DKLL SOLICITORS v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judgment Date | 06 March 2007 |
| Neutral Citation | [2007] EWHC 2067 (Ch) |
| Court | Chancery Division |
| Date | 06 March 2007 |
[2007] EWHC 2067 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Andrew Simmonds Q.c.
(Sitting as a Judge of the High Court)
Mr Boardman appeared on behalf of the Claimant
Ms Williamson (Instructed by HMRC) appeared on behalf of the Defendant
Approved Judgment
THE DEPUTY JUDGE:
This is an application for an administration order in relation to DKLL Solicitors—which I will refer to as the partnership—a firm of solicitors providing general legal services, whose principal place of business is in Epsom, Surrey. The application is made by Mr Anthony Lawson and Mr Stephen Lewis, who are the two equity partners. The partnership also employs four salaried partners, one of whom is a Mr Virash Patel. The partnership employs some 50 other staff in addition.
It is common ground that the partnership is hopelessly insolvent. It has liabilities exceeding £2.4m, including a debt owed to Her Majesty's Revenue and Customs—which I will call the Revenue—of at least £1.7m in respect of unpaid VAT, PAYE and National Insurance contributions. There is an estimated deficiency as regard unsecured creditors of at least £2m, on any view of the realisable value of the partnership's assets.
The purpose of the application is to enable the proposed administrators, who are Mr Malcolm Cohen and Mr Anthony Nygate, both of BDO Stoy Hayward, to effect an immediate sale of the partnership's business to a newly incorporated limited liability partnership, known as Drummonds Kirkwood LLP—and I will refer to that as the proposed purchaser—for a total consideration of £400,000.
The application is opposed by the Revenue, which issued a winding up petition against the partnership in December of last year. The petition is due to be heard tomorrow, hence the urgency of this application. I was told that the Revenue have also issued bankruptcy petitions against the two equity partners in respect of the Crown debt. The application is supported by two witness statements of Mr Lawson, dated 15 th February and 2 nd March 2007. The Revenue's grounds of opposition were set out in a witness statement of Mr James Sudds, dated 28 th February 2007.
Before considering the evidence and the Revenue's grounds of opposition in more detail, I should set out the relevant statutory provisions governing the exercise of this jurisdiction. Under paragraph 11 of Schedule B(1) to the Insolvency Act 1986, as modified by the provisions of Article 6 of and Schedule 2 to the Insolvent Partnerships Order 1994, and I quote:
“The court may make an administration order in relation to a partnership only if satisfied that (a), the partnership is unable to pay its debts and (b), that the administration order is reasonably likely to achieve the purpose of administration.”
Thus, paragraph 11 imposes to two threshold conditions which must be satisfied before the court may make an administration order. If those threshold conditions are satisfied, the court has a discretion whether or not, and if so, on what terms to make such an order.
For the reasons I have mentioned, there is no dispute that condition (a) is satisfied, namely that the partnership is unable to pay its debts. The reference to the purpose of administration takes one to paragraph 3 of Schedule B(1), which provides relevantly as follows:
“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 secure or preferential creditors.”
And then at paragraph 3(2):
“Subject to sub-paragraph 4, the administrator of a company must perform its functions in the interests of the company's creditors as a whole.”
In the present context, references to the company in those extracts must, of course, be read as references to the partnership. It is not possible to rescue the partnership as a going concern, so the objective relied on is (b), namely achieving a better result for the partnership's creditors as a whole than would be likely if the partnership were wound up without first being in administration. The applicant's case is that the sale of the partnership's business to the proposed purchaser for £400,000 will achieve that objective. In support of this contention Mr Lawson produced, as exhibit AJL5 to his first witness statement, an estimated statement of affairs as at 15 th February 2007, prepared by the applicants with the assistance and advice of the proposed administrators. According to the estimated state of affairs, total funds available for creditors on a forced sale in the event of liquidation, will be only about £105,000, compared to the £400,000 proceeds of the proposed sale, and the liquidation itself would create an additional £44,000 worth of preferential claims by employees for arrears of pay and holiday pay.
In paragraphs 14 and 15 of his witness statement, Mr Sudds says this.
“At this point I should add that in the respondent's opinion, the estimated realisations in compulsory liquidation are substantially lower than they would expect. Furthermore, no explanation has been given to justify such a substantial variation from what is listed, at approximately £1.7m worth of assets, to a realisable sum of only marginally over £100,000. The Revenue does not accept the valuations or contentions put forward on the, for sale scenarios, and the whole financial position is very short on detail.”
He then goes on to say:
“In the respondent's opinion the firm's assets could be realised for a sum more in line with the purchase price.”
Echoing this, in the course of her submissions on behalf of the Revenue, Miss Williamson said it was surprising that work in progress with a book value of £806,000 was estimated to realise, “Probably zero.”
In response, Mr Cohen has produced a report, dated 2 nd March 2007. The material parts are as follows: he says that he is a Fellow of the Institute of Chartered Accountants of England and Wales; a licensed insolvency practitioner and a partner in the firm of BDO Stoy Hayward, with over 25 years of experience in the field of corporate recovery.
He says that he has previously acted as supervisor to various professional practices, including Loxleys, Lewis Old King and the FHP Partnership, which at the time was the largest insolvent partnership, involving interlocking individual voluntary arrangements, and that he is currently the joint liquidator of Merricks LLP.
He says that he has provided advice and assistance to many partnerships in relation to their financial affairs, brokering deals with landlords and banks, and negotiating informal rescue arrangements. He is a member of BDO's professional practices focus group, and is also the co-author of Insolvent Partnerships published by Jordan. He continues:
“I have consented to act in this matter, as I am of the opinion that the proposed administration strategy i.e. an immediate sale of the partnership business will achieve a better result for the partnership's creditors as a whole than would be likely if the partnership were to be wound up without first being in administration. All stakeholders, i.e. creditors, employees and partners would be better off. I assisted the partners in preparing a statement of assets as at 15 th February 2007. The book value is shown as £1.27m for the assets,...
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