Koon v Ltd v Bowes & Ors

Introduction

The Applicant (“Mr Koon”) is a creditor of C A & T Developments Limited

Relying upon Paragraph 81 of Schedule B1 to the Insolvency Act 1986, Mr

The parties have each filed witness statements in support of their respective cases to which a substantial amount of documentation is appended. No directions have been made for oral evidence or cross examination. There are some issues of fact which cannot be resolved on the face of the witness statements without testing such evidence in cross examination. Notwithstanding the volume of appended documentation, there also remain some obscurities about the factual background. However, I am satisfied it is un-necessary for me to resolve these issues or clarify each obscurity to dispose of the Application fairly and in accordance with the applicable legal principles.

Mr Koon is a resident of Singapore. He became acquainted with Mr Anthony Stone (“Mr Stone”) when Mr Stone also resided there. Mr Stone introduced him to Mr Parker and, together, they discussed the possibility of entering into a business venture involving the purchase and sale of development property in England. A measure of agreement was reached and, on 27^th March 2015, the Company was formed as a vehicle for the proposed business.

At the outset, Mr Parker and Mr Stone were appointed as directors. The nominal share capital was £100. Mr Parker and Mr Stone were allotted 50 shares each. No shares were allotted to Mr Koon. It was not envisaged he would be entitled

Ultimately, on 9^th February 2015 and 15^th July 2015, Mr Koon transferred the sums of £35,000 and £25,000 to Mr Parker with the intention that they would be credited to the Company. Mr Parker duly transferred at least £42,500 to the Company’s bank account in respect of these amounts. It is unclear what happened to the balance of £17,500. On 27^th May 2016, Mr Koon transferred to the Company an additional sum of £249,976.24. By that stage, he had thus advanced some £309,976.24.

Utilising these funds, on 1^st June 2016 the Company purchased development land at Lunsford Lane, Larkfield, Aylesford, Kent (“the Property”) for a purchase price of £275,000. The Property comprised a vacant site with the benefit of planning permission for the construction of a single house.

Mr Parker maintains that, following the acquisition of the Property, he was engaged as an employee and the Company remunerated him at a monthly rate of £600. No steps were taken to implement the planning permission itself. However, he obtained reports and surveys and cleared the site of seven years’ growth of vegetation to level it in readiness for the intended development work. Mr Parker also maintains that, by 1^st November 2017, when he obtained Initial

By this time, Mr Parker had transferred his shares to his father, Mr Michael

There is only limited available evidence about Mr Michael Parker’s personal circumstances. It appears he is elderly. No evidence has been adduced to suggest he has significant experience in connection with the management of a company or the attendant legal formalities. Following the appointment of Mr Michael Parker as a director, Mr Koon contends that Mr Parker himself continued to act as de facto director or dictate the decision-making as a shadow director. In his own witness statements, Mr Parker does not specifically challenge these propositions. He states that “the change in directorship and shareholding has little, if any, bearing on this application and indeed [is] something that [Mr Koon] has never raised before” and, later, “I continued with my obligations to project manage the development as an employee. The Company’s accountants made the appropriate filing at Companies House as they had done with all the Company’s filings”. No witness statement from Mr Michael Parker has been filed in these proceedings and Mr Michael Parker has not done anything else to explain the parameters of his role in the Company’s affairs. More likely than not, following the appointment of Mr Michael Parker as a director, he played no more than a minimal role in the management of the

Mr Koon became increasingly concerned about the absence of progress in connection with the project. No doubt mindful that the planning permission was shortly due to lapse, Mr Parker suggested, in an email dated 8^th January 2019, that they should submit a new application for planning permission for two houses and advised that, once constructed, such houses would sell “for a combined £1,350” so that, after “build costs…of 600-650…a healthy profit is assured”. In an email on the same day, Mr Koon advised Mr Parker that he was unlikely to remit further funds and suggested that Mr Parker should raise funds himself. No further steps were taken to pursue the development and the planning permission was allowed to lapse on 31^st March 2019.

By this stage, Mr Stone was suffering from terminal pancreatic cancer having been diagnosed as such in November 2017. There is no evidence that he made any significant financial contribution to the project prior to his death on 30^th June or 1^st July 2019.

On 8^th July 2019, Mr Parker emailed Mr Koon a manuscript balance sheet in relation to the project. This recorded that Mr Parker had himself personally made a contribution of £104,025 which was to be added, on the balance sheet, to Mr Koon’s contribution. Although not stated expressly, it was implicit that the Company was indebted to Mr Parker in the sum of £104,025. No breakdown was provided with the email. However, it can be inferred that it was intended to encompass Mr Parker’s personal contribution to expenditure on the project, for example on obtaining professional advice and services or in connection with clearance work on the site. To his second witness statement dated 25^th November 2019, Mr Parker has exhibited personal bank statements to show that he has contributed some £87,488.40 in this way. He characterises this contribution as a loan to the Company. However, it is not possible to attribute transactions on the bank statement to items of expenditure on the project without explanatory evidence.

When, on 8^th July 2019, Mr Parker emailed the manuscript balance sheet, he may have anticipated that Mr Koon could be persuaded to invest further in the project. However, once it became apparent to Mr Parker that this was unlikely, he embarked on a different strategy.

Later in July 2019, he instructed a professional firm, VZX, to provide him with advice. VZX provide financial advice and advice on matters such as funding, corporate restructuring and insolvency.

Mr Parker contends that, when he approached VZX, he “wanted to continue with the planning application as it [was] clearly in the Company’s best interests”

In his witness statements, Mr Parker does not specifically state the capacity in which he instructed VZX. It would certainly appear that he instructed them in his personal capacity since, in Paragraph 66 of his first witness statement, he asserts, in terms, that “the advice given to me by VZX was that if I wished to continue to provide capital to the Company, to protect my position I should secure all future funding”. However, elsewhere, he refers to the “advice which

In my judgment, it is more likely than not that Mr Parker instructed VZX both in his personal capacity and as de facto director of the Company. In reality, his father never played an active role in the management or direction of the Company and, by then, Mr Stone was dead. It follows that Mr Parker was in full control of the Company’s affairs. It is unclear whether Mr Parker or VZX gave any consideration to the possibility of a conflict between Mr Parker’s interest as a creditor or a potential creditor and his duties as de facto director, if indeed they gave any consideration to the capacity in which Mr Parker was acting or purporting to act on behalf of the Company.

By the Debenture, the Company charged its assets to Mr Parker by way of fixed and floating charge. In the usual way, it encompassed a fixed charge over the

Company’s real property and a floating charge over the Company’s

“undertaking, property, assets and rights”. These were charged “as a continuing security for the payment and discharge of the Secured Liabilities” and the “Secured Liabilities” was defined widely so as to include “all present and future monies, obligations and liabilities owed by the [Company] to [Mr Parker], whether actual or contingent and whether owed jointly or severally, as principal or surety and/or in any capacity whatsoever, under or in connection with the Facility Agreement or this debenture…together with all interest (including, without limitation, default interest) accruing in respect of such monies or liabilities”.

“Facility Agreement” was defined, in specific terms, so as to mean “the term loan facility agreement of even date between the Lender and the Borrower for the provision of loan facilities secured by this debenture”. It can thus be treated as a reference to an agreement in writing dated 25^th July 2019 (“the Facility

An issue of construction arises as to whether “Secured Liabilities”, as defined, is limited to the amounts advanced following the Facility Agreement or encompasses any amounts advanced by Mr Parker prior to the same. More likely than not, in my judgment it encompasses the amounts advanced by him prior to the Facility Agreement on the basis that, in addition to the sums of £7,500 and £3,900 to be advanced pursuant to the Facility Agreement, the security in respect of “any additional sum loaned by the lender…” is apt to include previous advances. Although, on construction, the formula could conceivably be limited to future loans only, it does not contain express words of limitation and, in the Debenture, the “Secured Liabilities” are defined so as to include “all present and future monies, obligations and liabilities owed by

On this basis, the Debenture charged the Company’s assets as security for the repayment of the Company’s indebtedness to Mr Parker, if any, prior to the Facility Agreement itself.

The Debenture and the Facility Agreement were each signed by Mr Michael Parker on behalf of the Company and Mr Parker on his own behalf. Mr Michael Parker apparently signed the Debenture after a meeting of the board of directors attended only by Mr Michael Parker himself. No point is taken in relation to the formalities of execution or the quorum requirements of the Articles.

Meanwhile, on 24^th July 2019, documentation was filed for registration at Companies House including a document purporting to record the termination, on 23^rd July of Mr Stone’s office as a director and a confirmation statement dated 20^th July 2019 recording that the aggregate nominal value of the share capital had been increased from £100 to £1000, following which Messrs Michael Parker and the late Mr Anthony Stone held 50 shares each and Mr Parker himself held 900 shares.

In his first witness statement, Mr Koon states that, most likely, the confirmation statement was made after Mr Stone’s death “presumably at the direction of

In my judgment, it is to be inferred that the relevant documentation was filed on the instructions of Mr Parker himself as de facto director. It is unclear whether Mr Stone left a will or died intestate. It is also unclear whether and, if so, when a personal representative or representatives has been appointed. However, it is not suggested that Mr Parker sought or obtained the consent or approval of any representative of Mr Stone’s estate, whether formally appointed or otherwise and, in my judgment, it is thus likely that these steps were taken without obtaining such consent or approval.

Mr Parker’s explanation for his unilateral action in connection with the allotment of shares is obviously unsatisfactory. Whilst the sum of £900 was raised, this cannot seriously be characterised as action to “introduce funds into the Company” if intended to make a substantial contribution to the Company’s assets. Moreover, if Mr Parker was to remain entitled, as a creditor, to repayment of the monies he had already advanced, there is no good reason why this should separately be “reflected” in the issue of new shares. This is particularly the case if Mr Parker contemplated that he was to obtain security for the Company’s indebtedness through the issue of a debenture.

On 26^th July 2019, the Debenture was delivered to Companies House for registration and, on 29^th July 2019, the certificate of registration was issued. This was immediately brought to the attention of Mr Koon who instructed his solicitors, Wedlake Bell LLP, to take action on his behalf. By letter dated 31^st

It can be seen from the Company’s bank statements with Barclays Bank that, on

On 5^th August 2019, Mr Koon presented a winding up petition in respect of the Company at the High Court in London. Service was effected on 6^th August 2019.

Mr Parker instructed JMW Solicitors LLP (“JMW”) to act on his behalf. On 6^th

On 15^th August 2019, Mr Parker formally appointed Mr Bowes and the Third

On 3^rd September 2019, Mr Koon commenced the current proceedings for relief under Paragraph 81 of Schedule B1 to the Insolvency Act 1986.

In open correspondence, Wedlake Bell LLP offered, on behalf of Mr Koon, to pay the sum of £12,000 to Mr Parker in consideration of “the loans recently put into the Company by” him. No doubt, this was intended to comprehend the loans advanced after 25^th July 2019. The offer was made on the basis that Mr Parker would permit Mr Koon to replace the administrators. This offer was promptly rejected by JMW Solicitors LLP, on behalf of Mr Parker.

On 20^th September 2019, the administrators sent to the creditors, their proposals for achieving the purpose of administration. Following a description of the background and events leading to the administration, the statutory purpose of the administration was confirmed and their management proposals explained.

It can be seen that, in preparing their Proposals and the Estimated Outcome Statement, the Joint Administrators relied heavily on information provided by Mr Parker. In addition to Mr Koon, three creditors were identified namely Mr Parker himself, Mrs Ruth Parker and Mr Michael Parker, on the basis that they were respectively owed £89,744, £3,000 and £10,500. As a creditor in the sum of £309,956, Mr Koon was the majority creditor. However, it was recorded that

In Paragraph 4.6 of the Proposals, it was recorded that “…based on the information currently available, the objective which the Joint Administrators are pursuing in this instance is achieving a better result for the creditors as a whole than would be likely to be achieved if the company were wound up (without first being in administration).”

At Paragraphs 5.7-5.8, the Administrators observed that, on the basis that the lapsed planning permission can be reinstated, the market value of the Property is £245,000 subject to a 365 day marketing period and £200,000 subject to a 90 day marketing period. However, one option was “to explore the possibility of trading the company during administration, securing planning permission and engaging with a developer for the construction of one or more properties on the site”. In Paragraph 5.14, the Administrators confirmed that they had “…asked

With the Property valued in the Estimated Outcome Statement at £245,000, the sum of £232,500 was available after deducting the amount due to Mr Parker as

“fixed charge holder”. In addition to this sum, there were modest unencumbered assets (cash and tax refunds) amounting to £3,912 but after deducting administration expenses of £124,530 (including £79,011 in respect of administrators’ fees and £39,659 in respect of solicitors’ fees) and preferential creditor claims, no more than £109,976 would be available for the unsecured creditors leaving a deficit of £304,445.

By letter dated 24^th September 2019, Wedlake Bell LLP rejected the administrators’ proposals, on behalf of Mr Koon, expressing particular concerns about the level of fees and the possibility, canvassed in the proposals, that the land might be developed through a joint venture. Since Mr Koon is himself entitled to a majority, in value, of the creditors’ voting rights by virtue of Rule 15.31 of the Insolvency (England and Wales) Rules 2016, and remains implacably opposed to proposals, the administrators realistically have little prospect of obtaining the approval of the requisite majority of creditors under Rule 5.34.

Pending the outcome of these proceedings, the administrators have taken no further steps to obtain the approval of the creditors, whether by submitting revised proposals or otherwise. Having failed to obtain creditors’ approval, it is likely that the administrators would ultimately need to return to the Court for relief under Paragraph 55(1) of Schedule B to the 1986 Act in the eventMr

The statutory framework is now contained in Schedule B1 to the 1986 Act.

By Paragraph 3(1), an administrator is required to perform his functions with the objective of:

These objects rank in priority in descending order. The administrator must thus perform his functions with the objective specified in sub-paragraph (a) unless it is not reasonably practicable to achieve that objective and the objective in subparagraph (b) would achieve a better result for the company’s creditors as a whole. Similarly, the administrator may perform his functions with the objective specified in sub-paragraph (1)(c) only if he thinks that it is not reasonably practicable to achieve either of the objective specified in subparagraph (1)(a) and (b), and does not unnecessarily harm the interests of the creditors of the company as a whole.

Under a significant change to the statutory regime, the holder of a qualifying floating charge is entitled to appoint an administrator under the provisions of Paragraph 14(1). The instrument containing the charge must satisfy the formalities in Paragraph 14(2). In addition to satisfying the statutory formalities, the charge must itself be enforceable. A floating charge is unenforceable if and to the extent that it is “invalid” under Section 245(2) on the basis that it was created within one year, if not two years, of the onset of insolvency save to the extent that consideration is furnished after the charge or so as subsequently to reduce or discharge the company’s existing debts.

The notice of appointment must identify the administrator and be accompanied by a statement from the administrator confirming that he consents to the appointment and that the purpose of administration is likely to be achieved (Paragraph 29(3)).

The administrator has a range of statutory powers and functions, including the general power of management in Paragraph 59(1) and all the statutory powers

However, the administrator is under a duty to perform his functions in the interests of the creditors as a whole, Schedule B1, Para 3(2). By virtue of Paragraphs 67 and 68(2), he is also under a general duty to take custody and control of all property to which the company is entitled and comply with the

Conversely, administrators do not owe a general common law duty to the unsecured creditors in the absence of a special relationship, Charalambous v B& C Associates [2009] EWHC 2601 (Ch).

Paragraph 81 is in the following terms.

“81(1) On the application of a creditor of a company the court may provide for the appointment of an administrator of the company to cease to have effect at a specified time.

81(2) An application under this paragraph must allege an improper motive-

(a)

in the case of an administrator appointed by administration order, on the part of the applicant for the order, or

(b)

in any other case, on the part of the person who appointed the administrator.

To engage the statutory jurisdiction, it is thus necessary to issue an application under Paragraph 81(1) alleging “an improper motive” on the part of the applicant or the person who appointed the administrator. Upon the substantive hearing of the application, a statutory discretion is conferred on the court to provide for the appointment “to cease to have effect” and grant such other relief, if any, as it thinks appropriate under Paragraph 81(3)(a)-(d). However, it is not expressly provided that the relief is conditional upon or, indeed, in any way related to a determination of the “improper motive” allegation. The “improper motive” allegation is essentially a gateway.

Where there is no administration order, the “improper motive” must be attributed to the person who made the appointment and, logically, it must pertain to his “motive” for making the appointment. In this respect, impropriety in his motive might comprehend fraud, dishonesty, bad faith or an intention to achieve a collateral purpose to the disadvantage of other creditors. It might also involve knowingly taking advantage of conduct that was actuated by such a motive.

Consistently with these propositions, in Jackson v Thackrar [2007] EWHC 2173 (TCC), HHJ Thornton QC concluded that the directors of a company had exercised their powers of appointment with an improper motive where they were exercised at the direction of a third party otherwise than in the interests of the company. Conversely, in Curistan v Keenan [2011] NICh 23, McCloskey J considered that a bank’s motive in applying for an administration order to frustrate and obstruct litigation was not improper where perceived to be in harmony with the statutory purpose of administration in the analogous rules in Northern Ireland. In Thomas v Frogmore Real Estate GP1 Ltd [2017] EWHC 25, Philip Marshall QC reached a similar conclusion in a case in which Nationwide Building Society was alleged to have appointed administrators in order to stifle or impede litigation. However, in these cases, there was no suggestion that the appointment might have a material bearing on the administration itself.

No statutory limits are placed on the circumstances in which the court might exercise its discretion and nowhere in Paragraph 81 or, indeed elsewhere in the

It is axiomatic that, in the absence of good reason, the court will not exercise its discretion to make such an order. In view of the fact that the Act does not specify the circumstances which would constitute good reason for relief, it is not for a court to take it upon itself to provide a general definition of such circumstances.

Under my statutory jurisdiction in Paragraph 81(1), I shall make an order providing for the Administrators’ appointment to cease to have effect.

Firstly, the Application contains, by reference, allegations that Mr Parker appointed the Administrators with an improper motive. In Paragraph 3 of the

In Paragraph 4.2 of his witness statement dated 28^th August 2019, Mr Koon states that “…the motive behind the security and appointment of administrators” was to “prejudice my interests and the interests of the shareholders in relation to the Company and its assets”. Later, in Paragraph 51, he referred to the concerns of Wedlake Bell LLP in their letter dated 19^th August 2019 and, having referred to the Sections 245 and 238 of the 1986 Act, he stated that the appointment was “based on the improper motive of Mr Parker…” (My italics). In their letter dated 19^th August 2019, they stated that “…the purported grant of security was simply a tactic in order to place the Company into administration in order to defeat our client’s interest and acquire the land”. Finally, in Paragraph 57.3 of the witness statement, Mr Koon stated that “there is a clear and irreconcilable conflict of interest in the [Administrators] remaining in office due to the improper motive behind the appointment and the nature and validity of the security upon which the appointment is based” (My italics).

Whilst Mr Koon’s witness statement is open to criticism on the basis that it does not provide comprehensive particulars of the “improper motive”, it plainly contains more than one allegation that the appointment of Messrs Bowes and Rosler was attributable to an improper motive on the part of Mr Parker. It is also implicit that, as alleged, Mr Parker’s improper motive was essentially to advance his own interests as a creditor at Mr Koon’s expense, whether by enabling him to acquire the Property or by some other means. These allegations are to be viewed on the context of the correspondence that was exchanged between Wedlake Bell LLP and Mr Parker in the period leading up to the appointment in which they made a series of complaints about Mr Parker’s conduct. These included complaints that he had failed to provide them with accurate information in relation to the site and the Company’s affairs, failed to develop the Property and procured the grant of a fixed and floating charge over the same without providing any evidence that he had advanced any funds to the Company.

I am satisfied that, when making the application, Mr Koon honestly believed that, in appointing the administrators, Mr Parker was actuated by an improper motive. Moreover, there were and are reasonable grounds for that belief. In my judgment, the most likely explanation for Mr Parker’s conduct is that he entered into the Debenture as a device to enable him to appoint his own nominees as administrators and thus improve his prospects of influencing the insolvency process. This would include the management and disposal of the Property and the handling of any complaints about the conduct of the directors. Ultimately, Messrs Bowes and Rosler were appointed as administrators as part of the same strategy.

I am thus satisfied that, under Paragraph 81(1), I have a discretion to make an order providing for the administrators’ appointment to cease to have effect. I shall make such an order for the following reasons.

My first reason is, indeed, based on Mr Parker’s motives in appointing the Administrators. Mr Parker caused the Company to enter into the Debenture and appointed the Administrators in the knowledge that (1) the Company was insolvent without the support of Mr Koon and (2) Mr Koon was entitled to a majority, in value of the creditors’ voting rights. Mr Parker can be taken to have this knowledge following the advice given to him by VZX. He can also be taken to have acted in order to obtain a collateral advantage over Mr Koon and put himself in a better positon than otherwise so as to influence the insolvency procedure and the course of the administration. It is conceivable that, in doing so, Mr Parker believed he could procure a more advantageous outcome for the creditors as a whole. However, ultimately, this is a matter for commercial judgment. It is not self-evident that administration will achieve a better result for the creditors than liquidation if the Property is simply to be disposed of at a proper price taking into consideration all professional advice in connection with issues of marketing and the sale price. However, Mr Parker’s motive was to obtain a collateral advantage in connection with this process to which he would not otherwise have been entitled. In the sense originally envisaged, this advantage was achieved.

Secondly, Mr Parker caused the Company to enter into the Debenture by acting as a de facto director and committing breaches of his fiduciary duties to the

Thirdly, the Debenture is susceptible of challenge at the suit of the office holder for the time being and, in view of the fact, that they have themselves been appointed under the Debenture, the Administrators are thus potentially exposed to a potential conflict of interest and duty. Sections 238 and 239 of the Insolvency Act 1986 furnish them with grounds to challenge the Debenture and the underlying indebtedness in respect of VZX’s fees on the grounds that, by assuming responsibility for their fees or preferring Mr Parker to the other creditors, the Company entered into a transaction at an under-value or by statutory preference. If the Administrators were to issue proceedings, the Court would have jurisdiction to make an order restoring the position to what it would have been if the Company had not entered into the relevant transactions or entered into the Debenture.

Similarly, Section 245(2) of the 1986 Act provides that a floating charge is invalid except to the extent of the aggregate of the value of the consideration after the creation of the charge, the value of so much of that consideration as consists of the discharge or reduction at the same time or after the creation of the charge and the amount of contractual interest payable on such amounts. In re Peak Hotels and Resorts Ltd; Crumpler v Candey [2019] EWCA Civ 345, the Court of Appeal has recently confirmed that the value of services is to be assessed by considering that amounts that could reasonably have been charged for such services in the ordinary course of business. This raises obvious questions in the present case where the secured indebtedness can be taken to have incorporated, in part, an amount in respect of the advice given to Mr Parker in his personal capacity.

Conversely, there is no compelling reason why I should not make an order providing for the appointment of the administrators to cease. There seems little prospect of Mr Koon approving the Administrators’ proposals and, whilst it would be open to the administration to return to the Court for relief under Paragraph 55(1) of Schedule B1, the administration is at an impasse. However, it is not a complex administration. It encompasses a single property and the main issue is as to how it should be dealt with and disposed of. Mindful of the present dispute, the Administrators have sought to impose limitations on the administration pending resolution. In Paragraph 12.3 of his witness statement dated 25^th November 2019, Mr Bowes has confirmed that “to date, time costs incurred by Mr Rosler and I acting as Administrators stand at approximately

I shall hear further from counsel in relation to the time and date on which the

I am invited to make an order winding up the Company under Section 81(3)(d) of the Insolvency Act 1986. Consistently with the guidance of Neuberger J in Lancefield v Lancefield [2002] BPIR 1108, HHJ Behrens in Re BTR (UK) Limited [2012] EWHC 2398 and Norris J in Re Graico Property Company Limited (in administration) [2016] EWHC 2827(Ch), I am satisfied that I have jurisdiction, by analogy, to make such an order on an application under Paragraph 81(1) of Schedule B1. However, once the Administrators’ appointment ceases to have effect, the suspension of Mr Koon’s winding up petition will also cease under Paragraph 40(1) of Schedule B1 and, subject to any order that I make today, it would thus be open to Mr Koon to pursue his petition in the usual way. In my judgment, Mr Koon has a compelling case for an order winding up the Company but I shall hear further from counsel in relation to the most appropriate way of dealing with this aspect of the case.

Having determined to make an order providing for the Administrators’ appointment to cease, it is un-necessary and inappropriate for me to grant relief on Mr Koon’s alternative application for an order replacing the Administrators.