Administration over winding up order?

Overview

This case sets out the factors a court will consider in determining whether a company should be put into administration or wound up. It also explores the issue of how to determine whether an out of court appointment of administrators is valid.

Background

Wilton UK (Group) Limited (the “Company”) is a member of a larger group which provided professional, financial and pension services. One of the Company’s subsidiaries is Hartley Pensions Limited (“HPL”), a SIPP operator which entered administration in July 2022. HPL is heavily dependent on the Company for a variety of services, including information technology services, property management services and corporate legal and regulatory compliance services.

On 3 April 2023, three insolvency practitioners from Quantuma Advisory were purportedly appointed administrators of the Company (the “Administrators”) by qualifying floating chargeholders (a director of the Company and two trustees of a trust, one of whom was also a director of the Company).

The purported appointment of the Administrators was made the day before a winding up petition in respect of the Company brought by a Mr O'Sullivan and Most Consulting Limited (the “Petitioners”) was due to come before the court. The effect of the appointment, if valid, was to suspend the winding up petition.

Nevertheless, on 4 April 2023, the Court made an order which recited that, among other things, the Company’s defence to the petition debt claimed by Most Consulting did not appear to be bona fide and substantial. However, the issue does not appear to have been formally resolved.

On 9 June 2023, HPL brought an application for an administration order, with retrospective effect, in relation to the Company. The main issue before the Court was whether to (a) place the Company into administration (by way of regularising any invalidity in the original appointment) or (b) make a winding up order (or to continue winding up proceedings if the administration appointment was invalid).

At the conclusion of the hearing on 27 June, the Petitioners advised that the parties had reached a settlement, and the Petitioners withdrew their opposition to the administration. The Court found that this, of itself, did not change the Court’s function, since an administration order cannot be made by consent. In addition, a winding up petition is a class remedy, and other alleged creditors of the Company who had supported the winding up petition and opposed the making of an administration order were not parties to the settlement reached between the Petitioners and HPL.

The Court’s Decision

The Court was not expressly asked to rule on the issue of the validity of the administration appointment. Nevertheless, the Court found that there were strong grounds to conclude that the floating charge under which the Administrators were appointed was invalid, and that their appointment on 3 April 2023 was accordingly also invalid. The Court made this finding on the basis that, among other things, the floating charge was granted after the Company received any benefit, and no relevant consideration or value was given to the Company for the floating charge.

Having made this finding, the Court avoided actually deciding whether the appointment was invalid, but stated that it would grant relief (if appropriate) on the basis of the "worst case" scenario of invalidity.

The Court then considered whether the appointment order should be made. The requirements for making an administration order are:

1. The applicant must have standing to make the application.

2. There must be jurisdiction to make the order, which requires two conditions to be met:

   • The Company must be or be likely to become unable to pay its debts on the balance of probabilities.

   • It must be reasonably likely (that is, that there is a real prospect) that the administration order will achieve the purpose of administration set out in the Insolvency Act 1986 Schedule B1 para 3.

3. As a matter of discretion, it must be appropriate to make the order.

With respect to the first requirement, it was common ground that HPL had standing to make the application as a creditor. It was not necessary for the debt relied upon for the administration petition not to be the subject of a bona fide dispute on substantial grounds (which could be contrasted with the position on a winding up petition).

HPL claimed to be an actual and contingent creditor of the Company. Although there was some uncertainty and conflicting evidence as to the status of HPL as either a debtor or a creditor of the Company, the Court was satisfied that there was a good case for finding HPL to be a contingent creditor. The services the Company provides to HPL are essential to manage the orderly wind down of the business. If the Company were immediately placed into liquidation causing detriment to HPL clients, this would significantly increase the risk of Financial Ombudsman Service ("FOS") claims. If such claims were to be upheld due to the failure of the Company, then this would increase HPL's creditor claim against the Company for failing to adhere to agreed service lines. The FOS levies a fee of £750 per individual FOS claim, and given that HPL has 16,646 SIPP clients, HPL would be exposed to a potential liability of £12,484,500.

With respect to the second requirement, it was common ground that the Company was insolvent. The balance sheet of the Company at the year end 30 April 2020 showed net liabilities of over £4.7 million, and the Court had already found that the Company’s defence of the winding up petition was not persuasive, since there was only £31,535.07 in the Company's bank account to pay such debts.

The Court was also satisfied that there was a real prospect that the administration would achieve a better result for the Company’s creditors than would be likely if the Company were wound up (without first being in administration) and (failing that) enable property to be realised in order to make distributions to one or more secured or preferential creditors.

The proposed strategy was for the Company to continue trading for a period, reducing the risk of the claims from HPL referred to above, compared with trading abruptly ceasing on a liquidation. The precise period of trading was uncertain, and a forward-looking estimate had been prepared which envisaged a trading loss being incurred. However, even taking that trading loss into account and taking into account the higher professional fees on an administration, compared with a liquidation, the estimated outcome statement envisaged an improved financial outcome at the end of the day, an administration achieving a net asset realisation figure after payment of debts of some £679,816 more than on a liquidation.

There was also a very real benefit of administration over liquidation in terms of timing. The Administrators had already carried out a some work and had a head start on any newly appointed officeholders. In addition, a liquidation would cause a delay due to the need for a possible further hearing to resolve the issue of the disputed debt. There would also likely be a hiatus to put arrangements in place for creditors to vote on the issue, raising various issues as to the identity and quantum of individual creditors, suggesting a very real possibility of further delay.

Prior to withdrawing their opposition to the administration, the Petitioners argued that there was a major advantage to a liquidation over an administration – the availability of the remedy under section 127 of the Insolvency Act 1986 in avoiding dispositions of company property between the date of presentation of a winding up petition and a winding up order (as compared with the position in an administration).

The Court accepted that s127 IA 1986 can in certain circumstances provide a relatively straightforward remedy which has advantages over, for example, other transaction avoidance provisions of the IA 1986 (such as ss238, 239 and 423 IA 1986) or claims for breach of director's duties. Further, the availability of s127 can be a weighty factor pointing to a benefit of liquidation over administration.

However, the Court did not regard the availability of s127 IA 1986 in liquidation on the facts of this case to demonstrate that an administration would be a significantly worse outcome for creditors than a liquidation given the other benefits of administration. With respect to the substantive point of the benefit of liquidation over administration, s127 IA 1986 could always be prayed in aid as regards unknown transactions, and the Court found that this point had little to no weight.

At the end of the day, the Court found that the identity of the Administrators appeared to be the actual concern underlying many of the creditors' positions of support for the Petitioners. The Petitioners were not able to put forward any proposed administrators because the insolvency practitioners they wanted to see appointed as liquidators were not able to say that they considered that there was a real prospect of the administration achieving its statutory purpose. However, the Court found no merit to the arguments that it was inappropriate to appoint the insolvency practitioners in question as Administrators.

Conclusion

Accordingly, the Court made an administration order retrospective to 3 April 2023, when the Administrators were purportedly appointed. Since that time, the Administrators have entered into various commitments as administrators, including arrangements with landlords and employees. The Court stated that the validity of those arrangements should not be put in doubt.

Judge: HH Judge Davis-White KC (sitting as a judge of the Chancery Division)

Counsel: Clara Johnson of South Square (instructed by DWF Law LLP) for Hartley Pensions Limited (in administration)

Steven Fennell of Exchange Chambers (instructed by MD Law (Yorkshire) LLP) for the Petitioners

Hugo Groves of Enterprise Chambers (instructed by Locke Lord) for Nicholas Barnett