Randhawa & Anor v Turpin & Anor

By their application dated 13 August 2014 the applicants (whom I will call "the Randhawas", as they have been throughout these proceedings) seek orders (i) that the remuneration of the respondents (whom I will refer to as "the Administrators" although they have now ceased to act) is deemed excessive and is either disallowed entirely or reduced to such extent as the court thinks appropriate, and (ii) that the Administrators pay the costs of the application personally (and not as an expense of the administration). The remuneration and expenses claimed exceed £80,000. The application is made pursuant to R2.109 of the Insolvency Rules 1986 (under which the court may make various orders set out in sub-rule (4) in relation to an administrator's remuneration or expenses) and also para 74 of Sch B1 to the Insolvency Act 1986 (under which the court may make any order it considers appropriate if it finds that an administrator "has acted so as unfairly to harm the interests of the applicant").

Neither of the two forms of relief referred to in the application itself would require reliance on para 74. However in his second witness statement, the first applicant said that the Randhawas sought orders for the administrators to pay (i) their costs of dealing with the administrators and (ii) "a portion" of the fees and costs charged by the mortgagees and LPA receivers appointed by them to manage and sell the various investment properties owned by the company. In his submissions Mr. Edwards said that he did not formally abandon these claims but that he did not pursue any claim to recover any costs over and above the disallowance and repayment of the administrators' remuneration and expenses. He put forward no positive case for an order under para 74 and in my judgment none is shown. Insofar as the application is made under that head therefore I refuse it.

The Randhawas bring this application in their capacity as creditors of the company, in somewhat unusual circumstances. They acquired their status as creditors by purchasing (shortly before the application was made and apparently at face value) a debt owed by the company to its former solicitors Lewis Onions in the sum of £17,790. Their real economic interest in the company arises however as a result of a judgment for sums in excess of £2 million obtained by them against Mr Robert Williams on account of frauds perpetrated by him. Mr Robert Williams was the beneficial owner of at least 75% of the issued share capital of the company, and in enforcement of their judgment the Randhawas have obtained a charging order over those shares. The shares are held in the name of Mr David Williams, who is Mr Robert Williams' son. Mr David Williams is also the only registered director of the company, Mr Robert Williams having resigned when he was disqualified from acting as a director. It is the Randhawas' position that Mr Robert Williams has however continued to be the effective controlling mind and director of the company throughout.

The Randhawas are not therefore members of the company, although they have an indirect interest in a majority of its shares. In any event, an application under Rule 2.109 cannot be made by a member, but only by a creditor or creditors together holding 10% by value of the company's unsecured debts. It is accepted that the Randhawas satisfy this criterion.

The business of the company is in property investment. When the administrators were appointed it was the owner of five properties, all of which were occupied by tenants and all of which were charged to Nationwide Building Society. The company also had some cash and bank and a number of investments. There is an unresolved question whether it is also the beneficial owner of certain properties registered in the name of Mr Robert Williams.

In the course of the litigation against Mr Robert Williams, the Randhawas obtained a freezing injunction which affected, inter-alia, the assets of the company. It appears that this led the company's bank to refuse to make payments out of its account, including payments due to Nationwide, and that this in turn led Nationwide to appoint LPA receivers in respect of each of the properties. Although Nationwide held a floating charge which would have entitled it to appoint an administrator it did not do so. This may well be because, as is accepted, the company had no business other than managing and receiving the rents from the properties, the rents were sufficient to cover the outgoings and payments due to Nationwide and the properties were ample security for Nationwide's debt.

The Administrators were appointed on 11 September, 2013. The appointment was made by Mr David Williams as director, without any application to the court. Notice was given beforehand to Nationwide, which did not either make its own appointment or object to the appointment proposed by the director. The appointment followed advice given by the administrators' firm which included the following (taken from a note attached to the administrators' consent to act):

“Due to the complications with the freezing order over the Williams' assets, various mortgage payments had been missed and more recently, Nationwide Building Society had taken steps to appoint Law of Property Act receivers to the properties belonging to the company …

Given the complexities of the circumstances faced by the company and the subsequent freezing of the company's Bank account leading to the actions described above by the Mortgagees, it is considered appropriate to place the Company into Administration to take control of the Company's affairs and protect the interests of all creditors generally. ”

In his third witness statement, Mr Turpin seems to suggest that this was not advice to the director to follow any particular course, but a recommendation on the basis of which he made a decision. I do not see that there is any material distinction to be drawn between "advice" and "recommendation".

The Randhawas do not now contend that the appointment of the Administrators was invalid. It is accepted that the company was "unable to pay its debts" at the date of appointment, because Nationwide had in July 2013 properly demanded repayment of its lending on account of the payments missed. Although there are suggestions that the notification of intention to appoint sent to Nationwide was for no good reason sent to its head office rather than to the individuals known to be dealing with the company's affairs and that this was with a view to making it less likely that Nationwide would act in time to prevent the appointment, it is not said that this amounted to a procedural defect, or that there was any other procedural defect, sufficient to invalidate the appointment.

The Randhawas' overall contention however is that there was no good reason for the company to go into administration at all. There had been no need for the company to fail to make any payments to Nationwide; if the bank was reluctant to do so the director could have requested the Randhawas to consent expressly to those payments, which they would have done, but he made no such request. Its principal assets, ie the properties, were already under the control of the LPA receivers and the administrators had no intention of taking any steps to take over control from them. In due course, the receivers could be expected to sell sufficient properties to discharge Nationwide's debt whereupon there would be a surplus to be returned to the company which (subject to the potential claim by Belvadere referred to below) would then have a substantial surplus of assets. No creditors were pressing for payment, still less taking or threatening to take any action against the company or its assets. The company had cash at bank sufficient to discharge all its other outstanding debts, and consent for such payments would have been forthcoming if sought. Since the appointment, costs have been incurred for, it is said, no good purpose and with no benefit to creditors. The administration has now come to an end and the company is in exactly the position it was before the appointment, save that its assets have been depleted by the costs of administration.

In the Randhawas' view, the defaults to Nationwide were engineered and the administration appointment was made by Robert and David Williams in order to delay or frustrate their efforts to satisfy the judgment against Mr. Robert Williams, and/or reduce the assets available for that purpose by causing costs to be incurred. The case is not however put on the basis that the administrators themselves acted for, or were complicit in, any such purpose.

A significant area of uncertainty affecting the conduct of the administration, which I will outline now by way of background, is in relation to an entity known as Belvadere (or Belvedere) Investment Company. According to a witness statement filed by Mr. Turpin in an earlier application (Bundle1/Tab3/p192) when the company was formed the shareholders were Mr. Robert Williams (75%) and his then wife Mrs Pauline Williams (25%). According to its accounts, at some point in 1988-9 Mrs Williams' shares were transferred to Belvadere Investment Company Ltd, a company incorporated in the Isle of Man with number 014735C. There are no documents to show who was behind that company, but it is assumed to be Mr. Robert Williams. Belvadere Investment Company Ltd was however dissolved on 23 October 1996 and any assets it held would have vested in the Crown as bona vacantia.

The company's accounts show a liability to "Belvadere Investments" or "Belvadere Investment Company" going back at least to 1988 and apparently increasing year by year since then so that it stood at £553,198 by 2012, as shown in the last accounts prior to administration. No limited company can now be traced with that name, and neither Mr. Robert Williams nor Mr. David Williams has provided any satisfactory explanation as to what if any entity now exists with that name, or what the liability recorded in the accounts represents. The company's auditors could say only that Mr. Robert Williams instructed them to put this liability in the accounts. Mr. Robert Williams at one point informed the administrators orally that Belvadere was charging a management fee of £15,000 pa but had never collected payment. No documents have ever been produced to substantiate an entitlement to such a fee. Elsewhere he has professed to know little about Belvadere. Since he was running the company it seems unlikely that any third party management services would have been provided without his knowledge, so the probability must be that Belvadere is either entirely fictitious or some alter ego for Mr. Robert Williams.

The administrators have devoted time and effort in an attempt to find out whether Belvadere now exists that is able to claim as a creditor. An advertisement in the Gazette has produced no response. Letters to the former registered address of the Isle of Man Company were returned unanswered. The cost of this work is criticised as unnecessary in circumstances where the administrators do not as yet have any funds in hand to make a distribution. Until then, there is no need to know. When a distribution is a possibility (and assuming the permission of the court was obtained for them to make it) the administrators could have advertised for creditors under R2.68(2) and, if Belvadere did not appear, safely make their distribution and thereafter proceed on the basis that claims by it could be ignored.

Not having any firm information the administrators made an application for directions as to whether Belvadere, or the Crown, should be treated as creditors. The Randhawas intervened in the application and on 21 May 2014 I gave a direction that the administrators convene a meeting of creditors and present revised proposals to bring the administration to an end and pass control back to the directors. That meeting has been held, the revised proposals were approved and the administrators ceased to hold office on 22 August 2014. David Williams has been removed as a director and the Randhawas appointed in his place, so that the company is now under their control. It is thus now their responsibility as directors to deal with any claims by Belvadere or the Crown, whether as creditor or shareholder.

Mr. Edwards' submits that the director could not make the appointment of administrators without filing, inter alia, a statement by the intended administrator that "in his opinion the purpose of administration is reasonably likely to be achieved" (Insolvency Act 1986 Sch B1 para 29(3)(b)). In this case, he says, the administrators could not properly have made that statement, and therefore cannot have given any thought to the matter before they did so. In those circumstances they should not be entitled to any remuneration at all.

The purpose of administration is set out in para 3 of Sch B1 as follows:

“Purpose of administration

3(1) The administrator of a company must perform his functions with the objective of—

(a)

rescuing the company as a going concern, or

(b)

achieving 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), or

(c)

realising property in order to make a distribution to one or more secured or preferential creditors.”

The administrators sent a report and proposals to creditors, by letter dated 4 November, 2013. The document contained (in paragraph 3) a statement that the administrators had been appointed by the court. That however was not correct. In a section headed "Objective of the Administration" the purposes of administration were set out. The letter continued:

“ I am mindful that there are a number of factors which will ultimately affect the outcome of the procedure and subsequently (sic) the objective is to be achieved, including the outcome in relation to potential property realisations and uncertainty relating to the level of company creditors, further details of which are set out in this report.

Notwithstanding this, I am satisfied that, as a minimum, objective (b) can be achieved as an administration process is likely to achieve a better overall result for creditors, however, as matters progress it may be possible to achieve objective (a) a rescue of the company on a going concern basis. Further details setting out the rationale in this regard are set out below. ”

The letter did not however set out any basis upon which the administration might achieve a better result for creditors. It noted that the administrators had power to request the LPA receivers to vacate office, but said that no such request had yet been made. While noting that a request might be "appropriate if it is beneficial and cost-effective to do so" there was no indication then, and nor has there been subsequently, that the administrators would be able to achieve any better result either in managing or in realising the properties than the LPA receivers would.

So far as rescue as a going concern was concerned, an estimated outcome statement was attached which showed that, including the value of the properties said to be held on trust by Mr Robert Williams, if the claimant by Belvedere was accepted as a debt, there would be a deficit is far as unsecured creditors were concerned of approximately £111,000, but if that claim was excluded and there would be a surplus of approximately £440,000. The Randhawas criticised this statement on the basis that the values of the properties included in it were, they say, unrealistically low. If they are right, there may have been a surplus of assets even if the Belvedere claim was found to be genuine. The administrators' letter said only that if the Belvedere claim could be excluded "it may be possible to pay creditor claims in full and affect (sic) a rescue of the company. If this outcome proves possible than the joint administrators may be able to pursue objective (a) ... i.e. a rescue of the company, which would likely conclude with responsibility of (sic) the company being returned to the director. However subject to Stakeholders' preferences, the company may still enter into Creditors' Voluntary Liquidation should objective (a) be achieved, in order to effect an orderly distribution of its remaining assets to its shareholders."

The administrators' proposals themselves are criticised as "spectacularly vague". As set out in appendix 7 the only substantive proposal as to conduct of the affairs of the company was:

“ The Administration shall continue in the short term in order that the assets, liabilities and other statutory requirements as detailed in the Joint Administrators' report of 4 November, 2013 may be dealt with. This includes the potential for applications to court for directions over the treatment of various charges and restrictions over the property assets to which (sic) the company has an interest. ”

There were a number of other provisions which could be summarised as keeping all options open. It was proposed that the administrators might apply to the court for authorisation to pay a dividend to unsecured creditors "should this be deemed appropriate", to extend the period of administration, and that the conclusion of the administration to return control to the directors, or place the company into voluntary or compulsory liquidation.

Mr. Edwards referred me to Doltable Ltd v Lexi Holdings Plc [2005] EWHC 1804 (Ch) in which Mann J refused to make an administration order in respect of a company which owned a single property, in circumstances in which fixed charge holders had appointed LPA receivers to manage and dispose of the property. The underlying objective of the application was to have the sale process taken over by administrators who, the directors felt, would achieve a better price. It was suggested that if this was accomplished, there would be a surplus remaining after the property was sold, and that this would amount to "rescuing the company as a going concern". Mann J rejected that contention on the basis that the business of the company related only to the single property it owned, so that it could not be said to be a going concern if that property was sold, even if there was cash left which might in principle be employed in some other business. There were several other grounds for refusal of the application, one of which was that the appointment of administrators would not assist or advance the sale process.

It does not in my view follow that a process in which the assets of the company are managed while its liabilities or potential liabilities are explored, which may lead to the position that when the true level of liabilities is established they can be satisfied out of the assets, leaving assets with which the company can continue its business, cannot be described as "rescuing the company as a going concern". I do not consider that, in this context, the word "rescue" implies that the administrators must themselves do or achieve something which could not otherwise happen, but only that the administration should enable a going concern to be preserved when it otherwise would or might not be. It is not difficult to imagine circumstances in which a large claim is asserted against a company which, if valid, it would not be able to pay. The directors may not be willing to continue running the company while the claim is contested, incurring liabilities in circumstances in which, if the claim is successful, they may be found to have acted improperly. It seems to me that an administration in which the business of the company was continued under the management of the administrators while the alleged liability was explored and if necessary litigated, with the aim that if the claim was found not to be a good one the directors could then resume control of the company with its business activity having been preserved as a going concern would be one which could be described as a "rescue".

In the present case, given the doubts about whether the Belvadere claim was a genuine one it seems clear that there was a reasonable prospect that it might be found not to be a valid claim at all. If that was the case, even if all the properties vested in the company had to be sold to discharge the Nationwide debt, there were four other properties apparently held on trust for the company with which it could have carried on business. This company was not, as Doltable Ltd was, a single property company that could not be said to have a business that it extended to the potential acquisition and management of other properties, so that it seems to me that it would have been just as much carrying on this company's business if it continued that business using the trust properties (whether or not it caused them to be registered in the company's own name) or surplus cash assets rather than the properties of which it was the registered owner. Of course, if the Randhawas' contentions as to the value of the directly owned properties are correct, it would not even be necessary to sell all of them to pay off the Nationwide debt, in which case it could have continued its business using such of those properties as it retained.

Does it matter that the administrators had no clear idea of how this process would unfold at the time of their appointment, or that they would in all probability play no part in the management for realisation of the properties in the hands of the LPA receivers, or that the uncertainty involved as to the Belvedere claim could probably have been resolved if the director and Mr Robert Williams had provided full information about Belvedere, as it appears likely that they were in a position to do, or that the director could, on the face of it, have continued in charge of the company and relatively easily obtained any necessary consent or court order for the use of its assets to pay its immediate liabilities without any impropriety? Does it matter that the director and/or Mr Robert Williams may have acted for the improper motive of frustrating or impeding recovery by the Randhawas? Insofar as the question is whether the administrators could properly have made the statement that the statutory purpose of administration was reasonably likely to be achieved, in my view it does not.

It is not, I repeat, suggested that the administrators themselves acted from any improper purpose or by way of participation in or assisting any improper purpose the director may have had. The Insolvency Act gives the directors power to appoint an administrator and the responsibility for the decision to do so falls on them. It does not oblige them to carry on trading whenever they could properly do so, so that it is not necessarily improper to appoint an administrator in circumstances where the directors could equally properly have taken some other course of action. Even if the administrator takes the view that the directors are being unnecessarily timid in seeking to make an appointment when bolder directors might have carried on, it seems to me that it is not the function of the prospective administrator to refuse appointment so as to compel them to take risks day are unwilling to do.

If the directors have acted for an improper purpose, or are otherwise in breach of their duty to the company in making the decision to appoint an administrator, that is something that may give rise to a claim against them. When they have made that decision, it seems to me, the responsibility on the prospective administrator in considering whether the statement as to the statutory purpose can be made is to look ahead of as this at what will or may happen during the administration if he is appointed, and not behind at the motives which may have led the directors to choose to make the appointment.

I should say of course that in so far as the directors took advice in coming to the decision to make an appointment, those who advise them may also have come under a duty to the company in the giving of that advice. That includes the prospective administrators. But again the claim has not been run before me on the basis that it seeks to make the administrators' firm liable for any defect in advice they may have given prior to the appointment.

Further, even if it is not the case that the administrators were likely to have any significant part to play in dealing with the Nationwide properties, there was a role to be played in securing that the properties held in Mr Robert Williams' name were preserved for the benefit of the company, and if appropriate transferred to it.

I reject therefore the contention that the administrators could not or should not have made the statement as to the statutory purpose which led to their appointment. It follows that I reject the argument that they should not be entitled to any remuneration at all for their services. The Randhawas criticised heavily the amount of time and effort that has been spent on administration which, they say, has achieved very little. I also reject the suggestion that once appointed they should have brought the administration to an end immediately, or continued it only for the purposes of complying with their statutory obligations such as making a report on the directors. In principle, it seems to me that it was appropriate for them to pursue a policy of ascertaining what the assets were and obtaining control of them, and seeking to explore whether the Belvedere claim was a genuine liability or not with a view to taking a decision as to how to proceed when assets were available in their hands.

That is not to say, however, that I am necessarily approving all of the time spent and costs incurred in doing so. There is force in the suggestion that the administrators should not have incurred significant costs in investigating the Belvedere claim once their initial enquiries had shown that the company with that name had been dissolved and the director and Mr Robert Williams were not able or willing to provide any other firm information. As and when there were assets available for a distribution that would have satisfied the other unsecured creditors, the position could have been tested easily and cheaply by advertising for claims and, if none emerged from Belvedere, paying off all the other creditors. Once that had been done, the company could be restored to the director or, if no director was willing to act, putting the company into winding up to make a distribution to shareholders.

There was, as both counsel accepted, no time in the hearing before me to explore in detail the remuneration that should properly be paid for these services. Having determined the principal issues that were contested, it seems to me that if the level of remuneration cannot be agreed, it will be necessary to have a further hearing to give directions for a detailed consideration of these matters. As to the costs of the application, the ordinary rule is that the costs are to be paid by the applicant. There is no basis for departing from that in relation to the issues I have been able to address so far, but it is a matter that will have to be considered again at the end of any contested process to determine the amount of remuneration in detail.