Administration should not be used as a substitute for resolving a shareholder dispute, nor should an applicant act to damage a company’s position to make administration more likely, Deputy Insolvency and Company Courts Judge Jones has decided.
At very short notice, we were able to help one of the two director/shareholders of a company opposing an Administration application brought by the other director/shareholder to prevent an administration order being made. Each shareholder held 50% of the equity.
The applicant claimed that the relationship between her and her fellow director had broken down to such an extent that key decisions at board and shareholder level were deadlocked and that the company was prospectively insolvent on the cash flow basis.
She had offered to buy our client out of the business but her offer had been rejected.
Without our client’s knowledge or consent, the applicant had then instructed a firm of licenced insolvency practitioners to seek to market the business of the company for sale, the deadline for receipt of offers having been extended until the day following the hearing.
She argued that the company was insolvent and that administrators should be appointed without delay. She gave evidence of sums said to be outstanding to certain trade creditors which were outside agreed credit terms.
She was the company’s Financial Director, whereas our client was responsible for Sales and Marketing. The applicant was therefore relying on figures which she was responsible for producing.
No creditors had threatened any form of recovery or insolvency proceedings.
Our client, a single parent who had initially started the business from her kitchen table in 2009 and who brought the applicant into the company in 2014, opposed the application on the following basis:-
1. It was brought on the basis that the applicant was a creditor of the company – she had loaned money to the company under a director’s loan account, but repayment of the loan had never been demanded so it was not repayable.
2. Our client produced independent accounting evidence calling into question the true level of the applicant’s loan account and provided further evidence to show that the applicant had in any event, shortly before the hearing, deducted from the company’s bank account more than sufficient money to discharge what was said to be owed to her and so could not claim to be a creditor.
3. The applicant accepted that the company was balance sheet solvent but claimed that it was prospectively insolvent from the point of view of cash flow – she relied upon a cash flow forecast and aged debt report which she herself had prepared. Our client produced independent finance evidence calling into question the contents and conclusion of the applicant’s documents.
4. The company had recently substantially increased overheads by moving to larger premises and was in the middle of its slowest seasonal sales period.
5. Whilst the company had a number of aged creditor debts which were outside credit terms, it had an excellent relationship with those creditors who were not calling for payments and, in the case of major creditors, payment plans had already been put in place.
6. There was no evidence before the Court that the statutory purpose of an administration could be achieved if the application were to be granted.
The judge held there were four matters which needed to be determined, namely:-
1. Was the applicant a creditor?
2. Was the company unable to pay its debts or likely to become unable to pay its debts?
3. Was the statutory purpose of administration likely to be achieved i.e. on the facts of this case, would an Administration Order achieve a better result for the company’s creditors as a whole?
4. Whether or not, if satisfied as to the other matters, the court should exercise its discretion to grant the application.
The judge held as follows:-
1. Despite the applicant having taken more than enough money from the company’s bank account to discharge the amount said to be due to her on her loan account, she claimed that she was holding those funds on behalf of the company and did not intend to apply them for her own benefit – it was therefore unclear as to whether or not she was a creditor.
2. The company was clearly solvent on its balance sheet – and whilst it had some financial problems there had not been any threat to bring proceedings. This was something which could properly be taken into account.
3. The applicant’s evidence failed to disclose what the position would be if the company were to be wound-up – the court could assume that the usual fees would arise in a liquidation and these would reduce the amount available to creditors.
It could assume that, in the event of a winding-up, the staff would be left to submit their claims in the liquidation and that the position would probably be better if staff were TUPE’d over in a purchase of the business out of administration. There was, however, no evidence as to what an effect an administration would actually have on the company, as opposed to what effect it might conceivably have.
4. On the question of discretion, the application would in any event fail – the Judge was extremely reluctant to grant the application, not purely because she was unable to find that the applicant was definitely a creditor, but because there were other routes which could have been taken by the applicant in relation to what was effectively a shareholder dispute.
The Court was not prepared to exercise its discretion to put the company into administration and was not impressed that the applicant, through her solicitors, had taken steps to ensure that the company itself had no funds to enable it to be represented in what was clearly a hostile application. The application was dismissed with costs and leave to appeal was denied.
If you find yourself facing such a hostile application, contact Derek Jones on email@example.com or 0118 945 0159.