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Judge takes unusual step on turnaround case

Associate at Reed Smith, Colin Cochrane, has analysed an unusual case where the high court decided against issuing an administration order to two insolvent companies.

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A high court judge recently made an unusual decision that could have major consequences for insolvency practitioners by reaffirming the discretionary nature of the court’s right to grant an administration order.

 

In August Judge Purle found that two companies, Oak Property Partners and Oak Forest Partnership, were technically insolvent and the statutory purpose of administration would likely be achieved.

 

Despite this, the court refused to grant an administration order on the basis that it would be better for creditors to give the two companies more time to turn themselves around.

 

If the companies eventually enter into an insolvency procedure there would be questions around how the appointed insolvency practitioner would consider the question of wrongful trading, given that the court has allowed the companies to continue trading notwithstanding their insolvency.

 

The case

An application for an administration order had been brought by the creditors of Oak Property Partners and Oak Forest Partnership.

 

The business of both companies was to sell off hotel rooms on long leases.

 

The applicants acquired leases from the companies on terms entitling them to serve notice on the owner to repurchase the lease, they also served notice on the companies and made their application as prospective creditors.

 

Judge Purle considered the pre-conditions to making an administration order.

 

The conditions are that the court must be satisfied:

  1. The company is or is likely to become unable to pay its debts.
  2. The order is reasonably likely to achieve the purpose of administration.

 

On the first pre-condition Judge Purle considered the cashflow projections produced by the companies to be “highly optimistic” and did not have any confidence they would be able to pay their debts. On the second pre-condition Judge Purle agreed with the applicants that an administration would likely achieve a better result for creditors than a winding up. However, he considered that compulsory liquidation was not the only alternative to this “premature” administration.

 

The other option was to give the companies time to bring their businesses round.

 

Therefore, while the two pre-conditions to administration were “technically satisfied”, Judge Purle exercised his discretion not to grant an administration order as it would be better for creditors to give the companies more time. The judgment is particularly interesting as the courts have traditionally refrained from exercising discretion to refuse an order when the pre-conditions are satisfied. From a wrongful trading perspective, it will raise some potential concerns for directors of companies if the court has found them to be insolvent but allowed them to continue trading. It will be interesting to see what recourse insolvency practitioners may have against such directors for wrongful trading claims.

 

Whether this case sets a precedent whereby judges are more willing to allow insolvent companies the opportunity to trade their way out of insolvency remains to be seen. Such decisions could have far-reaching implications for creditors who may feel aggrieved that they are not able to best protect their interests. The time period that the applicants in this case must wait before they make another application to the court is unclear from the judgment.

 

This may be a concern because the court will not wish to delay proceedings to the point where the companies are in an even worse position.

 

Co-authored by Elizabeth McGovern, counsel, at Reed Smith.

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