Administration order blocked by 'industrial scale' breach of s.127 Insolvency Act 1986

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david-menzies By David Menzies, Director of Insolvency

28 April 2017

The High Court in England and Wales decided that an administration order should not be made against a company because it would remove the ability of an office holder to raise a challenge against property dispositions made after a winding up petition had been lodged. David Menzies reports on the court’s decision.

The High Court in England and Wales has considered, in the case of Officeserve Technologies Limited [2017] EWHC 906 (Ch), whether an administration order is justified on the grounds that administration will provide a greater return than liquidation.

Background

The application before Judge Purle at the High Court in Birmingham concerned an application by the directors for an administration order over Officeserve Technologies Limited (the company), which was the parent company of two further trading companies. At the time of the application there was an outstanding petition for the winding up of the company lodged in another Court where the petitioner was owed £3m.

The company appeared to have an extremely high cash burn rate (£449k per month), which Judge Purle referred to tongue in cheek in the judgement as ‘the stellar ambition of many [companies]’.

For the company, it was argued that administration would preserve goodwill and better allow the administrator to continue trading the company to produce a better return for creditors. The objective of administration of achieving a better return for creditors than in liquidation seemed therefore, at face value, to be achievable. Judge Purle described this as a ‘low threshold’ to be achieved.

However, concerns were raised about payments totalling just under £2m which appeared to have been issued by the company after the presentation of the winding up petition. It was suggested that some of these payments related to extravagant expenses to the director. It was accepted that in such circumstances these transactions could be challenged by an administrator as well as a liquidator but that the provisions of s127 of the Insolvency Act 1986, which voids any disposition or transfer of company property after a winding up petition is lodged unless the court orders otherwise, do not require extravagance or other wrongdoing to be proven.

In the judgement issued, Judge Purle says ‘It [s127] is there to enforce the principle of pari passu distribution in a liquidation, and that principle may have been breached on an industrial scale in this case.’

Decision

It was concluded that whilst the purpose of administration had been established, Judge Purle had discretion on whether to award an administration order or not. He used his discretion in this case to not make an administration order because of what might be the very significant impact in this case of s127. Judge Purle concluded that ‘If an administrator is appointed instead of a liquidator, the advantage of s.127 will be lost, and a better result may not in fact be achieved.’

Conclusion

The outcome of this case highlights the wide discretion which the court has in considering whether or not to make an administration order.

It also serves as a useful reminder that in considering the purpose of administration, consideration should be given to the effect of legislation under the different insolvency processes which may result in a better outcome for creditors.

Topics

  • Insolvency

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