Administration and the statutory purpose: unsuccessful challenge to an application to appoint administrators

14th October 2020

Duncan Lole and Olivia Robinson discuss their recent case in the High Court (Strategic Advantage SPC v High Street Rooftop Holdings Limited [2020] EWHC 2572), in which the Court considered the statutory purposes of administration and in what circumstances the making of an administration order is an appropriate exercise of the court’s discretion on the application of a qualifying floating chargeholder. Hugo Groves and Matthew Maddison of Enterprise Chambers were instructed by Walker Morris LLP on behalf of the Applicant.

What was at issue?

The case involved an application by Strategic Advantage SPC (the Applicant) for an administration order in relation to High Street Rooftop Holdings Limited (the Company). The Applicant applied principally on the ground that it was a debenture holder under a facility agreement and that events of default had arisen in relation to loans which it made to the Company, entitling it to appoint an administrator under paragraph 14 of Schedule B1 to the Insolvency Act 1986 (Schedule B1).

The Company argued that the application should be refused essentially on two grounds. First, that no event of default has arisen because the underlying contract had been varied to allow extra time for payment or alternatively that the Applicant should be estopped from relying on its terms. Second, that the Company’s financial position was such that the Applicant would be repaid in full so the insolvency requirement had not been met, and any discretion should be exercised by the court against the making of an administration order.

What were the facts?

In 2018, the Applicant and the Company entered into a facility agreement under which the Applicant made two tranches of funding available to the Company. The facility was secured by fixed and qualifying floating charges created by a debenture, and the sums drawn down were to be repaid by specified dates. The facility agreement provided that failure to repay by the due dates would constitute events of default entitling the Applicant to declare the debenture enforceable. The Company did not make the repayments by the due dates, but the Applicant agreed to waive the events of default upon the Company fulfilling certain conditions. When the Company failed to meet those conditions, the Applicant revoked the waiver, and asserted that the qualifying floating charge created by the debenture had become enforceable. It sought an administration order on the basis that that events of default had arisen which entitled it to appoint an administrator under Schedule B1.

Was the debenture enforceable?

The court found that, (subject to the Company’s defence that the repayment terms were varied or that the Applicant was estopped from enforcing the original repayment dates), the security became immediately enforceable upon an event of default, as defined in the facility agreement. The Company’s failures to make the necessary repayments by the due dates clearly constituted events of default.

Had there been a variation of the contract or an estoppel?

The facility agreement provided that an amendment would not be effective unless it was made in writing and signed by both parties. There was nothing of the kind and therefore there had been no effective amendment. Nor was there anything which amounted to an unequivocal representation that the repayment dates would be extended, such that the Company might be entitled to establish an estoppel. Further, the fact that both parties had agreed to the contingent waiver was fatal to establishing an estoppel. Therefore the debenture was enforceable and, since the Company had not raised a dispute which had to be determined at trial, the Applicant was entitled to seek an administration order under paragraph 35 of Schedule B1.

Statutory purpose

By paragraph 35(2) of Schedule B1, the court may make an administration order irrespective of whether or not the company is or is likely to become unable to pay its debts, provided it was satisfied that the applicant could appoint an administrator under paragraph 14. As explained above, the Court was so satisfied. The next question was, for the purpose of a paragraph 35 application, does the Applicant have to demonstrate a real prospect of one of the statutory purposes of administration being achieved (as it would if the application had been made under paragraph 11)? The court held ‘yes’. A paragraph 35 applicant is not exempt from that requirement by reason of being a qualifying charge holder. Therefore, on an application to appoint an administrator by a qualifying floating chargeholder under paragraph 35, the applicant has to show that there is a real prospect of one of the statutory purposes of administration being achieved.

Paragraph 3 of Schedule B1 sets out the purposes of administration, which are: (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 secured, or preferential, creditors.  The administrator must first seek to achieve (a) unless it is not reasonably practicable or would not achieve as good a result as (b) for the creditors as a whole. If (b) is also not reasonably practicable, he may seek to achieve (c).

In order to make an appointment under paragraph 14, the person making an appointment must file a statement by the administrator that “in his opinion the purpose of administration is reasonably likely to be achieved”. In this case the proposed administrators both signed Consents to Act which included such statements. The Court considered those statements and was referred to the case of Re Integeral Ltd [2013] EWHC 164 (Ch). In that case, Richard Snowden QC (as he then was) remarked that a potential administrator who opines to the Court as to the prospects for an administration order, should do so “carefully, with an independent mind, and on the basis of a critical assessment of the position of the company and the proposals put forward”. Having considered the evidence submitted by the Company and the proposed administrators, the Court was satisfied that, if the proposed administrators were appointed, there was a real prospect that one of the statutory purposes of administration would be achieved.

Court’s discretion

Finally, even though the court was satisfied that the debenture was enforceable and that there was a real prospect of the statutory purpose of administration being achieved, the Applicant still needed to establish that the making of an administration order was an appropriate exercise of the court’s discretion. In the judge’s opinion, a return to secured creditors was more likely to be achieved if licensed insolvency practitioners (rather than the existing management) were in control of the Company. The office holders can seek to ascertain full information regarding the financial position of the Company and take informed commercial decisions about safeguarding the Company’s assets and achieving a return to secured creditors. Therefore the making of an administration order was an appropriate exercise of the court’s discretion.

WM Comment

This case is a useful reminder of the statutory purposes of administration, and that creditors and proposed administrators should carefully consider whether one or more of them can be achieved before taking steps to make an appointment.  In this case, the Court agreed with the opinion of the proposed administrators that there was a real prospect that one of the purposes will be achieved.  There may be other cases in which the Court is not so satisfied. The fact that licensed insolvency practitioners have signed consents to act is not determinative. The Court must be satisfied that there is a real prospect that one of the purposes will be achieved, and consents to act may be subject to scrutiny.