Re The Designer Room Ltd

JurisdictionEngland & Wales
CourtChancery Division
JudgeMR JUSTICE RIMER
Judgment Date23 March 2004
Neutral Citation[2004] EWHC 720 (Ch)
Date23 March 2004

[2004] EWHC 720 (Ch)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Before:

Mr Justice Rimer

Re: The Designer Room Limited

MS L HILLIARD (instructed by Addleshaw Goddard) appeared on behalf of the JOINT ADMINISTRATORS, THE APPLICANTS.

MR JUSTICE RIMER
1

This is an application by Nicholas Roy Hood and Vivian Murray Bairstow, the joint administrators of The Designer Room Limited ("the company"). It raises once again the question as to the power, if any, of administrators to make payments to pre-administration creditors.

2

The administration order was made on 12 th June 2002, and so the administration is governed by the law in force prior to the changes introduced by the Enterprise Act 200The order was made for the purposes specified in s.8(3)(a), (b) and (d) of the Insolvency Act 1986, namely (1) the survival of the company, and the whole or any part of its undertaking, as a going concern; (2) the approval of a voluntary arrangement under Part 1 of the 1986 Act; and (3) a more advantageous realisation of the company's assets than would be effected on a winding up. The administrators were directed to make reports of progress to the court at various stages, and have done so.

3

The company has a number of preferential creditors within the meaning of s.386 of, and Schedule 6 to, the 1986 Act, and the administrators have assumed the task of agreeing their respective claims. The preferential creditors are the Inland Revenue (£212,822.38), Her Majesty's Customs and Excise (£544,793.30), the Department of Trade and Industry (£74,399.83), and the company's employees (£3,798.17). Those sums total £835,813.68.

4

The outcome of the administration is that approximately £63,000 will be available for distribution to the preferential creditors after payment of the outstanding expenses of the administration. On this basis the preferential creditors would, if paid this sum, receive a dividend of 7.5 pence in the pound. There will be nothing for any of the unsecured creditors.

5

The application asks for an order that the administrators be at liberty to pay the preferential creditors such a dividend. In support of the application, Mr Bairstow explains in his witness statement that whilst he would normally achieve such a result by the route of a company voluntary arrangement, or by an exit from the administration resulting in the company entering into either voluntary or compulsory liquidation, the adoption of any of these alternatives in this case will be disadvantageous to the preferential creditors. If the company were to be put into compulsory liquidation, the £63,000 would suffer the costs of the Official Receiver as liquidator, perhaps also those of a private liquidator, and also the ad valorem fees on money paid into the Insolvency Services account. A voluntary winding up would save the ad valorem fees, but the costs of it would still involve a material inroad into the money available for the preferential creditors. As there will be nothing for the unsecured creditors, the administrators also consider that it would be uneconomic to prepare a proposal for a voluntary arrangement, circulate it to all creditors, and then hold a meeting to seek approval for the sole purpose of making a distribution to the preferential creditors.

6

In the circumstances, what the administrators therefore want to do is to pay the preferential creditors themselves and so maximise the dividend. Having paid them, the administrators would then propose to petition for the compulsory winding up of the company. Their proposal so to pay the preferential creditors is supported by Her Majesty's Customs and Excise. The Department of Trade and Industry has similarly expressed its support. Notice of the present application was given to the Official Receiver, who indicated that no one from the Insolvency Service would be attending the hearing.

7

Ms Lexa Hilliard appeared for the joint administrators. I needed no persuading by her that what the administrators wish to do is in the interests of the preferential creditors. However, the reason they have sought the court's direction that they may make the proposed distribution is because they recognise that there is nothing in Part II of the 1986 Act, or in Schedule 1 to it (which lists the powers of an administrator), which, either expressly or by clear implication, confers any power on them to do so.

8

The application is made under s.14(3) of the 1986 Act, but I should also refer to s.14(1). They respectively provide that:

"(1) The administrator of a company-

(a) may do all such things as may be necessary for the management of the affairs, business and property of the company, and

(b) without prejudice to the generality of paragraph (a), has the powers specified in Schedule 1 to this Act;

and in the application of that schedule to the administrator of a company the words 'he' and 'him' refer to the administrator…

(3) The administrator may apply to the court for directions in relation to any particular matter arising in connection with the carrying out of his functions."

9

Ms Hilliard referred me to several authorities dealing with the power of administrators to pay pre-administration creditors. The first in time is Re St Ives Windings Limited [1987] 3 BCC 634. The administration order in that case had been made for the purposes specified in s.8(3)(a) and (d), being two of the purposes for which the order was made in this case. The application to the court was for a direction to permit the administrators to make distributions to creditors of a nature which had been approved at the creditors' meeting. Harman J was addressed by counsel for the administrators, who advanced an argument in support of the application, but he did not have the benefit of any argument the other way. In those circumstances, Harman J expressed what he called his provisional view that there was no power in the court to sanction the payments which the administrators wanted to make, and he declined to make the order sought. What he instead did was to vary the administration order by adding the approval of a voluntary arrangement as a further purpose, with a view to the distributions being made to creditors under such an arrangement.

10

Re John Slack Limited , 2 nd July 1990, is a decision of Scott J. It is unreported, and I have not been shown a transcript of the judgment, but it is referred to in the next case to which I will come, a decision of Knox J. Slack was a case in which the administration order was made for the same two purposes as the original purposes of the order in the St Ives case. The result of the administration was that there was a surplus sufficient to pay all creditors in full, and Scott J authorised the administrators to do just that. He noted the provisional view of Harman J in St Ives, that there was no power to make the payments, but said that whereas in that case what was proposed was merely a pro rata distribution, in the case before him what was proposed was a payment in full, so that there was no possibility of any dissentients. If, in making that distinction, Scott J was recognising that administrators have no power to pay a dividend to pre-administration creditors, I do not, with respect, understand on what basis he considered that they have a power to pay them in full. The merit of what the administrators wanted to do was, of course, obvious, and I can well understand why Scott J wanted to make the orders sought. But the brief reference to the case in Knox J's decision does not convince me that what Scott J was doing was other than to authorise what might perhaps strictly be viewed as being in the nature of a judicious excess of the administrators' statutory powers. If, however, the true basis of the decision in Slack is that an ability by joint administrators to pay all pre-administration creditors in full carries with it a power actually to make such payment, that ability is not present in this case.

11

Re WBSL Realisations (1992) Limited , Re Ward Group plc [1995] 2 BCLC 576 is a decision of Knox J. The application was by the joint administrators of two companies, WBSL and Ward, the former being a subsidiary of the latter. The sole purpose of the administrations was the more advantageous realisation of assets. The administration of WBSL had been successful and enabled all creditors to be paid in full, and the judge was asked to sanction that. As regards Ward, it was insolvent but the administrators sought an authority enabling them to agree all the creditors' debts and pay them on a pari passu basis.

12

It is not unambiguously clear from the report whether Knox J authorised the payment in full of the WBSL creditors, but I presume that he did, no doubt guided by Scott J's decision in Slack. I have explained why I do not regard Slack as providing authority for the purposes of the distribution sought to be made in this case. The bulk of Knox J's judgment was devoted to the question of whether he could sanction the pari passu payments to the Ward creditors. He held that he could, taking the view that paragraph 13 of Schedule 1 to the 1986 Act permitted the desired distribution in the special circumstances of the case. Paragraph 13 confers on an administrator a "power to make any payment which is necessary or incidental to the performance of his functions".

13

In the course of his judgment, Knox J referred to Re Mount Banking plc, 25 January 1993, unreported, in which Ferris J authorised administrators to make certain payments on account to pre-administration creditors, but in circumstances in which the payment was needed in order to preserve the goodwill of the company's business pending the attempt to achieve...

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