A recent opinion by Lord Hodge in the Court of Session has clarified an administrator's powers and duties in cases where they wish to bring an administration to an end.
In particular, it clarifies where they have achieved a different objective from that approved by the creditors.
It is a Scottish case (case), but will be persuasive authority south of the border given the UK-wide applicability of the Insolvency Act 1986 and the fact that Lord Hodge is shortly to be elevated to the UK Supreme Court.
The case concerned an application by joint administrators for directions from the court in circumstances where they considered that a company might be rescued as a going concern. There was a significant dispute in relation to the level of debt owed to one creditor, which may or may not have affected the ability of the company to continue as a going concern once it exited administration.
That dispute was likely to be resolved within a matter of months by a binding determination of an expert. The administrators sought to found on a draft report by that expert, but the creditor claimed this report was defective and that they intended to make representations prior to the report being finalised. The creditor's position was that the true debt was some 20 times higher than that set out by the administrators on the basis of the draft report.
The issues upon which directions were sought were: (a) The extent to which an administrator has discretion to declare that the objectives of the administration have been achieved and thereby bring the administration to an end in terms of paragraph 80 of Schedule B1 of the Insolvency Act 1986; (b) whether the Administrator must make an application to the court in those circumstances to bring their appointment to an end; and (c) whether an administrator requires to call a further creditors' meeting in circumstances where the objectives being achieved were different from those which were approved at the initial creditors' meeting.
On considering the particular circumstances applicable to this case, the court held that:
(a) It was a matter for the administrator and not the court to determine whether the objective of the administration has been achieved. Where that objective was the rescue of the company as a going concern, the administrator must assess the likelihood of the company realistically maintaining its status as a going concern into the future. This was primarily an accounting exercise and the test would be whether the business stood a fair chance of success. Current accountancy practice was to consider the directors' business plan and cashflow forecasts for at least 12 months into the future. In a case such as this, where there is a significant dispute as to the quantum of a particular debt which might affect the company's ability to pay its debts upon exiting administration, this represents a material consideration for the administrators in making this assessment. If the administrators chose to act before any binding determination of the claim is made, they must be able to demonstrate that they had (i) sought clarification of and considered the creditor's position; and (ii) taken legal advice on the claim in light of the creditor's stated position and any other relevant information before them prior to acting.
(b) The court went on to consider whether the administrators, having carried out this exercise would then require to apply to the court for an order that their appointment shall cease to have effect. It was held that this was not required. The Act gives an administrator the power to decide whether the company has been rescued as a going concern and, if so, to file the relevant paperwork terminating his appointment.
(c) Finally, the court considered the question of what steps an administrator must take where they have fulfilled objectives which are different from those approved by creditors. The Act states that where a substantial revision to the administrators' proposals is proposed, a further creditors meeting should be fixed to approve the revisal. In this case the creditors had approved proposals with the aim of making a distribution to secured creditors. The administrators now sought to exit administration on the basis that the company might carry on business as a going concern. It was argued on behalf of the administrators that rescue as a going concern is further up the hierarchy of possible objectives in the Act, and therefore the administrators ought not to be required to fix a further creditors' meeting as - in effect - the outcome was better than that approved by the creditors. They also sought to argue that in this case the one creditor whom they knew would object to the proposal would likely be voted down, and therefore the meeting would serve little purpose. The court rejected both of those arguments holding that a meeting should be fixed, although did point to the administrators' right to apply for directions under paragraph 68, asking the court to approve the varied proposal in circumstances where creditors were acting unreasonably in rejecting it.
Whilst the opinion turns largely on its facts, it provides useful guidance to administrators in considering their position in cases where one of the statutory objectives of an administration has been achieved.