Harlow (Administrator of Blak Pearl Ltd) v Creative Staging Ltd

References in this judgment to the Act are references to the Insolvency Act 1986. References to Schedule B1 are references to Schedule B1 of the Act. References to the Rules, or any Rule, are references to the Insolvency Rules 1986.

This is an appeal from the order of District Judge Williams, made on 24^th of March 2014, refusing an application made by the administrator of the company with which this application is concerned, Blak Pearl Ltd (“the company”).

By that application the administrator, Mr. Harlow, sought an order that his appointment as administrator should cease to have effect from the making of the order. He sought other orders also. The first provided for dismissal of the application of Creative Staging Ltd (“CSL”) to withdraw its petition for the winding-up of the company. The next was for dismissal of the application of another third party creditor, Rock Star Opportunities Ltd. (“Rock Star”), to be substituted as petitioner. Finally, he applied for the company to be wound up on the petition by the court pursuant to paragraph 79 (4) of Schedule B1.

What happened in this case is that a petition had been presented against the company on 24^th of August 2012 by CSL for a debt of just over £63,000. Before that petition could be heard CSL came to terms with the company under which it agreed to withdraw the petition upon receipt of the sum of £88,000 by two instalments paid respectively, on 15^th October (£50,000) and 29^th November 2012 (£38,000).

Also on 29^th November 2012 but later that day, a qualifying floating charge holder (“QFH”), Thincaps Loan Syndicates Ltd. (“Thincaps”), appointed Mr. Harlow as administrator. That can legitimately be done by a QFH, despite the presentation of a petition, unlike the more common example of a directors’ out of court appointment, which cannot proceed so long as there is an extant petition on the file.

When there is a competition between administration initiated by the directors, or the company, and a creditor who wants a winding-up petition, the court ultimately decides which is to go ahead and, in the event that an administration order is made, then under paragraph 40(1)(a) of Schedule B1 the petition has to be dismissed.

However, the position is different in the case of the appointment of an administrator by a QFH. The effect then is that the petition is suspended under paragraph 40(1)(b) of Schedule B1.

The effect of suspension was considered by His Honour Judge Norris, Q.C. in Re J. Smiths Haulage Ltd. [2007] BCC 135 who concluded that the effect of suspension was that the petition had no legal effect during the period of suspension only. That period of suspension however lasted only as long as the company remained in administration, and the petition revived upon its ceasing to be in administration.

Thus, in the present case, the administrator sought both to bring the administration to an end and revive the petition, upon which he then sought a winding-up order.

An alternative course open to him would have been to petition for a winding up order and to include in the petition an application under paragraph 79. This is the route expressly contemplated by Rule 4.7(7)(c) “where applicable”. However, the reason why the administrator prefers to have the order made on the original petition is because of the doctrine of relation back.

Under section 127 of the Act, in a winding up by the court, any disposition of the company's property made after the commencement of the winding up, (which is ordinarily the date of presentation of the petition) is void unless the court otherwise orders. Thus, the £88,000 paid to CSL would be vulnerable as would a number of other payments, potentially, totalling approximately £600,000, though it was acknowledged by counsel for the administrator, before me, that a number of them would clearly be payments in the ordinary course of business made without notice of the petition which it would be difficult to attack. If the administrator is required to present a new petition, any winding-up order will relate back only to the date of the presentation of the new petition.

Mr. Whitaker (for the respondent to the appeal) has pointed out, as he did before the district judge, that there are detailed legislative provisions, in particular paragraph 21 of Schedule 1 of the Act as incorporated by paragraph 60 of Schedule B1, reinforced by Rules 4.7(7) and (9), for the administrator to present the company's petition, in which case an application also needs to be made where appropriate requesting that the appointment of the administrator shall cease to have effect. It is said that that is, as on its face it appears to be, a complete code enabling the company to be placed in liquidation following an administration. However, this overlooks the fact that there is already in existence a petition which has not been dismissed but, because this is a QFH appointment, suspended.

Mr Whitaker says his approach is reinforced by the absence in the Rules of any power to substitute on the original creditor's petition anyone other than a creditor or contributory. There is, notably, no power to substitute an administrator acting in that capacity, though, as a petition, once presented, is treated by Rule 4.7(9) as if it were a contributory’s petition, it might be said that where an outgoing administrator desires to present a petition on behalf of the company, the company should be treated as a “contributory” for the purpose of Rule 4.19(2).

I also add that I say "acting in that capacity" because it does appear that an administrator might, in respect of unpaid fees, at least to the extent that they are not disputed, have power to petition, and therefore to be substituted as petitioner, in his capacity as creditor.

On the figures which Mr. Whitaker has shown me, the administrator appears in this case to be substantially out of pocket and so that may be a very relevant factor.

I turn to consider the decision of Judge Norris QC in J. Smiths Haulage Ltd. because that is at the heart of this appeal. In that case a winding-up petition was presented against the company in March 2006 and an administrator was appointed in April 2006 by a QFH. Thus the statutory suspension, as in this case, took effect. However, a winding-up order was in fact made also in April 2006 but after the administrator’s appointment and his disposal of the company’s business.

Judge Norris held that the undisposed of winding-up petition did not prevent the QFH from appointing an administrator. That must be right. The undisposed of winding-up petition was suspended. He contrasted that with a stay of the petition and ruled that the existence of the petition, including its potential to avoid dispositions, was without legal effect for the period of administration, because of the suspension. Section 127 of the Act would therefore not avoid a disposition by an administrator validly appointed under paragraph 14 of Schedule B1.

That conclusion would not avail CSL in this case because their payments were received after the presentation of the petition but before the appointment of an administrator, and were not the administrator’s payments.

It was noted by Judge Norris that there was express power, in the event of the administrator's proposals not being approved by creditors, for the court to make an order on the suspended winding-up petition. More importantly, he also had no doubt, even when that was not the case, that the court has power under paragraph 79(4)(d) of Schedule B1 to make an order on the suspended petition: either dismissing it or making a compulsory winding-up order, depending on the course taken by the administration and the necessity for distributions or investigations. He held that that was an approach he would have adopted in that case had the winding up order not been made in April 2006. He also held that he could have rescinded the April order and then wound the company up under the original petition. Any fresh order on the petition (had he rescinded the April order) would relate back to the date of its presentation, so there seemed to be no point in the exercise. He thus declined to make an order rescinding the suspended petition and writing it out of history, thus preserving the earlier commencement date for the purposes of section 127 of the Act.

In paragraph 5 of his judgment he made the distinction between "suspended" and "stayed" and concluded:

He went on:

Then having drawn attention to the provisions of paragraph 55 of Schedule B1, empowering the court to make an order on a suspended winding-up petition in the event of the creditors failing to approve the proposals, he continued:

Judge Norris, as I have said, then went on to decline to rescind the winding-up order and instead made an order in the following terms:

I need not read the rest.

His actual decision therefore was to confirm the winding-up order as made, though previously ineffective, upon the footing that he undoubtedly had power, were it not for the winding up order wrongly made in April, to make a winding-up order on the suspended petition.

It seems to me that the approach of Judge Norris is clearly correct, notwithstanding the able submissions of Mr. Whitaker to the contrary.

Once the court has a petition before it, it is seized of the matter. It cannot, as was conceded before me, be withdrawn without the consent of the court, even if all parties agree, as happened (as between the actual parties to the petition) in this case.

The court when it comes to consider the exercise of its power upon the hearing of the petition must do so from the perspective of the class which a winding-up order is meant to benefit, namely the creditors as a whole: see Crigglestone ColeCo. [1906] 2 Ch. 327 per Buckley J. at 331.

Mr. Whitaker sought to impress upon me that in the present case I need not consider the interests of creditors generally because the overwhelming probability was that only the secured creditor, Thincaps, ultimately would benefit. Be that as it may, and I am not at all convinced that that would necessarily be the case (though, clearly, there is that risk) that is still a creditor whose interests are entitled to have priority over the private interests of CSL, whose interest now is to avoid repayment of the sum received after presentation of its own petition, and in respect of which was Rockstar was previously asking to be substituted.

It appears that most unsecured creditors, as often happens, including Rockstar, have lost interest in this insolvency and so Rockstar did not attend at the hearing before the district judge asking to be substituted, despite its extant application to that effect.

However, the secured creditor, Thincaps, who released its security to the extent of £1,000, did seek to be substituted and was directed by the district judge to make an application for substitution in respect of that £1,000 within a specified period.

It seems to me that these additional steps are unnecessary and merely add to the costs of finally putting to rest what is undoubtedly an insolvent company, already subject to an insolvency process. The less expense that is undertaken in that regard the better.

It is a highly material factor that the course proposed by the administrator would be in the interests of creditors, whether Thincaps alone as secured creditor or the general body of creditors, because the full retrospective effect of section 127 of the Act would be preserved back to the date of presentation of the suspended petition.

That was a material factor that affected Judge Norris in the J. Smiths Haulage case and led him to conclude that he would have adopted that course had the April winding up order not been made.

It is said by Mr. Whitaker that previous authority and relevant provisions of the Rules and Act were not cited to Judge Norris. It is true that they were not, but when Judge Norris reached his decision in October 2006 he had been the Chancery judge sitting in Birmingham for some years hearing (as my own experience confirms) insolvency applications on a regular basis. I am not prepared to proceed on the basis that he was acting in ignorance. He founded his approach (as in my judgment he was entitled and correct to do) on the broad words of section 79(4)(d) of Schedule B1 to fashion a remedy that seemed to meet the need in the particular circumstances before him.

Mr. Whitaker also complained that the approach of Judge Norris was inconsistent with previous decisions of Mr. Justice Harman in BrookeMarineLtd. [1988] BCLC 546 and Synthetic Technology Ltd. [1900] BCLC 378 at 382.

Those two cases contain what was at that stage the almost universally accepted proposition that a winding-up order could only be made on a properly presented petition.

In the present case Ms Markandya’s primary point is that she does not need to challenge that proposition because she says here there is a properly presented petition which, if the court is persuaded to make the order terminating the administration, will revive and upon which an order can be made, because it is before the court, and it is for the court to decide how to dispose of that petition. She says that the technical obstacles put up in the way of an order being made by Mr. Whitaker are just that, but do not undermine the substance of the court's power to make a winding-up order on the petition.

Mr. Whitaker's submissions ultimately are that the court simply had no jurisdiction in this case to make (and still has no jurisdiction to make as things stand) a winding-up order in the face of what is now, for understandable reasons, opposition from his client, the petitioner, CSL. That is doubly so as the proposed supporting creditor (Rock Star) did not even bother to appear before the district judge, having now apparently lost all interest.

In my judgment the decisions of Mr. Justice Harman, to which reference has been made, are not determinative of this application. There is an extant petition, which will shortly no longer be suspended, and the barriers erected by Mr Whitaker are essentially procedural, not of substance. The court is often faced with applications concerning companies which have ceased to have any ongoing commercial viability but are in administration, where it is sought to proceed to a liquidation. It is commonplace in such cases for immediate orders to be made and for procedural requirements to be waived under Rule 7.55.

It may be that the administrator in the present case could be sent off to find a creditor who would wish to take over the petition. There might then be another hearing (possibly disputed) in relation to that. It may be that the administrator themselves could (as on the figures I have seen is certainly so) join in as a supporting creditor in respect of their unpaid fees.

All that is just a procedural thicket, guaranteed to enhance costs and make the ultimate result more needlessly distant than it should be.

There is a perfectly proper reason for the administrator to wish to proceed in the way he proposes rather than by way of a new petition under paragraph 21 of Schedule 1 of the Act, namely the desire to preserve the consequences of section 127 of the Act. For reasons best known to Parliament, but which no-one has explained to me, express provision has been made in the case of a QFH appointment for a pending petition to be preserved, albeit suspended. As it has been preserved and revives once the administrator ceases to hold office, the proper course must be to enable anyone who has an interest in seeking a winding-up order on that petition to do so. The administrators clearly have a sufficient interest, as Parliament has expressly given them power to present their own petition, but why do that when one is already in place, with its own more advantageous commencement date?

In addition, the court has, since the two decisions of Mr. Justice Harman, to which I have referred, developed in a small number of cases, starting with Lancefieldv Lancefield [2002] BPIR 1108, and applied in BTR (UK) Ltd. [2012] BCC 864 and Marches CreditUnion Ltd. [2013] EWHC 1731 (Ch), a jurisdiction for the court to make a winding-up order, if necessary of its motion or initiative, based upon the fact that section 122 of the Act expressly provides:

That has been treated as the governing section confirming jurisdiction and the following sections, in particular section 124 onwards, have been regarded as procedural requirements which are not absolute in their impact.

Those cases were decided without reference to the two previous decisions of Mr. Justice Harman, but are now established (at least at first instance) and it would not be appropriate, in my judgment, for me sitting at first instance to depart from them now.

That is not something upon which the administrator relies directly in this case, as I have said, but it does seem to me to reinforce the approach of Judge Norris because if the court could make a winding-up order without so much as a petition, then it seems to me that the court can more readily accept that it has that jurisdiction to make a winding-up order upon the existing petition, which remains in being, relying upon the administration coming to an end and the wide powers conferred by paragraph 79(1)(d).

Accordingly, I would, were it necessary to do so, waive any defects in the present petition and, subject to consideration of discretionary matters, regard it as open to me to make an order for winding-up on the existing petition.

The district judge did not do that. The primary ground for his decision was that he accepted Mr. Whitaker's submissions that he had no jurisdiction. That being so, having taken the view that he had no jurisdiction he clearly could not exercise it.

He did go on to consider (obiter, I think) in paragraph 15 as follows:

It seems to me that the district judge erred in approaching the matter in that way. When he said that no good explanation had been given as to why the statutory process had not been followed, it seems to me perfectly clear that the explanation is obvious that the liquidator would not then be able to pray in aid section 127 back to the date of presentation of the suspended petition. That, as I have said, is a proper consideration.

As to the prejudice caused to a significant body of creditors, as I have said, a number of the potentially challengeable payments obviously are or may be payments in the ordinary course of business which are unlikely to be disturbed, but there are others which are not. If there are proper claims, Parliament must have intended them to be retained by suspension of the petition rather than its dismissal, and it is not incumbent upon the administrator or myself to adopt or impose a course which would take that away. It is not a proper discretionary factor against the exercise of the power which I have found that the court has.

In all the circumstances it does seem to me that this court ought to recognise that Parliament must have intended to keep the petition in being for a reason and one of the reasons is so that an order might be made on the suspended petition, taking advantage of the doctrine of relation back, despite any objections of the Petitioner.

The court is seized of the petition. The company is plainly insolvent and it ought to be put into liquidation now and not at some future time after further costs and expenses have been incurred dealing with substitutions and the like. Accordingly, I will allow the appeal and grant a winding-up order upon the petition, waiving all procedural requirements that have not otherwise been complied with.

I will now hear counsel on consequential matters.