Interactive Digital Systems Ltd v VST Enterprises Ltd
| Jurisdiction | England & Wales |
| Judge | Stephen Davies |
| Judgment Date | 14 April 2021 |
| Neutral Citation | [2021] EWHC 887 (Ch) |
| Docket Number | Case No: CR-2021-MAN-000122 |
| Date | 14 April 2021 |
| Court | Chancery Division |
[2021] EWHC 887 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS IN MANCHESTER
INSOLVENCY & COMPANIES LIST (ChD)
IN THE MATTER OF VST ENTERPRISES LIMITED
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
His Honour Judge Stephen Davies sitting as a High Court Judge
Case No: CR-2021-MAN-000122
Louis Doyle, QC (instructed by Howes Percival LLP, Solicitors, Leicester) for the Applicant
Anja Lansbergen-Mills (instructed by Hill Dickinson LLP, Solicitors, Manchester) for the Respondent
Robert Mundy (instructed by Knights plc, Solicitors, Nottingham), for the Petitioners in CR-2020-004299
Hearing date: 8 April 2021
Date draft judgment circulated: 12 April 2021
APPROVED JUDGMENT
This judgment was handed down remotely by circulation to the parties' representatives by email. It will also be released for publication on BAILII. The date and time for hand-down is deemed to be 2:15 p.m. on 14 April 2021.
I direct that pursuant to CPR PD 39A paragraph 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
His Honour Judge Stephen Davies
A. Introduction and summary of decision
This is my judgment following the hearing of an administration application issued on 2 March 2021 (“ the application”) in respect of VST Enterprises Limited (“ the Company” or “ VST”) by Interactive Digital Systems Limited (“ the Applicant”), as a creditor of the Company within the meaning of para.12(1)(c) of Schedule B1 to the Insolvency Act 1986.
The application came on initially before HHJ Halliwell on 10 March 2021, when it was adjourned to 8 April 2021 with directions for the filing of further evidence. In addition to the evidence filed in accordance with that order there has been a flurry of further evidence filed in the days preceding the hearing, to which no opposition was taken by each party.
I heard extremely able and persuasive submissions from Mr Doyle, QC, counsel for the Applicant, from Ms Lansbergen-Mills, counsel for the Company, and from Mr Mundy, counsel for the Petitioners in the petition for the winding-up of the Company on just and equitable grounds in case number CR-2020-004299 presented in January 2021 (“ the J&E Petition”), who supported the application. Given the time of day and the detail and importance to the parties of the matters argued, I reserved judgment.
The real battleground between the parties was on the issues of: (a) whether the Applicant has proved that the Company is balance-sheet insolvent; and if so (b) whether the court should exercise its discretion to make or refuse to make an administration order. Having considered the evidence and the submissions I am satisfied that, whilst the Applicant has established balance-sheet insolvency, it is not an appropriate case for the exercise of the discretion to make an administration order. My reasons follow.
B. Parties
The Company was incorporated on 13 November 2012, but did not trade until 2015. There are 107 shareholders. Most are private individuals or companies; however the vast majority of the shares are held by the Company's parent company, Davis Co Holdings Limited (“ Holdings” or “ Davis Co”), which is owned by the Company's CEO, Mr Louis-James Davis. The Company described itself in 2015 as a start-up, its purpose being the commercial exploitation of an image (Vcode) which can be scanned using a smartphone application and linked to a platform from which transactions can be processed and information communicated.
The Applicant was engaged by the Company in around 2018 to undertake the design and programming of the software and technology infrastructure for the VCode platform. Unfortunately the relationship between the Applicant and the Company has not been a smooth one, with allegations by the Applicant of non-payment of monies due by the Company and of unauthorised use of its software, and with allegations by the Company of various breaches by the Applicant. A threat by the Applicant to issue a winding-up petition was averted in 2019 and further disputes were compromised by a Settlement Agreement entered into on 22 November 2020 (“ the Settlement Agreement”), the terms of which raise issues of some importance in this case.
The eight Petitioners acquired shares in the Company between May 2017 and August 2018. Between them they acquired 112 shares, thus less than 0.1% of the Company's allocated share capital, although between them they paid over £200,000. The main reasons for their seeking a just and equitable winding-up order are said to be “the insolvency of VST, impropriety on the part of VST and its directors, a break-down of confidence in VST and its directors, and that, in the circumstances, it is necessary for a liquidator to be appointed to investigate the activities of VST and the conduct of its directors”. The J&E Petition is opposed and an application by the Company to strike out the petition is listed in May 2021.
C. Relevant legal principles
There is little dispute as to the relevant legal principles, as opposed to their application to the particular facts, many of which are disputed. I adopt with gratitude the summaries in the skeleton arguments.
By Sch. B1, para.11 the Court may make an administration order in relation to a company only if satisfied that:
(a) the company is or is likely to become unable to pay its debts; and
(b) the administration order is reasonably likely to achieve the purpose of administration (by para.111(1) meaning an objective specified in para.3).
As regards (a), the term “unable to pay its debts” is, by para.111(1), attributed the meaning given by s.123 of the 1986 Act; that is, either cash-flow insolvent within the meaning of s.123(1)(e) or balance-sheet insolvent within the meaning of s.123(2) of the 1986 Act. The burden of proof in demonstrating a company's inability to pay debts (or the likely inability to pay debts) rests on the applicant, on a balance of probabilities: Highberry Ltd v. Colt Telecom Group plc (No.2) [2002] EWHC 2815 (Ch).
For the purpose of ascertaining balance-sheet insolvency within the meaning of s.123(2), contingent and prospective liabilities are not to be taken at full face value, but rather fall to be discounted for contingencies and deferment. The section requires the court to make a judgment whether it has been established that, looking at the company's assets and making proper allowance for its prospective and contingent liabilities, it cannot reasonably be expected to be able to meet those liabilities. If so, it will be deemed insolvent although it is currently able to pay its debts as they fall due. The more distant the liabilities, the harder this will be to establish. It is very far from an exact test, and the burden of proof is on the party asserting balance-sheet insolvency ( BNY Corporate Trustee Services Ltd v Eurosail-UK 2007–3BL plc and others [2013] UKSC 28 at §§37–42) (“ Eurosail”).
As regards (b), it is well established that “reasonably likely” does not require the court to be satisfied as to the achievement of the purpose of administration on a balance of probabilities; rather, the test is less exacting in that it suffices that there is a real prospect that the administration's objective will be achieved: Hammonds v. Pro-Fit USA Ltd [2007] EWHC 1998 (Ch), [2008] 2 BCLC 159 at [24] (Warren J).
Paragraph 12(1)(c) of Sch. B1 allows for an administration application to be made by “one or more creditors of the company”. Paragraph 12(4) provides that the reference to creditor “includes a contingent creditor and a prospective creditor”. It was held by Buckley J in Stonegate Securities Ltd v. Gregory [1980] 1 Ch 576 at 579 that a contingent creditor is “a creditor in respect of a debt which only becomes due on an event which may or may not occur” (in contrast to a prospective creditor where the contingency is one that will, as opposed to may, happen in the future).
If the court is satisfied that: (a) the applicant for an administration order does have standing, here that it is a contingent creditor of the company; and (b) the company is or is likely to become unable to pay its debts; and (c) that the administration order is reasonably likely to achieve the purpose of administration, then it has a discretion as to whether or not to make an administration order. As Sir Geoffrey Vos C (David Richards LJ and Asplin J agreeing) said in Rowntree Ventures Ltd v. Oak Property Partners Ltd [2017] EWCA 1944 (Civ) at [24]:
“It is necessary first in my judgment to understand that the discretion provided to the court in para.13 of Sch.B1 is of a wide and general nature. It is not constrained in any way. Any appellate court considering a particular exercise of such a discretion must ensure that nothing it says operates so as to cut down the width of the statutory discretion that parliament has given to the court. The effect of this proposition is that a multitude of factors may properly be taken into account in deciding in any particular case whether it is appropriate to make an administration order when the two statutory pre-conditions have been held to be fulfilled. Nothing that I say today should be taken as limiting the factors that can properly be considered. The circumstances are likely to be infinitely variable. The interests of secured creditors, preferential creditors, unsecured creditors and the company itself will change from case to case.”
The pursuit of insolvency proceedings in respect of a debt which is otherwise undisputed will amount to an abuse in two situations. The first is where the petitioner does not really want to obtain the liquidation or bankruptcy of the company or individual at all, but issues or...
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