Rejection of Administrator’s Proposals: Inherent Power of Court to Wind-Up

Background

The High Court in Leeds recently issued a decision in the case of Lavin v. Swindell , which concerned the rejection of an administrator’s proposals by the majority of creditors. The creditors wanted the administrator to petition for the winding up of the company (BTR (UK) Ltd). The administrator declined and, in response, a number of the creditors made an application to court seeking an order compelling him to do so. The court considered whether it was mandatory for an administrator to apply for directions when his proposals had been rejected by creditors or whether such an application was discretionary.

Facts

BTR was placed into administration in December 2011 upon an application of the director. The director had originally wanted to put the company into a CVL but opted for administration when one of the creditors petitioned for compulsory winding up before the necessary meetings to approve the CVL could take place. 6 weeks after his appointment, the Administrator sold some of BTR’s assets to an associated company, ITAS Global Ltd (“ITAS”) with payment to be made in instalments. In his subsequent proposals the Administrator suggested dispensing with the initial creditors’ meeting as there was unlikely to be sufficient funds to make a distribution to unsecured creditors. The creditors requested a meeting and the majority rejected the Administrator’s proposals. The majority of creditors also purported to vote in favour of a resolution requiring the Administrator to petition for the winding up of BTR. The Administrator did not seek directions for a variety of reasons. The Administrator reported to the court that his proposals had been rejected, as he was required to do by paragraph 55 of Schedule B1 to The Insolvency Act 1986. However, he did not ask for directions from the court in relation to whether he should petition for the winding up of BTR. Eight of the creditors made an application to court seeking an order compelling the Administrator to petition for winding up.

Decision

The Judge decided that in cases where the creditors reject an administrator’s proposals it is mandatory for the administrator to apply for directions under paragraph 55. He reasoned that , although paragraph 55 does not contain an express reference to an application for directions, the language suggests that a hearing will take place and therefore an application will be made. He also noted that he found it difficult to comprehend how an administrator could manage the affairs of a company in accordance with revised proposals (as required by paragraph 68) without making an application for directions. The Judge determined that whilst an application would normally be made by an administrator, there is no reason why it should not be made by a creditor. In addition, the Judge also determined that in this case it was appropriate for the court to use its discretion and make an immediate winding up order without the need (and expense) of a petition.

Advice

Despite this being an English case, it is likely that a Scottish court would adopt the same approach and determine that an application to court for directions when proposals are rejected is mandatory. It does seem to be the sensible approach for the reasons that the Judge commented on. An administrator would be left at an impasse otherwise. Of particular benefit in this case was the power of the court to make an immediate winding up order in exceptional cases. This is evidently a useful tool but unlikely to be one that we see invoked often. The decision also provides a further example of the courts being prepared to take into account the wishes of the creditors.

BBM Solicitors specialise in advising IP’s in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal (emb@bbmsolicitors.co.uk) or Alasdair Baijal (agb@bbmsolicitors.co.uk). This briefing note is current 25 January 2013 and is our understanding of the position described at that date. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).