Rowntree Ventures Ltd & Anor v Oak Property Partners Ltd & Anor

Two companies are concerned in the applications before me, Oak Property Partners Ltd. (“Property”), which is the owner of a hotel in Hitchin, Hertfordshire, and Oak Forest Partnership Ltd. (“Forest”), which is the owner of a hotel in Hever, Kent.

When I say they are the owners, they are the freehold owners. The business model that the companies have adopted is that of selling off individual hotel rooms and common parts to lessees on long leases, so that the companies are not hotel operators. They have carried on business, effectively, as property developers.

The Applicants before me are or represent those who have acquired leases upon terms which entitle the leaseholder to a repurchase of the lease from the relevant company in given circumstances.

In the case of the Hitchin hotel owned by Property, a number of leaseholders have given notice exercising their right to repurchase, which will come into effect within the next two years or so. In the case of the Hever hotel owned by Forest, a number of leaseholders have also given notice, which will come into effect starting in October of this year. One lease has already been repurchased. The evidence is not entirely clear, but appears to suggest that the repurchase was completed in April of this year.

The Applicants seek the appointment of administrators. When they purchased their respective leasehold interests they were given what now appear to them to be extravagant promises of a guaranteed return which appear to have been more than optimistic and possibly reckless or wantonly misleading.

I say "possibly" because that issue is not before me, but it underlies the flavour of the applications made by Mr. Gupta on behalf of those prospective creditors. They say that although they are merely prospective creditors following the service of notices requiring repurchase, they nonetheless have standing, as it is common ground they do, to apply now for the appointment of administrators under the relevant provisions of Schedule B1 of the Insolvency Act 1986. It is also common ground that for that to occur there are two preconditions which must be satisfied, as specified in paragraph 11 of Schedule B1.

The court has first to be satisfied upon a balance of probabilities that the company is, or is likely to become, unable to pay its debts. Either balance sheet insolvency or cash flow insolvency will, it is accepted by both sides, suffice for the purpose of this requirement.

The court must also be satisfied that an administration order is reasonably likely to achieve the purpose of administration. This means a realistic chance must be shown.

The purpose of administration is found in paragraph 3(1) of Schedule B1, which requires an administrator to perform his functions

“with the objective of -

It is not necessary for any particular alternative to be specified in the order appointing administrators, but, as I have to be satisfied that the administration purpose is reasonably likely to be achieved, the evidence needs to establish a realistic chance that at least one of the alternatives will be achieved. Mr. Gupta, upon being pressed by me, accepted that the most realistic basis in this case is that an administration would be likely to achieve a significantly better result for creditors than a winding up, if for no other reason than the avoidance of ad valorem fees which would be incurred in a compulsory winding up on any realisations. That assumes that there would be realisations, a proposition queried by Ms Staynings who suggests an administrator would have nothing to do, as all units are now leased and the hotel is managed externally.

An officeholder might however choose to operate, at least for a while, the repurchase program which would in turn, in all probability, result in their realising either individual leases or possibly the freehold, avoiding in the case of an administration ad valorem fees which might otherwise be incurred in a liquidation.

It is said on behalf of the companies by Ms Staynings that neither of the preconditions is satisfied in this case. I only have to be, though I do have to be, satisfied on a balance of probabilities as to the first precondition. In Re COLT Telecom Group Plc [2002] EWHC 2815 (Ch) Jacob J. (as he then was) said this at [26]:

Ms Staynings also relied upon what Hildyard J. said in Green v. Gigi Brooks Ltd. [2015] EWHC 961 (Ch):

In this case Ms Staynings relies especially upon projections produced by those in charge of the two companies to demonstrate the likelihood - or at least realistic possibility - of survival, and to contradict any inference of insolvency.

Having considered the evidence, I am satisfied that each of the companies either is or is likely to become unable to pay its debts. I say that for the following reasons, starting with Property. Whilst there is ostensible balance sheet solvency, that is dependent upon the recoverability of a very large debt from a company called White Linen Hotels and Resorts Ltd., known as "White Linen" for short, which is now subject to a CVA, though that is itself under appeal.

White Linen formally managed the hotel but no longer does so. It is now managed by Stevenage Conference Centres (“SCC”).

The recoverability of the debt from White Linen is very doubtful, given the CVA. The company is a deferred creditor of White Linen in the CVA. White Linen is expected to pay 100 per cent to all the remaining creditors, but that does not achieve repayment for Property.

In addition, a very large number of repurchases, for which notice has been given, have to be funded, starting in 2018. Projections have been produced, but they are, on any footing, highly optimistic. They depend upon re-sales being achieved of the repurchased properties almost immediately upon their being repurchased.

There is little or no room in the projections for slippage. However, there is also some evidence that finance may become available, which would assist cash flow, though the evidence is somewhat shaky about that. The finance appears to be from someone who is an acting but not yet an actual director of the finance company in question and is all, as things stand, subject to contract.

Moreover, the projections are based upon a valuation which assumes a return of five per cent, which the valuer has not expressed any view upon one way or the other, but has simply been told to assume. The five per cent return is an optimistic rate of return. Though not as optimistic as the previously guaranteed rate of return, it is greater than the return achieved hitherto.

Accordingly, it seems to me that on those figures I cannot be confident that Property will overcome its present difficulties and on a balance of probabilities, even on a cash flow basis, I conclude that Property is likely at least to become unable to pay its debts in the future. Nonetheless it is, so it would appear, paying its debts currently, as they fall due and I cannot assume that there is no possibility of its recovery. I am sceptical about that but my scepticism must not be taken to be a statement of certainty, it is one of likelihood or probability and is an assessment of the future position not the present.

Is therefore an administration order in the case of Property likely to achieve the purpose of administration? It is accepted that rescue as a going concern is unlikely once an administrator is appointed. Nevertheless, for the reason that I have given concerning the avoidance of ad valorem charges, an administration would be reasonably likely to achieve a better result for creditors than a winding up, if that were the only option. However, winding up is not the only option. Another option is to give Property the opportunity to bring the business round without being subject to either liquidation or administration. My scepticism may turn out to be wrong, especially as the ultimate outcome turns on future events over some years. We may, depending upon what happens in the immediate future, be on the verge of another property boom. That is not presently anticipated, at least by me or by anyone else whose commentaries I have read, but who knows? That is for the future and, as the projections showing repurchases in the case of Property only start in two years' time, there is much to be said for waiting and seeing how events turn out.

In those circumstances it seems to me that the appointment of an administrator of Property now which would, inevitably, lead to the very heavy costs that are commonly associated with such appointments, would be premature.

The Applicants would, no doubt, regard an appointment now as justified because they feel - and they may be right about this, but I cannot say that they are or that they are not - cheated by what has happened in the past. They point to various unsavoury matters concerning those who have been associated with the company or other family members who have been involved in timeshare frauds and the like. They also highlight the fact that the shareholder of Properties is a shadowy Nevis corporation, which always leaves one (these days) in a state of unease.

I cannot, however, decide the case on the basis of the company kept by those operating Properties or their family connections or the fact that offshore entities, which though topical, are still perfectly legal, are being utilised. Nor can a desire to investigate (which is what the applicants and those they represent really want) of itself justify an administration as that is not part of the purpose of administration.

Whilst therefore I consider that the two administration pre-conditions that I have mentioned are technically satisfied, I would not in the case of Property at this stage exercise my discretion in favour of an administration order.

I turn to consider Forest. That is in a similar position, save for one thing: the problems are more immediate in that the repurchases start in the next few months (in addition to the one completed in April this year). It does however presently appear to be balance sheet solvent.

The cash flow position in the case of Forest is similar to Property. Its ability to survive is dependent upon the reality of projections demonstrating its ability to deal with the substantial repurchase obligations, running into millions, which are soon to affect it, though even they will not all be payable at once, but over a period of years. Again, those projections (and supporting valuation) are optimistic in their assumptions in the same way as the projections for Property, though the difficulties may in this case also be mitigated by the possible availability of finance.

Forest also has also had management difficulties, now hopefully resolved. As things stand, White Linen are operating the Hever hotel by engaging a third party. Those arrangements are however under threat in the sense that the challenge to the White Linen CVA may succeed on appeal, resulting in White Linen going out of business into some sort of insolvency process.

Contingency plans have been put in place in that event for SCC to operate Hever on the same basis as Hitchin. It is said that SCC is willing to do so, but the position is not without uncertainty.

Forest itself, on that footing, is not now incurring any day-to-day liabilities from the management of the hotel. It is being managed by others, and it is hoped that that will remain the case.

Future repurchases, which are due to start in October 2016, will continue until August 2019. Once again, the ability of the company to deal with those repurchases is dependent upon optimistic projections which I am sceptical about, but I would not, as a matter of discretion in this case either, as things stand, appoint an administrator, but would give the company the opportunity to endeavour to see its way through its difficulties. Whilst therefore an administration would be better than a winding-up, the option of remaining out of any insolvency process has better prospects, for creditors as well as for Forest itself, ultimately.

I would not have reached that conclusion on the exercise of my discretion if there was firm evidence, as opposed to a suspicion of past fraud, that those in control of the company either had in some way misappropriated assets or were likely to do so in some intervening period between now and the onset of a formal insolvency process. I am mindful of the example set by Warren J. in Hammonds v Pro-Fit USA Ltd [2008] 2 BCLC 159, in which he intervened by appointing an administrator even though the applicant’s debt was disputed, in circumstances where the making of an immediate order was desirable for limitation purposes.

There is nothing which has been identified in this case which would cause that sort of reasoning to apply here.

In all those circumstances, and despite the (I hope healthy) scepticism with which I have approached the accounts and projections in this case, I decline in the exercise of my discretion to make the orders that are sought.