limited, a shareholder of the Hotel Company, also appears before me. I shall refer to the Respondents in the remainder of this judgment as “the controllers” though that expression also where the context permits extends to their associates.

The administrators have had great difficulty since their appointment, fully set out in the evidence, in obtaining information from the directors of the Hotel Company and the controllers. Nevertheless, the position has been reached in which Shepherd’s debt, despite the earlier run around, has been settled in full by payment of an agreed sum; and all other known creditors have either been paid, or their debts have been waived. When I say “their debts have been waived”, I refer to debts of persons who are in some way connected with the Hotel Company.

The position, therefore, as of today is that the Hotel Company has been rescued as a going concern. The controllers say that the Company should be returned to its directors and shareholder, and that the administration should be determined. On the face of it, that is clearly correct because the administration purpose has been wholly achieved.

The creditors were paid off directly by third parties connected with the Hotel Company, or by waiver. No funds were provided to the administrators to allow them to pay the creditors.

It is accepted by the administrators that, subject to one point, there is no practical reason for the administration to continue, and the administration can be terminated, subject to provision being made for an orderly handover of operations from the administrators, and subject also to the administrators being allowed to complete the final administrative tasks relating to the administration, whatever all that may mean, but it may be that I can come to that later.

The one point to which that is subject is that there are outstanding issues as to the remuneration of the administrators, and possibly as to the discharge of outstanding expenses. Part of the administrators’ working capital was provided by the principal creditor, Shepherd. That needs to be returned, and there is presently insufficient cash to enable both that and the administrators’ own remuneration, which is said to be substantial, to be met. There is presently sufficient cash to repay Shepherd alone.

Paragraph 99 of schedule B1 provides in sub-paragraph 3 as follows:

“The former administrator’s remuneration and expenses shall be –

(a)

charged on and payable out of property of which he had custody or control immediately before cessation, and

I am not concerned with paragraph 70 in this case. Accordingly, on the face of it, the administrators are fully secured, but the security does not extend to future property because they do not have a floating charge.

The administrators, who have understandable concerns as to the way in which the controllers have conducted themselves in the past believe, with apparent justification, that every means possible will be used by the controllers to avoid payment of their remuneration. They do, however, have a charge, and the ability of the controllers to frustrate the payment of proper remuneration is thus limited.

The Insolvency Act 1986, whether in schedule B1 or elsewhere, does not in terms provide any machinery for enforcement of the charge. However, I have no doubt that the court would enforce the charge, for example by the appointment of a Receiver, or an order for sale, or both, as appears to have been recognised by the Chancellor in Re MK Airlines Limited [2012] EWHC 1018 (Ch) at paragraphs 25 and 26. It was not strictly necessary, though it would have been better, for Parliament to provide machinery, as the court has inherent power to enforce any charge, and Parliament must have intended the court to exercise those powers, should it become necessary to do so. To attribute to Parliament any other intention would be absurd. It accordingly seems to me that there should be no difficulty in enforcing the charge even though there is no power of sale as such attached to the statutory charge. A sale would be subject to the directions of the court, and the court would, in an appropriate case order a sale of, in this case, the hotel, if and when remuneration is established to be due, and remains unpaid.

That, however, is a future question for the following reasons: It is said by the controllers that the remuneration sought by the administrators is excessive, and, moreover, that the administrators are, because of their alleged misconduct in office, entitled to no remuneration.

Since the present applications were brought, a further application has been brought under paragraphs 74 and 75 of schedule B1, under which the shareholder, JJW Limited, and a director, Mr Al Jaber, claim that there has been unfair harm and misfeasance by, amongst other things, the charging of excessive remuneration. That is something for which relief can be given to a member or creditor under paragraph 74 , or to a creditor or contributory under paragraph 75. I have no doubt that if it is established that excessive remuneration has been charged, relief could be given under one or other or both of those paragraphs.

There is a separate application to determine remuneration brought by Mr Al Jaber, claiming to be a creditor, and JJW Limited, as a member. Leaving aside the provisions of paragraphs 74 and 75, there is no express power for the court to determine remuneration upon the application of a member alone, and the status of the creditor, Mr Al Jaber, may be questioned as he purports to have waived his debt. I say purports, because the waiver was expressed to retain voting rights, which seems something of a contradiction. It may well be that the waiver is not fully effective, though I am not deciding the point. Be that as it may, there is no doubt that the connected creditors are not pressing for payment of their debts, and that the waiver could be made fully effective, if need be.

I am inclined to the view that there is an inherent power in the court, in an appropriate case, to order administrators’ remuneration to be assessed upon the application of a shareholder. It might be appropriate to do so, for example, in the case of a company whose assets exceed its liabilities, even though it may previously have been cash flow insolvent, That must in my judgment follow from the court’s power to direct administrators generally. Otherwise there would be an unacceptable lacuna in the statutory scheme. Rule 2.109 of the Insolvency Rules 1986 as amended presently contains provisions enabling creditors to challenge remuneration and expenses but is silent on the rights of shareholders in that regard.

The reason only creditors are mentioned in terms in the Rules is presumably because ordinarily the dismal reality is that the only people interested in an administration are the company’s creditors, but that is not necessarily so in every case, including this one. There is no doubt that the shareholder also is interested. However, I need not be troubled by the omission of any express reference to shareholders in rule 2.109 because there is, as I have said, the application under paragraphs 74 and 75, and it presently seems to me the level of remuneration is going to have to be considered and determined in those proceedings, subject to any further submissions I may receive hereafter in relation to that. There are directions yet to be sought in the new application and yet to be the subject matter of argument.

It is said by the administrators that the preferable course would be to authorise them to exercise the power, which they claim to have, to grant a charge in favour of themselves over the Hotel Company’s assets to secure their remuneration and expenses. The expenses may include, they say, a substantial liability for Corporation tax arising out of the connected creditors’ waivers in a sum in excess of £800,000. I emphasise the word “may”. The submission was advanced very tentatively to me, and it does appear upon what I presently know that the prospect of there being such a liability is not strong, and that there may still be steps which could be taken to avoid any such liability there may be. It also was said by Mr Khangure for the administrators at one stage that it was mainly a question of awaiting Inland Revenue clearance.

I have not heard detailed argument on whether clearance is likely. But, even if there is a Corporation tax liability that will be an expense chargeable under Rule 267(1)(j), which will be covered by the statutory charge, and will, in fact, once the administrators go out of office be payable by the Hotel Company. As such, the statutory charge of the administrators will have priority in respect of remuneration or expenses because Corporation tax is lower in the order of priorities, unless the court otherwise orders, and at the moment I have been presented with no material suggesting that the court should order otherwise.

If it were to be the case that the court would order otherwise, then that would be one of the risks that administrators run by virtue of holding their office. It is a state of affairs that will come about whether or not they continue in office, and so it does not go to the question of whether their office should now be terminated.

The real battle in this case is over the administrators’ remuneration. It will be evident from what I have said that I do not regard their fears in that regard as frivolous, but nor do I consider that the fears they have are sufficient to justify their continuing in office when, as they themselves recognise, there is no practical reason for them to do so, and, most importantly, the administration purpose has been achieved.

The statutory charge is in my judgment ample to protect the administrators. In the present case that, as a matter of practical reality, means the charge on the hotel, which cannot be defeated by any conduct, or at least any legitimate conduct, of the controllers.

The administrators are concerned that they may well be faced with illicit conduct, praying in aid the excoriating judgment of Mr Justice Coulson and the adverse comments of Master Leslie. As I have said, I consider their fears to be understandable, but I do not consider that it will be possible for the controllers by whatever means to defeat the statutory charge, by (for example) granting a further charge, at least so long as the statutory charge is protected by a sufficient entry at the Land Registry.

As far as Land Registry protection is concerned, the administrators express concern that the only way in which the statutory charge could be protected is by way of a restriction, and prayed in aid the analogy of Form JJ in Appendix C to the Land Registry’s Practice Guide 19. This is the Form used to protect the statutory legal aid charge. The significance of this Form is that it merely requires notice to be given to (in that case) the Lord Chancellor of a proposed dealing. If applied by analogy to this case, the notice would have to be given to the administrators, who would then have to take action to protect their charge and prevent the relevant dealing. This is insufficient protection, the administrators argue.

The Form JJ, however, is headed “Statutory Charge of Beneficial Interest” in favour of the Lord Chancellor. As Mr Davies points out, the charge in this case affects the legal and not just the beneficial interest of the Hotel Company, and ought in principle to be protectable by notice, as it affects the registered estate: see section 34 of the Land Registration Act 2002.

There are two forms of notice, an agreed notice and a unilateral notice. An agreed notice is a slightly misleading description because it can be entered in the register without any agreement of the registered proprietor if the applicant satisfies the registrar that the interest claimed is valid. In this case the interest arises by statute under paragraph 99 of schedule B1, and it is inconceivable that the administrators could not persuade the registrar that the interest claimed is valid. On that footing, as the statutory charge amounts to an interest affecting the registered estate, it would be registrable as an agreed notice, and this would protect the administrators’ priority under sections 29 and 30 of the Land Registration Act 2002: section 32(1) of the same Act.

I can see no basis upon which the Land Registrar could properly refuse to register an agreed notice in respect of the statutory charge in this case, given that the Hotel Company is the registered proprietor of the hotel. It would be necessary merely for the application to recite paragraph 99 and make reference to the outstanding claim for the administrators’ remuneration and expenses, and the making and subsequent discharge of the administration order of 15^th February 2013.

I would be minded, if necessary, to order the Registrar to enter such a notice upon application, but before doing so I would invite the administrators to approach the Land Registrar to see if there are any further comments he would wish to make. It is my experience, but I am sure there must be exceptions to this, that the Chief Land Registrar is normally only too happy to do whatever the court tells it to do (Footnote: ¹).

In those circumstances I can see no justification for authorising the administrators to grant themselves a charge more extensive in scope and effect than the statutory charge. If they perceive some remaining risk on the part of the controllers, they may identify that risk and, if appropriate, seek injunctive relief, but in those circumstances they will have to persuade the court that it is appropriate to grant injunctive relief, notwithstanding the existence of the charge, and to provide a cross undertaking in damages, as any other litigant would have to do when obtaining interim injunctive relief (which I assume this would be).

It is not, however, in my judgment appropriate to defer the termination of the administrators’ office simply to await the result of the dispute over remuneration, even assuming, as I do for argument’s sake, that the controllers will put every obstacle they can in the administrators’ way. They have legitimate obstacles that they can put in their way; namely, the present pending proceedings, which will see their natural course, and in which I will shortly give directions. If illicit ways are identified, as I have said, they can be dealt with by separate application.

Accordingly, I decline the relief the administrators seek authorising them to grant a charge to themselves in respect of their outstanding remuneration and expenses, and will make an order terminating the administration.

As to the need to cater for any of the administrative matters referred to but not spelt out in Mr Khangure’s skeleton argument, I will hear further argument (Footnote: ²). I will also hear further argument on the form of order. I do not, subject to further argument, think it appropriate at this stage to make provision giving effect to the administrators’ discharge under paragraph 98 of Schedule B1 whilst the unfair harm and misfeasance proceedings are unresolved. Liability under paragraph 75 in unaffected by discharge anyway: paragraph 98(4)(b) of Schedule B1. It does not seem to me that the administrators would be unfairly adversely affected by their discharge remaining in abeyance for the time being. (Footnote: ³)