A Purle of a judgment: creditors think twice when applying for administration orders…

The judiciary has traditionally refrained from exercising commercial assessments in a business context. However, a recent High Court case has demonstrated that the court is willing to use independent commercial judgment when deciding whether to make an administration order.

Of all of the parties that have an interest in struggling companies, it is the unsecured creditor who cannot use the “out-of-court” process to place a debtor company into administration. If an unsecured creditor wishes to do so, it must apply to the court for an administration order.

In Rowntree Ventures Ltd v Oak Property Partners Ltd [2016] EWHC 1523 (Ch) administration orders were sought by a number of creditors over two connected companies, both of which owned a hotel in the home counties.

In his judgment, it was accepted by HHJ Purle Q.C. that the two preconditions for making administration orders were met:

  1. the companies were, or were likely to become, unable to pay their debts (one on a balance sheet basis and both on a cash-flow basis); and
  2. administration orders would be likely to achieve a better return for creditors than liquidation, and therefore achieve their statutory purpose (by avoiding the greater anticipated costs of a liquidation).

However, HHJ Purle Q.C.  refused to grant the applications. Why? He determined that an administration order was in each case premature and that it was preferable to give the two companies further opportunity to “bring the business round”.

The lesson to take away from this case is that even where the statutory prerequisites are met, the court retains a discretion not to make an administration order. Administration orders will more likely be made where there is clear evidence of past fraud, or those in control of the company have misappropriated assets or were likely to do so.

This case is particularly interesting because the court effectively concluded that the best course was to “wait and see” how events turn out.

Rowntree Ventures Ltd & Anor v Oak Property Partners Ltd & Anor [2016] EWHC 1523 (Ch) (10 June 2016) http://www.bailii.org/ew/cases/EWHC/Ch/2016/1523.html

If you require any assistance with any insolvency related matters, please contact Mark Hague or another member of the TP insolvency team