Mr Martyn Kebbell v Hat & Mitre Plc

Hearing dates: 8 th and 9 th July 2020. Further written submissions: 16 th July 2020.

Approved Judgment

I direct that pursuant to CPR PD 39A para 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.

This is an application by two shareholders and directors of Hat & Mitre Plc (the “Company”), the principal purpose of which is to obtain a determination that the Company is not, or no longer should be, in administration. The Second and Third Respondents (the “Administrators”) were appointed as administrators of the Company by its directors on 19 December 2018.

The application notice, which was issued over a year after the Company entered administration, sought several different heads of relief. In the event, the Applicants limited their application to relief in the form of a declaration that the appointment of the Administrators pursuant to paragraph 22 of Schedule B1 to Insolvency Act 1986 (“Schedule B1” and “ IA 1986” respectively) was invalid, an order terminating the appointment of the Administrators with immediate effect and an order that the Administrators be personally liable for their costs and expenses and be debarred from recouping them from the Company's assets.

The application notice itself did not specify the grounds on which invalidity was alleged, nor did the witness statements which were eventually made by the Applicants in support of the application on 12 June 2020 and 19 June 2020. The grounds were first articulated in the skeleton argument prepared on the Applicants' behalf by Mr Andrew Shaw on 2 July 2020. The way that he put the Applicants' case was that the appointment of the Administrators was a nullity because it was made by the directors for an improper purpose contrary to s.171(b) of Companies Act 2006 (“CA 2006”). He submitted that:

“ The resolution passed at the board meeting on 19 December 2018 was thus passed for the improper purpose of furthering the interests of the Company's minority shareholders at the expense of the majority shareholders and is consequently void. Accordingly, the appointment of the Administrators is a nullity.”

The majority of the Company's shares are held by the First Applicant (“Mr Kebbell”) (52%), his two children (1% each) and the Second Applicant (“Mr Kitchen”) (17%). The remaining shares are held by 6 other shareholders or groups of shareholders, the most relevant of whom for present purposes are the two other directors of the Company, Mr Keith Young who holds 10% and Mr Richard Thoburn who holds or controls a smaller stake.

The improper purpose is said by the Applicants to be attributable to Mr Young (who at the relevant time had become the chairman with a casting vote at meetings of the board) and Mr Thoburn, although Mr Shaw accepted that their case against Mr Thoburn was thin. For reasons which were never explained, and which caused substantial difficulties in getting to the bottom of what occurred, Mr Young and Mr Thoburn were not joined as parties to this application and they did not appear as witnesses.

It may be that the difficulties caused by the absence of Mr Young and Mr Thoburn would have been flushed out if the application had been listed for directions at the outset in the normal way. Again, for reasons which were not entirely clear, the parties did not take steps to ensure that this happened. At the beginning of the hearing I made clear to Mr Shaw that they were proper parties, not least because the Applicants sought an order that they indemnify the Administrators pursuant to paragraph 34 of Schedule B1 if I were to declare it to have been a nullity on the grounds alleged. It was also clear from the outset that the fact that the Applicants had chosen not to join them might affect the approach that I was able to take to the evidence.

Notwithstanding these considerations, both Mr Shaw and Mr Joseph Curl, who appeared for the Administrators, urged me to proceed with the hearing in any event. With some reluctance I agreed to do so. This was in part because the Applicants had an alternative application to which Mr Young and Mr Thoburn did not appear to be proper respondents, but also because Mr Shaw accepted that he could not seek relief under paragraph 34 of Schedule B1 at this stage. It may of course be an abuse of process for the Applicants to proceed to seek such relief on a further application in due course if it is established that they could and should have sought that relief at this hearing in an application to which Mr Young and Mr Thoburn were parties. However, that is a matter which I cannot decided without a better understanding of why these proceedings were not properly constituted in the first place.

The alternative claim is for an order pursuant to paragraph 74(2)(d) of Schedule B1 that “ on payment by the Applicants to the creditors of the Company of all amounts claimed, the appointment of the Administrators ceases to have effect”. In support of that claim it is said that the Administrators have been acting and are continuing to act in a way which will unfairly harm the interests of the Applicants as members of the Company, and in the case of Mr Kebbell as a creditor.

During the course of the hearing, it became apparent that the Applicants also sought to advance a claim based on paragraph 81 of Schedule B1. This empowers the court, on the application of a creditor, to provide for the appointment of an administrator to cease to have effect where an applicant is able to allege (and so it seems to me to prove) an improper motive on the part of the person who made the appointment.

This way of putting his case is only available to Mr Kebbell, because Mr Kitchen is not a creditor of the Company. It is similar in form to the way in which the Applicants made their claim based on a breach of s.171(b), but there are differences. It was not foreshadowed in the application notice and the way in which it came to be advanced was said by the Administrators to be procedurally unfair.

The Background

The Company's only business is its ownership of two linked properties at Abbot's Court, 34 Farringdon Lane and 22–23 Clerkenwell Close (the “Property”). The accounts for the year ended 31 March 2018 recorded that the Property was then valued at £6,549,410. At the time of the administration, the Property was let to an associated company, Maxwell Stamp Plc (“MSP”).

The shares in MSP are held by the Company's shareholders in the same proportions as they hold their shares in the Company. Prior to its own administration, which commenced on 24 January 2019, MSP carried on business as an international aid consultancy. The Applicants were (and continue to be) directors of MSP. Mr Young and Mr Thoburn had also been directors of MSP but were no longer directors at the time with which these proceedings are concerned.

By the beginning of 2017, MSP had run into financial difficulties. One of the consequences of these difficulties was that it stopped paying rent to the Company for its occupation of the Property. At the same time, the Company's directors were being told that there were significant buildings works required to be done at the Property and that the payment of dividends may have an adverse impact on MSP's own overdraft and guarantee facilities. As at 30 June 2018, rent for six quarters totalling £450,000 was outstanding. The existence of this outstanding indebtedness, and disagreements as to the steps that should be taken to enable it to be discharged, were amongst the circumstances which ultimately gave rise to the Company going into administration.

At a board meeting held on 15 August 2018, the Company's directors considered a proposal by Mr Young that the Company should either find a new tenant or sell the Property. Concern about how to proceed in circumstances in which MSP was not paying the sums it owed the Company was not a new issue. I was shown material which indicated that it was a topic at board meetings as from the time at which MSP stopped paying rent at the beginning of 2017.

The Company's directors cannot have been much comforted by what they were told at the August board meeting about the prospect of receiving payment from MSP, because Mr Kitchen said that there was no prospect of any rent being received from MSP in that calendar year. He also said that, although he and Mr Kebbell would propose to MSP's directors that they should lend MSP c.£200,000 to ease its current cash crisis, it would be for MSP's own board to decide how the proceeds of that loan should be used.

In his witness statement Mr Kitchen said that the funding the Applicants had in mind was an offer “ to put forward personal funds to either enable MSP to meet its obligations to the Company, or to the Company to meet its own obligations pending MSP's fortunes improving”. However, this intention was not reflected in the minutes of the meeting and he...