Mond v Synergi Partners Ltd

This is my extemporary judgment in the matter of Synergi Partners Limited, case number 2134 of 2015. This is a somewhat unusual administration application. The application was issued on 4 February 2015 by Mr David Emanuel Merton Mond in his capacity as a creditor of the company for the purposes of paragraph 12(1)(c) of Schedule B1 to the Insolvency Act 1986 as amended. The application is supported by Mr Mond’s witness statement of 22 January 2015, together with Exhibit DEMM/1.

The applicant appears before me today by Mr Louis Doyle of counsel. What is sought is an administration order in terms to take effect retrospectively from 23 November 2010, almost four years and three months ago.

The background to the application is as follows: On 22 November 2009 Mr Mond, in his capacity as a qualifying floating charge holder, appointed Mr Jonathan Avery-Gee as administrator of the company. The period of administration was not extended and therefore the period of administration automatically terminated on 22 November 2010. During the course of the administration, and on 29 January 2010, creditors had approved the administrator’s proposals. Those proposals were modified by a meeting of creditors on 3 November 2010, some 19 days before the administration terminated automatically, so as to allow for the company to be moved into creditors’ voluntary liquidation and for Mr Gerald Krasner and Mr Julian Pitts, both of Begbies Traynor’s Leeds office, to be appointed as joint administrators. Unfortunately it was not until 23 November 2010, and thus one day after the one-year period of administration provided for in paragraph 76(1) of Schedule B1 had expired (so that the administration had by then ended), that Mr Avery-Gee in fact completed Form 2.34B ‘Notice of move from administration to creditors’ voluntary liquidation’. It is apparent from the stamp endorsed on that form by Companies House that the notice was not registered there until 27 November 2010. There is authority that a notice under paragraph 83 of Schedule B1, moving a company from administration to creditors’ voluntary liquidation, only takes effect when registered: see Re Globespan Airways Ltd, Cartwright v The Registrar of Companies [2012] EWCA Civ 1159; [2013] 1 WLR 1122.

It is accepted by Mr Mond, and also by Mr Krasner and Mr Pitts, that those two individuals were never validly appointed as liquidators of the company, as envisaged by the notice. As such, and as Mr Mond points out, those two individuals have been acting without any standing in the name of the company for a period now in excess of four years. As Mr Doyle points out, this is not a case in which there is a defect in appointment which might be capable of cure. Rather, the appointment is simply void because it never happened. What Mr Mond therefore seeks is a retrospective administration order to the day immediately following the termination of the original administration on 22 November 2009. Mr Doyle suggests that if the court were minded to grant the order sought, it might be just as well to make the order effective from 22 November 2009, so as to provide what he describes as a ‘seamless join’ between the end of the original one-year period ending on that date and the commencement of the administration order.

The reason why a retrospective administration order is sought is as follows: Synergi was part of a group of companies engaged in the provision of what may be termed ‘consumer financial debt solutions’. During the four years since their purported appointment, Mr Krasner and Mr Pitts have been investigating potential claims against the company’s former directors for wrongful trading. A letter before claim with lengthy enclosures dated 2 June 2014 has been addressed to each of the directors by a firm of solicitors in Manchester, Irwin Mitchell. Mr Mond makes it clear that those letters were sent to each of the directors before it had been appreciated that there was any problem with the appointments of Mr Krasner and Mr Pitts. The value of the wrongful trading claim, in terms of potential recovery, is put at approximately £7 million. According to the company’s statement of affairs dated 8 February 2010, the company’s secured creditors totalled some £4.43 million, with unsecured creditors totalling in excess of a further £6 million. Without a retrospective administration order at this stage, the wrongful trading claim would necessarily have to be abandoned because it is intimated on behalf of individuals who have no standing to bring it as liquidators. That abandonment, it is said, could only work to the detriment of creditors.

Mr Doyle acknowledges that there is no useful purpose in an administration order other than the retrospective order sought. The two conditions for the making of an administration order appear in paragraph 11 of Schedule B1 in the following terms: “The court may make an administration order in relation to a company only if satisfied – (a) that the company is or is likely to become unable to pay its debts, and (b) that the administration order is reasonably likely to achieve the purpose of administration.” The latter condition requires reference back to paragraph 3(1) of Schedule B1. That provides that; “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.”

As Mr Doyle points out, the first of the two threshold conditions - that the company is or is likely to become unable to pay its debts - is uncontroversial. The company was heavily insolvent as at 8 February 2010. That leaves the question of whether the second of the threshold conditions can be satisfied: whether there is a real prospect of one of the statutory purposes of administration being achieved. Mr Doyle submits that that is addressed in terms in paragraph 19 of Mr Mond’s supporting witness statement as follows: “In my opinion the purpose of the administration, namely achieving a better result for Synergi’s creditors as a whole than would be likely if Synergi was wound up (without first being in administration) would be achieved: see paragraph 3(1)(b) of Schedule B1 to the Act. This is so because the claims can only be brought after Synergi has gone into insolvent liquidation. Therefore placing Synergi into insolvent liquidation and ensuring that Mr Krasner and Mr Pitts are appointed liquidators is required to properly prosecute the claims; and a necessary first step is to place Synergi into administration.”

At paragraph 22 of Mr Mond’s witness statement he states that he has been informed by Messrs Krasner and Pitts that it would be their intention immediately on appointment to send out proposals to creditors and that those proposals would include the proposal immediately to terminate the administration and to place Synergi into creditors’ voluntary liquidation. Mr Mond observes that the court will be aware that as a qualifying floating charge holder he could simply have placed Synergi into administration under paragraph 14 of Schedule B1 to the Act. However, in the circumstances he says that he was keen to avoid any suggestion at any future date by any interested party that the invalid appointment of Messrs Krasner and Pitts had not been brought to the court’s attention and had therefore been hidden.

Mr Doyle had originally submitted that, although somewhat unusual, there was no conceptual difficulty in the purpose of administration being achieved by reason of the administration facilitating a liquidation in which claims can be pursued for the benefit of what would be, in both the administration and the subsequent liquidation, the company’s creditors. In other words, he says that administration would bring about a better return for creditors than would otherwise arise in an insolvent liquidation. He points out that only a liquidator may pursue a wrongful trading claim under section 214 of the 1986 Act. Mr Doyle acknowledges that that submission may beg the question as to why Mr Mond did not simply petition for the company’s winding up. The answer to that is said to lie in paragraph 20 of Mr Mond’s witness statement, where he points out that the court would have no power in a compulsory winding up to appoint Mr Krasner and Mr Pitts as liquidators, and so they would be reliant on either a Secretary of State’s appointment, or on an appointment following a meeting of creditors convened by the Official Receiver. What Mr Mond is essentially said to be driving at is the risk of the loss of Messrs Krasner and Pitts, and their state of knowledge based upon their involvement with the company in the four years preceding the letters before claim. Mr Doyle submits that that is not an unreasonable stance for Mr Mond to take; any fresh appointee would have, effectively, to start again.

Mr Doyle submits that there would be no detriment or prejudice to creditors whatsoever by reason of the administration order sought. On the contrary, he says that creditors could only benefit from any potential recovery. Nor are there said to be any significant assets sitting in the company’s estate. This is not a case, therefore, where the court is being asked to make an administration order on the basis of potential recoveries, where the professional costs necessarily to be incurred in the course of pursuing those recoveries can be met from significant sums in the company’s coffers. In other words, creditors will not be funding the wrongful trading claims. They will be financed in some other way.

It was on the basis of those submissions that Mr Doyle originally sought a retrospective administration order from the court. That was the basis upon which the application first came on for hearing before His Honour Judge Pelling QC, sitting as a judge of the Chancery Division in the Applications Court in Manchester last Friday, 13 February. Judge Pelling indicated that he was concerned about making an administration order retrospective as far back as 23 November 2010. I understand that he indicated that he was concerned not simply about the retrospectivity of it, but also as to the basis upon which it could be said that making such an order would achieve one of the statutory purposes of administration. On that basis, and at the invitation of Mr Doyle, the application was adjourned to the applications list in Manchester today, Friday 20 February, before me, with costs being reserved. Mr Doyle points out that at the hearing last Friday, the applicant identified to the court that what was being sought was not a retrospective order which was seeking to cure a technically deficient appointment because, as Mr Doyle acknowledges, the purported appointment of the present liquidators is accepted as being void. Rather, what the court was being asked to do was to make a retrospective order which would cure the fact of those void appointments, by casting back over four years and validating the actions of those individuals, not as liquidators but as administrators, in the intervening period, with a view to the company being moved by those freshly appointed administrators into creditors’ voluntary liquidation. The completely understandable concern of Judge Pelling was that, as sought, the retrospective administration order appeared to run entirely contrary to the line of authority starting with the decision of the late Mr Justice Hart in Re G-Tech Construction Limited [2007] BPIR 1275, such that the application might benefit from what Judge Pelling characterised as “some mature reflection”. That is what Mr Doyle has since applied to the application. He says that the applicant is mindful of both the hurdle that confronts him and of the need to be absolutely full and frank with the court by way of the legal submissions made on his behalf in the inevitable absence of any other party. The approach that he has taken has been to identify the nature and scope of the so-called G-Tech jurisdiction in seeking to assist the court in reaching a rational basis for a decision on the merits of the application. He also points out that the court may appreciate that, given the apparent shortcomings of whoever was responsible for the defective appointment, or who failed to spot it much sooner, the pursuit of this application is something that Mr Mond may feel bound to pursue (at his own cost), even if he is unsuccessful.

Mr Doyle proceeds to address the jurisdiction to make a retrospective administration order. He points out that G-Tech involved a retrospective administration order which was made to rescue the purported appointment of an administrator made under paragraph 22 of Schedule B1 where the wrong form had been used to effect the appointment. The notice filed had been in Form 2.9B (which is used after the giving of notice to appoint an administrator) rather than using Form 2.10B (which is used where there is no need to serve a notice of intention to appoint).

One of the key points about the decision in G-Tech - and one which Mr Doyle says is easily missed or over-looked - is that the judgment of the case, as reported in the Bankruptcy and Personal Insolvency Reports, is only a draft judgment, which had not received formal judicial approval by the judge, who was in the process of preparing a reasoned judgment before that was complete. Mr Doyle says that it is not clear, or understood, how the draft judgment came to be reported in the BPIR. One obvious concern is said to be that the draft judgment published is clearly, from a reading of it, incomplete, and should therefore be treated with some care. The answer to that, I think, appears from the footnote prepared by the editor which states that the late Mr Justice Hart had passed away before judicial approval to the case had been given. What is reported in the BPIR would appear to be a transcript of the recording of the judgment which, for some reason, had not been submitted to the judge for his approval in the usual way before the judge sadly passed away on 20 February 2007. Given that the judgment had been delivered on 29 September 2005, obviously there had been some delay on the reporter’s part in picking up on the potential significance of the judgment.

The ratio of G-Tech, or at least the closest one can get to one in the judgment as reported, is said to appear at paragraphs 20 and 21. However, it seems to me that one ought really to take the judgment up at paragraph 19: “The order which I am asked to make on that application is an order appointing Mr Clarke as administrator and directing, under paragraph 13(1) of Schedule B1, that the appointment of the administrator should take effect from 30 September 2004. The magic of 30 September as opposed to 14 September is that were the appointment to be made to take effect from 14 September - assuming that such an appointment can be made at all - it would have already expired as of today’s date, as the … is disabled by the provisions of Schedule B1 from extending a period of administration after it has expired. Accordingly, the date of 30 September has been selected, it happily being the case that no substantive acts of Mr Clarke as purported administrator took place between 14 and 30 September. The question then is whether the court order can be made retrospectively in the manner suggested. The statute does not say that it cannot be done, and the wording is certainly, in my judgment, wide enough to give the court jurisdiction, both to order there is a proper case, although it is a jurisdiction to be exercised in relation to administration orders with extreme caution, given the effect it may have. My initial view was that the scheme of the Act made it very difficult to construe paragraph 13(1) as having that width. However, I have been persuaded by Mr Deacock that it is possible to take a wide view of the section without doing violence to the language and posed by him that a similar view has been taken by Mr Justice Evans-Lombe in a different case.”

It appears from the report that the submissions that led Mr Justice Hart to take such a “wide view” of the relevant provision (which almost certainly must have been paragraph 13(2) of Schedule B1 and not the paragraph 13(1) referred to) centred on the replacement of all of the old Part II of the Insolvency Act 1986 with Schedule B1 (by way of the Enterprise Act 2002). That, it is said, enabled Mr Justice Hart either to distinguish (or to ignore) the earlier judgment of Mr Justice Lewison in the earlier case of Darrell v Miller [2003] EWHC 2811 (Ch); [2004] BPIR 470, to which Mr Justice Hart made reference in his judgment. Darrell is said to have involved a number of applications to replace an insolvency practitioner whose authorisation to act had terminated, including authorisation in respect of appointments as administrator. A consent order had been submitted for approval on 28 August 2003 and had been intended to take effect from 1 September 2003. In the event, the order had not been approved until 8 September 2003. Mr Justice Lewison refused an application to backdate the order (under Part II of the 1986 Act) on the grounds that he had no jurisdiction to make such a retrospective order because the Civil Procedure Rules governed the order and did not permit an order to be made with retrospective effect.

Mr Doyle acknowledges that despite Mr Justice Hart having acceded to the submissions made to him, there remains a real question over whether paragraph 13(2) of Schedule B1 can have retrospective effect in the absence of express terms to that effect. Mr Doyle makes the point that only the applicant was represented before Mr Justice Hart. Paragraph 13(2) provides that an appointment of an administrator by administration order takes effect (a) at a time appointed by the order, or (b) when no time is appointed by the order, when the order is made. Mr Doyle says that this court hardly needs reminding that it has been established at the highest authority that it is contrary to principle to construe a statute as having retrospective operation unless the possibility of such a conclusion is indicated by clear words to that effect. Reference is made to supporting authority for that proposition. Mr Doyle acknowledges that it is difficult, if not impossible, to find language within Schedule B1 which suggests that an administration order can be made retrospectively. He says that it is also perhaps no coincidence that those authorities (or any other authority to similar effect) or, indeed, the basic proposition for which they stand as authority, were not cited to Mr Justice Hart in G-Tech.

Mr Doyle says that despite the obvious shortcomings with the jurisdiction, and Mr Justice Hart’s statement that the retrospective jurisdiction must be exercised “with extreme caution”, the fact nevertheless remains that various judges, including me, have referenced and relied upon G-Tech as a means of curing the otherwise potentially catastrophic effects of an invalid appointment in the absence of any other procedural solution to the difficulty raised. Such reliance, however, is said to provide a solid foundation for nothing; and Mr Doyle acknowledges that it is not difficult to see how the Court of Appeal, in time, and with the benefit of full argument, and unconstrained by parties applying without opposition for a ready cure to an otherwise apparently inconsequential problem, might easily reach the conclusion that G-Tech is wrongly decided and should not be followed. He says that the unease of judges with G-Tech is apparent from at least two subsequent decisions. In Re Derfshaw Limited and Others [2011] EWHC 1565 (Ch); [2011] BCC 631, Mr Justice Morgan made administration orders with retrospective effect where a notice of intention had not been served on the company, but not without identifying the “scope for argument” as to the correctness of G-Tech in the absence of clearer statutory language.

In Re Frontsouth (Witham) Limited and Limited [2011] EWHC 1668 (Ch); [2011] BPIR 1382, Mr Justice Henderson again made a retrospective administration order but not without saying that he shared some of the misgivings expressed by Mr Justice Morgan in Derfshaw.

In Re Care Matters Partnership Limited [2011] EWHC 2543 (Ch); [2011] BCC 957, Mr Justice Norris was concerned with an application for a retrospective administration order where the notice of intention had not been served on the company. After commenting that such applications appeared to be “increasingly treated as a matter of routine”, the judge considered that the only proper course open to him (at paragraph 3) was “to accept with the same misgivings voiced by Mr Justice Morgan and Mr Justice Henderson that the jurisdiction identified in G-Tech Construction provides the only answer in the instant case, and to consider whether I may properly exercise it.” In the circumstances, and on the facts of that case, the order was not made because it was held that the preconditions for doing so were not satisfied. It is said that interestingly in Care Matters, Mr Justice Norris gave permission to appeal “without hesitation” on the basis that the jurisdictional basis apparently provided by G-Tech was in need of definitive determination in a case fully argued on both sides.

Against this rather uneasy jurisdictional background it is said that the question in the present case which then arises is, even if the jurisdiction is there, can an administration order be made retrospectively for a period of more than one year? Mr Doyle accepts that in G-Tech, at paragraph 19, the appearance in the draft judgment is that Mr Justice Hart would not have been prepared to make a retrospective administration order which “cast back” more than one year. The difference between G-Tech and the present case, however, is said by Mr Doyle to be that G-Tech involved a retrospective order where the appointment of an administrator, albeit invalid, had already been made. In the present case the court is being asked to effect an appointment on a retrospective basis where there has been no purported appointment of an administrator. I must confess that I find difficulty in identifying that as a valid point of distinction.

In my judgment, the real difficulty in the present case is presented by paragraph 76(1) of Schedule B1. That provides that the appointment of an administrator shall cease to have effect at the end of the period of one year beginning with the date on which it takes effect. That difficulty was adverted to by Mr Justice Hart at paragraph 19 of his judgment in G-Tech (previously cited). That difficulty was also recognised by Mr Justice Henderson in Frontsouth. There it was held, on the basis of a practice which was said by now to be fairly well established, that an alternative solution could be provided by making a fresh appointment by order and retrospectively back-dating that order for a maximum of 364 days. In that case it was said that that would leave the administrators with only a few months in which they had had no authority to act.

Mr Doyle referred me to paragraph 29 of Mr Justice Henderson’s judgment, which I note was a reserved judgment. Paragraph 29 reads as follows: “One thing that clearly cannot be done, however, is to make successive retrospective appointments for more than one period of 364 days. This possibility was canvassed before Mrs Justice Proudman in Pillar Securitisation Sarl and Others v Spicer and Another [2010] EWHC 836 (Ch), [2010] NLJR 655, where she was invited to make two successive administration orders in order to validate the acts of the administrators since their original purported appointment in October 2008. Mrs Justice Proudman had no difficulty in rejecting this submission: ‘59. Mr Todd QC sought to get around this by submitting that the court could and should make two administration orders, one following immediately upon the other. If Mr Todd QC’s submissions were correct, this device could be deployed in every case to get round the prohibition in Paragraph 77(1)(b) against extending the term. The submission must be wrong and I reject it.’ I respectfully agree; and although Mr Atkins told me that he had at one stage contemplated making such an application in the present case, he had wisely thought better of it, and in the event he sought only a single order back-dated for 364 days. This would have the effect of leaving a relatively short period of a few months during which the acts of the administrators could not be validated, but fortunately only three or four of the relevant disposals of flats took place during that period and the inconvenience of taking steps to regularise the position with the affected purchasers would not be too great. Accordingly, having heard argument on 23 June I indicated that I was provisionally minded to make such an order.”

I should point out that the difficulty of backdating an administration order by more than 364 days did not surface in the case of Derfshaw Limited, where the purported appointment of administrators, out of court, had in each case taken place only some weeks or months previously: see, in particular, paragraphs 5 and 12 of Mr Justice Morgan’s judgment.

In the present case it seems to me that there are five possible outcomes of the present application. The first is to make an administration order retrospective to the date sought in the application of 23 November 2010. The first difficulty with that approach is that such an administration order would automatically have come to an end (by paragraph 76(1) of Schedule B1) 12 months thereafter, and thus on 23 November 2011. It is difficult to see what would be achieved by making such an order. Mr Doyle did not seek to argue that such an order would operate retrospectively to validate the move to creditors’ voluntary liquidation; but even if he were wrong on that, it seems to me that the difficulty is to identify how the making of such an order would satisfy the second of the threshold conditions in paragraph 11 of Schedule B1, of being reasonably likely to achieve the purpose of administration. The only object of making such a retrospective validation order would be to attempt to validate the move from administration into creditors’ voluntary liquidation. I cannot see that that could in any way operate to serve any of the statutory purposes of administration. It would not rescue the company as a going concern. It would not 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); nor would it realise property to make a distribution to one or more secured or preferential creditors. It would be the re-creation of a temporary administration for the sole purpose of moving the company into winding up.

It seems to me that the first possible outcome is not available to the applicant because it does not satisfy the threshold condition of being reasonably likely to achieve any of the statutory purposes of administration.

The second possible outcome would be to make an administration order retrospective for 364 days. Mr Doyle accepted that that outcome would be of no use to anyone because nothing had been done by any administrator during those 364 days. It was the purportedly appointed joint liquidators, Messrs Krasner and Pitts, who had been in office during that period. Their acts would not be retrospectively validated; and Mr Doyle, understandably, did not seek to persuade the court to make such a useless order, which would achieve nothing for the applicant.

The third possibility would be to make an administration order to take effect prospectively. However, again it is not possible to see how that would serve to fulfil any of the statutory purposes of administration, and thus it is precluded by the second of the threshold conditions in paragraph 11.

The fourth possible outcome is simply to dismiss the administration application on the footing that the threshold condition in paragraph 11(b) has not been satisfied. It cannot be demonstrated that an administration order would be reasonably likely to achieve the purpose of administration. What is sought is liquidation rather than administration so that a wrongful trading claim can be pursued. Mr Doyle, on instructions, did not invite me to dismiss the administration application. What he invited the court to do was to apply the fifth of the possible outcomes, which was one identified by the court.

Under paragraph 13(1) of Schedule B1, on the hearing of an administration application the court may, amongst other courses, by paragraph (e), treat the application as a winding-up petition and make any order which the court could make under Section 125. In my judgment, that is the appropriate course to take in the present case; and it is the outcome which, having taken express instructions, Mr Doyle invited the court to take. In the present case, the company is clearly insolvent and needs to be placed in some form of insolvency regime. Given that the only reason for an insolvency practitioner being appointed to office is to pursue a wrongful trading claim, it seems to me that the appropriate insolvency regime is that of winding-up. True it is that the court cannot, when making a winding-up order, specify the identity of the liquidator. The applicant will have to take his chance on persuading the Official Receiver, or the Secretary of State, that it is appropriate, in the particular circumstances of the present case, for Messrs Krasner and Pitts to be appointed liquidators, to continue the work which they have already been undertaking. I can see the good sense of that; although I cannot in any way bind either the Official Receiver, the general body of the company’s creditors, or the Secretary of State.

For those reasons, it seems to me that the only appropriate outcome for this administration application is to make an order for the compulsory winding-up of Synergi Partners Limited. For reasons that I have already indicated, I will direct that the applicant should obtain a written, approved transcript of this judgment. He is likely to wish to do so in any event.

So I will make the usual compulsory winding-up order.