Monte Developments Ltd v Court Management Consultants Ltd & Ors [2010] EWHC 3071 (Ch)

[2010] EWHC 3071 (Ch)Case No 746 OF 2010
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 29/11/2010
Before
THE HON MR JUSTICE FLOYD
Between
MONTE DEVELOPMENTS LIMITED (IN ADMINISTRATIONApplicant/Respondent(1) COURT MANAGEMENT CONSULTANTS LIMITEDRespondents/Applicants(2) PAUL GRANT JACKSONRespondent(3) PATRICIA MARY JACKSONRespondent
Peter Shaw (instructed by Salans LLP) for Applicant Company (Respondent to the cross-Application)Timothy Higginson (instructed by James Jackson) for Respondents (and cross Applicants)Hearing Hearing dates: 18-19 November 2010
Judgment
[1]I have before me two applications concerned with the administration of Monte Developments Ltd ("the Company"). The first application is an application by the joint administrators of the Company for an order discharging a charging order absolute made in favour of the respondents, Court Management Consultants Ltd, Paul Grant Jackson and Patricia Mary Jackson. The charging order was made absolute on 29th January 2010 in the sum of £234,372.87 over a property known as a 25 Clermont Terrace, Brighton ("the Property").[2]The second application is an application by the respondents for orders pursuant to paragraphs 74(1) and/or (2) and 81 of Schedule B1 of the Insolvency Act 1986.[3]The business of the Company was concerned with the renovation and letting of the Property. The charging order arose out of proceedings in the Queen's Bench Division brought by the respondents against the Company and Stephen Ensor, and James Parsons (“the QB proceedings”). Mr Ensor owned the Company's only issued share beneficially although he was not a registered shareholder. Mr Parsons was the registered shareholder and was the sole director of the Company.[4]In the QB proceedings the respondents made claims against the Company under a number of heads: i) a claim for accountancy work for £1,634 plus VAT and £550 (referred to as “the Accountancy Work Agreement”); ii) a claim under an agreement relating to appointing the first respondent as a director of the Company for a fee of £10,000 plus VAT ("the Appointment Agreement"); iii) a claim under an agreement ("the Thring Townsend Agreement”) which concerned the payment of legal fees to a firm of solicitors of that name relating to the option to acquire the Property: £1736.23 was claimed specifically under this agreement; iv) a claim under an agreement ("The Litigation Work Agreement") which required the Company to pay fees to the respondents in giving advice and assistance to the company in enforcing the option referred to above: a total sum of £123,221.13 is claimed under this head.[5]Accordingly the total sum claimed against the Company was £138,602.31. The respondents applied for summary judgment. The application came before Master Eastman on 22nd September 2009. Master Eastman made orders as follows in relation to the Company: i) the Company have liberty to defend in respect of the sum of £1039.50 plus interest in relation to the Accountancy Work Agreement; ii) the Company have liberty to defend in respect of the sums of £10,000 plus VAT and £122,602.50 plus interest in relation to the Appointment Agreement and the Litigation Work Agreement on condition that the sum of £30,000 is lodged with court by 20th October 2009, in default of which the Company shall be debarred from defending in respect of these two claims and the claimant will be entitled to enter judgment in the sums claimed iii) the Company have liberty to defend in respect of the sums claimed in relation to the Thring Townsend agreement iv) the Company make an interim payment of £1000 forthwith in relation to the Thring Townsend Agreement; and v) the defendants pay the costs of the application summary assessed in the sum of £10,500 inclusive of VAT.[6]Under Master Eastman’s Order the company undoubtedly had to pay to the respondents the sum of £11,500 (inclusive of the VAT on the costs) within the time prescribed by the rules. However, there was no order for payment in relation to the Appointment Agreement and the Litigation Work Agreement. Even if the company failed to lodge the sum of £30,000 by 20th October 2009, it was necessary for the respondents to take a further step, namely to enter judgment in the sums claimed. There is no dispute that such a step would be necessary, and that it would need to be taken in accordance with CPR 3.5.[7]The Company and the other claimants in the QB proceedings sought permission to appeal to the judge from the order of Master Eastman. Whilst that appeal was pending, the time limit for payment into court under Master Eastman’s order expired, but the respondents did not apply to enter judgment. On 3rd December 2009, Swift J. refused permission to appeal and refused a further application for a stay or extension of time to comply with Master Eastman’s order. She also made an order that the Company pay the respondents’ costs of the hearing to be subject to a detailed assessment if not agreed. No detailed assessment of those costs has, however, taken place.[8]Following the dismissal of the application for permission to appeal, the respondents applied for an interim charging order. On 13th January 2010, Master Foster made an interim charging order over the Company's interests in the Property. The order contained four recitals as follows:
“(a) a judgment given and order made on 22 September 2009 by Master Eastman in [the QB proceedings] ordered the [Company] variously to pay money to the judgement creditors; (b) a judgment given on 3 December 2009 by the Honourable Mrs Justice Swift, DBE refused the judgement debtors' application for permission to appeal all of the money judgement and money orders given by Master Eastman; (c) the amount now owing under the judgment or order of 22 of September 2009 as at 29 January 2010, inclusive of interest and costs, is £234,372.87; (d) the [Company] is the registered owner … [of] the asset described in the schedule below [i.e. the Property].”
[9]The substantive part of Master Foster’s order of 13th January granted an interim charging order over the property in the sum of:
“£134,971.13 plus interest up to 29th January 2010 in the total sum of £22,920.84 and costs in the total sum of £76,480.19 together with any further interest becoming due and the costs of this application”
[10]Recital (c), insofar as it suggests that the respondents had a judgment for £234,372.87 is not entirely accurate. The only judgment for an ascertained sum which the respondents had obtained was for £11,500 which was made up of the interim payment of £1000 and the assessed costs of the hearing before Master Eastman of £10,500.[11]It would appear that the figure of £234,372.87 identified in recital (c) is made up (roughly) in the following way: i) The sums of £10,000 plus VAT and £122,602.50 plus interest (calculated at £22,920.84) for which the Company had obtained conditional leave to defend, but for which no judgment had yet been entered; ii) £76,480.19 in costs, presumably including the £10,500 of assessed costs in the order of Master Eastman, the unassessed costs ordered by Swift J. in her order, and the unassessed and as yet unordered costs of the action as a whole.[12]In fact, according to a later letter from the respondents’ solicitors, a further sum of £618.63 of expenses claimed in respect of the Litigation Work Agreement had been added in, and the interest calculated is on the all three sums.[13]Master Foster’s order of 13th January 2010 fixed a further hearing on 29th January to determine whether the order should be made final. On that day Mr Ensor appeared in person and was heard by the Master on behalf of the Company, although he was not a director. The interim charging order was made final.[14]In the meantime, between the interim and final orders, Mr Parsons had been in discussions with accountants and had approached the present administrators. On 26th January 2010 the Company passed a resolution determining that it was in the best interests of the Company and its creditors to appoint administrators. A Notice of Intention to appoint administrators together with the resolution were filed at court in the afternoon of 27th January 2010 pursuant to the procedure in paragraphs 22, 26 and 27 of Schedule B1 to the Insolvency Act 1986 and rule 2.20 of the Insolvency Rules 1986. The appointment of the joint administrators took effect on 9th February 2010.[15]On 28th January 2010, solicitors acting for the proposed administrators wrote to the court and to the respondents notifying them of the intention to appoint administrators and of the effect of the moratorium provided for by paragraphs 43(2) and 44(4) of Schedule B1. That moratorium provides that, without an order of the court, no legal process can be continued or steps taken to enforce a security. In response to that letter Mr James Jackson of the respondents’ solicitors made a witness statement dated 28th January. Mr James Jackson is the second respondent’s son. In his witness statement he drew attention to the fact that the Property was worth some £610,000 and that the maximum indebtedness to the Bank was £294,616.95. Having discussed some of the liabilities of the Company, Mr Jackson concluded that that it was “simply inconceivable that [the Company] at this time could possibly be insolvent” and that there was “no possible basis for asserting such insolvency”. To support this view Mr Jackson referred to some documents concerning meetings he had had with Mr Parsons, in which Mr Parsons suggested that there was “equity” in the Company.[16]The Master appears to have taken Mr Jackson at his word, because he proceeded to make the charging order final. At this stage it is sufficient to point out that(a) Mr Jackson’s figures, whilst bringing the Property into account at its full valuation, ignored any liability for corporation tax on the capital gain on the sale of the property, and ignored the costs incidental to effecting a sale, and(b) had Mr Jackson’s figures taken account of these matters, and had the other information now available to me, it is very unlikely that he would have been able to make the statements about solvency which he did.[17]There is no transcript of the hearing before Master Foster or any note of his judgment. I was told by Mr Higginson, who appeared on behalf of the respondents that the Master accepted the submission, no doubt based on Mr James Jackson’s evidence, that the administration process was a sham. This is supported by a letter from the respondents’ solicitors dated 29th March 2010. That must have been the basis on which the Master decided to ignore the effect of the interim moratorium and make the charging order final. If he had thought that the administration was or might be genuine, I believe he would have adjourned the matter to enable the administrators (who were not yet appointed) to appear, adduce evidence and make representations. Otherwise the making of the charging order would carry with it a risk of preferring the respondents over other unsecured creditors of the Company, contrary to the usual objective of a genuine administration.[18]Mr Higginson does not suggest that the order of Master Foster which made the charging order final in itself constituted that “judgment” which his clients were to be entitled to enter in the event that the condition in Master Eastman’s order was not complied with. In any event his clients did later seek permission from the administrator to proceed to enter such a judgment, which after an initial refusal, the administrator gave. Judgment was eventually entered in June of this year.

The Charging Orders Act 1979

[19]Section 1(1) of the Charging Orders Act 1979 provides:
“(1) Where, under a judgment or order of the High Court or a county court, a person (the “debtor”) is required to pay a sum of money to another person (the “creditor”) then, for the purpose of enforcing that judgment or order, the appropriate court may make an order in accordance with the provisions of this Act imposing on any such property of the debtor as may be specified in the order a charge for securing the payment of any money due or to become due under the judgment or order.”
[20]Sub-section (6) to (8), added by the Tribunals, Courts and Enforcement Act 2007, deal specifically with orders requiring payment by instalments:
“(6) Subsections (7) and (8) apply where, under a judgment or order of the High Court or a county court, a debtor is required to pay a sum of money by instalments. (7) The fact that there has been no default in payment of the instalments does not prevent a charging order from being made in respect of that sum. (8) But if there has been no default, the court must take that into account when considering the circumstances of the case under subsection (5).”
[21]The power to set aside or vary a charging order is contained in section 3(5). It is expressed in very broad terms:
“(5) The court by which a charging order was made may at any time, on the application of the debtor or of any person interested in any property to which the order relates, make an order discharging or varying the charging order.”

Jurisdiction to make the final charging order

[22]Mr Shaw, who appears on behalf of the administrators, submitted that, save for the £11,500 actually ordered to be paid under Master Eastman’s order, there was no jurisdiction to make the final charging order. He founded this submission, first of all, on the opening words of section 1(1). He said that, with the mentioned exception, there was “no judgment or order” which “required” the Company “to pay a sum of money to another person”. The requirement to pay sums of money in question all depended on the taking of a further step (entering judgment or causing costs to be assessed).[23]Insofar as he relied on the absence of any assessment of costs, Mr Shaw is supported by the decision of Walton J. in A&M Records v Darakdjian [1975] 3 All ER 983. Walton J. declined to grant a charging order nisi in respect of an order for costs to be assessed. He was being asked to make an order under section 35(1) of the Administration of

Justice Act 1956, which was in these terms:

"The High Court … may, for the purpose of enforcing a judgment or order … for the payment of money to a person, by order impose on any such land or interest in land of the debtor as may be specified in the order a charge for securing the payment of any moneys due or to become due under the judgment or order."
[24]The words in section 35 - " judgment or order for the payment of money to a person" - have become “under a judgment or order ... a person is required to pay a sum of money to another person” in the 1979 Act.[25]Walton J. asked himself (at 985 a-c) whether one can one impose a charge before there is an ascertained sum. He answered that question in the negative, largely because of the disproportionate consequences that conclusion would have on the saleability of the asset.[26]In answer to a suggestion that a charging order could be made in respect of some specified sum which the plaintiff would be likely to recover, he said, at 985 f-g: "Moreover, it seems to me that although s 35(1) uses the words "for securing the payment of any moneys due or to become due under the judgment or order" that means all moneys due or to become due under the judgement or order… It seems to me that the charging order was intended to be a simple method of procedure designed to deal with a simple situation that is to say, an order saying A shall pay B £x.”-[27]At 986 at b he said:
“If one has to rely strictly on the wording of s 35(1), it seems to me that when that subsection talks about "any moneys due or to become due", if one is imposing a charge for an uncertain amount, those are not moneys due. The enquiry as to damages of course ends in a sum, but the money is not due nor, I think, do they become due. "Moneys" would be a very odd word to use for the result of an enquiry as to damages. The court orders the payment of damages, and it is only when the damages have been ascertained by an enquiry as to their amount that any moneys, in my view, become due. ”
[28]The revised wording in the 1979 Act – a sum of money – would seem to fortify the reasoning of Walton J. One would scarcely change the wording from “money” to “a sum of money” if one’s purpose was to clarify that unascertained amounts were covered.[29]Although in the present case the sums by way of costs inserted in the charging order were ascertained, they had not been ascertained by the process of assessment which was ordered to be carried out under the order of Swift J., or in the case of the remainder of the costs by any process of assessment at all.[30]Mr Higginson relied on the closing words of the sub-section “money due or to become due”. He submitted that these words indicated that not everything had to be due at the time the charging order was made, as money falling due in the future was expressly included. To the extent that that conclusion was inconsistent with A&M Records, he invited me not to follow it.[31]In my judgment the sums included in the charging order for costs which had not been assessed were not within the opening words of section 1 of the 1979 Act. They were not sums of money which the Company was required to pay under Master Eastman’s order. Moreover they do not fall within the closing words of the section either. It was not money which it was possible to say would become due under his order. Quite apart from the fact that some of the costs were attributable to the order of Swift J., the costs which were actually due under Master Eastman’s order were unascertained. No judgment had been given or order made for the general costs of the action. None of the costs had been assessed. At the time the charging order was made it was not possible to say that the sums which the respondents chose to put in the order in respect of costs was money “to become due” under the order.[32]I next turn to the position in respect of the inclusion in the charging order of the sums identified in Master Eastman’s order as those for which the respondents would be entitled to enter judgment in default (“the claimed sums”). The order specified a consequence of failure to pay in, namely that the Company be debarred from defending the action and entitling the respondents to enter judgment for the claimed sums. That did not mean that there was a judgment at the time the condition was not complied with. It would be necessary for the respondents to comply with CPR 3.5 to obtain such a judgment. They had not done so at the date the charging order was made final.[33]Section 1(1) of the 1979 Act is plainly wide enough to cover the case of an order which provides for payment of money in the future (for example by instalments as the later sub-sections make clear). But is it wide enough to cover money which will only become due upon the taking of a further step? Mr Shaw submitted that it is not. The closing words of the section were wide enough to encompass future instalments specified in the judgment or order, but not wide enough to cover money which might become due under a future judgment or order.[34]Mr Higginson stressed the formal nature of the further step which the respondents were required to take. Just as instalments falling due at a later date were covered, so were sums of money which would become due when the respondents entered judgment.[35]In my judgment the claimed sums are not “money due or to become due under” Master Eastman’s order. Firstly, there is a fundamental distinction between money which will inevitably become due, such as future instalments, and money which may or may not become due depending on whether a further step is taken. The present case is a good illustration. The entering of judgment pursuant to Master Eastman’s order required the permission of the administrator or the court. Whilst the permission of the administrator was eventually obtained here, there will be circumstances where it will not be. Both cases would, on the respondents’ case, be examples of money “to become due”, yet in the latter case the money would never become due in fact. It cannot be right that a charging order can be validly granted in respect of money which might never become due.[36]Secondly, I think that that distinction is clear from the words “to become due under the judgment or order”. The language is not wide “money falling due following the judgment or order” or “as a consequence of steps being taken pursuant to the judgment or order”, but it would need to be to cover the money claimed here.[37]Thirdly, the claimed sums simply do not become due under Master Eastman’s order. That order was an order for payment of a sum into court, giving a conditional entitlement to apply for a judgment. The sums would be due under the judgment if and when one was obtained.[38]I would accordingly hold that there was no jurisdiction to make the charging order made, covering unassessed costs and sums not yet the subject of a judgment or order. I would vary it so as to substitute the sum of £11,500. It seems to me that no question of discretion arises here. The order as made is without the provisions of section 1. However, as will be apparent from what follows, I have come to the conclusion that I should set the charging order aside in full in any event, in the exercise of my discretion.[39]There is, in principle, nothing improper for a company, acting on professional advice, to seek to initiate an insolvency process in the hope of preventing a creditor from gaining an advantage over other creditors of the company. Nor is there anything improper in the step of seeking to obtain a charging order in the hope of gaining an advantage over unsecured creditors. In Roberts Petroleum v Kenny [1983] 2 AC 192 Lord Brightman said in this context: “A person who has the misfortune to have given credit to a company which runs into financial difficulties has every right to seek to secure himself. And such company or its other creditors have every right to hasten liquidation in order to thwart such a purpose."[40]In that case, a large judgment creditor had obtained a charging order nisi whereupon the company, by resolution, placed itself into creditors’ voluntary liquidation. Although the case was decided after the 1979 Act it fell to be decided under section 35(1) of the Administration of Justice Act 1956 which I have already set out. Under the relevant procedural rules at the time, RSC Ord. 50 r 1, the court “shall, unless it appears (whether on the representation of the judgment debtor or otherwise) that there is sufficient cause to the contrary, make the order absolute with or without modifications.”[41]Lord Brightman, with whom the rest of their Lordships agreed, regarded the imposition of the statutory scheme of a voluntary liquidation as “a sufficient and indeed decisive “cause to the contrary”” see page 209 D-E..[42]Mr Higginson submits that that case was concerned with a different type of insolvency process. He submits that in a case such as the present, where the statutory scheme of administration is imposed out of court and at the behest of the Company, the court’s discretion needs to be exercised more carefully.[43]I agree that it would be wrong to treat a notice of intention to appoint administrators as a conclusive reason for refusing to make a charging order final. But, where it appears that the intended administration is appropriately invoked, then that is plainly a powerful factor to be taken into consideration. Were it not so, a creditor with notice of the administration would be able to gain an advantage over the other creditors, who will all be subject to the statutory scheme.[44]Both sides recognised that the solvency or insolvency of the Company at the date the charging order was made was an important factor touching the exercise of my discretion to set aside the charging order. If the Company was insolvent, then the charging order would enable the respondents to gain an advantage over other unsecured creditors which it should not gain. If the Company was solvent, then that factor disappears.[45]Mr Shaw submitted, correctly in my view, that the Company was insolvent on a cash flow basis. Mr Higginson submitted that what was relevant here was the balance sheet basis, largely as I understood it on the basis of some exchanges between Sir William Blackburne and Mr Shaw at a previous hearing on part of this application. For my part, I did not understand those exchanges as deciding that the cash flow basis is not relevant as a matter of principle. I can, however, understand that, on the facts of the present case where the Company had in any event decided to proceed to a sale of the Property, the balance sheet may provide a better indication of whether, by obtaining the charging order, the respondents were in fact gaining any advantage over other creditors.

Was the Company solvent at the date of the charging order?

[46]I therefore propose next to examine the evidence concerning the solvency on a balance sheet approach. Both sides made submissions about the strengths and weaknesses of various items in the putative balance sheet. That is the correct approach, as it is not possible to resolve all these matters on written evidence.

Assets

[47]I first consider what assets the Company had. Its principal asset was the Property. Both sides approached this aspect of the case on the basis that the Property would be sold. In January 2010 the Property was valued at £610,000 although the administrators have subsequently received an offer for £615,000. From this there needs to be subtracted the costs of sale, which according to the evidence would amount to £15,400. There was a dispute about some fixtures and fittings, but the value of these is small in any event.[48]The principal dispute is that the respondents contend that certain sums paid out to Mr Parsons and his company Sunborne Limited, amounting to about £69,000, are either to be treated as loans or are sums paid out in breach of fiduciary duty and will have to be repaid to the Company. The administrator presently is minded to agree that there may be claims against Mr Parsons and/or Mr Ensor, although he does not agree that they are necessarily loans. For present purposes I am prepared to assume in the respondents’ favour without deciding that the Company has a good claim for recovery of these sums. There would however be a significant cost of recovery. In addition, Sunborne Limited is insolvent. Mr James Jackson suggests in his evidence that Mr Parsons is a man of substance, but the particulars do not indicate of how much substance.[49]Mr Shaw submitted that on this claim should be treated as of uncertain value, and disregarded. For the purposes of the exercise I am conducting I think it would be fair to treat a sum of £50,000 as being part of the current assets, giving total assets of about £650,000.

Liabilities

[50]On the liabilities side there is no dispute about the respondents’ claim for £234,372.16 and bank indebtedness of £297,052.91 making a total of £531,425 odd.[51]There is a dispute about how much should be allowed in respect of contingent tax liabilities. The respondents’ calculation yields only £33,200. The administrators’ calculation yields some £80,000. So here there is a significant difference. For the moment, I take the respondents’ figure of £33,200, although I will return to this issue below.[52]The respondents accept that there are some £33,205 of valid creditor claims which should properly be brought into account. The administrators say that they should recognise greater sums, but I will again take the respondents’ figure for now.[53]In addition the respondents omitted from their calculation a claim of the first respondent for £6899 and a claim for a director’s fee payable to a past director for £11742.[54]These liabilities, even on the respondents’ figures, already exceed the value of the property. It is only if one takes into account as assets the value of the claims against Mr Parsons and his company that one approaches a surplus.[55]However, the liabilities listed above do not exhaust the claims against the company.[56]The first dispute in this area concerns proofs submitted by Mr Parsons himself. There are three elements to his claim(a) £10,000 for a director’s fee which I have already allowed for above(b) £30,000 incentive fee for raising finance and(c) 2 years’ salary at £18,000. There is provisional agreement on the allowability of the first and the unallowability of the third. The evidence for the second head is a board minute of 9th March 2009, attended by Mr Silver as Company secretary and Mr Ensor. The minutes record that it was agreed that Mr Parsons would be due the sum of £30,000 for his services in procuring borrowing for the companies.[57]Mr Higginson points out that there is evidence that it was Mr Ensor who arranged the finance, and that the broker who was employed was paid in full. He suggests that there is doubt about the authenticity of the board minutes, given that a separate minute dated April 2008 is inconsistent with something Ms Lyons of Forward Property Solutions has said about when she was first approached. These may ultimately be valid points, I do not know. But I think it would be wrong to dismiss this £30,000 claim at this stage altogether, just as it would be wrong to ignore the potential claim of the administrator against Mr Parsons for recovery of the Company’s assets.[58]There is also a dispute about a claim by A-Spire as accountants. The administrators are minded to allow some £8,000 in respect of their claim, whereas the above figures only allow for about £1000. This is not a large difference. The administrator has explained the position in his evidence. The relevant A-Spire ledger shows that time spent was allocated to Tyre Techniques Limited. A-Spire have told him that this time is misallocated and should have been allocated to the Company. The administrator has applied a discount of 20% and disallowed one invoice which he considers may have been paid. He refers to information he has received from A-Spire’s Ms Shapiro confirming the position.[59]Mr Higginson draws attention to the fact that Mr Silver of A-Spire resigned as company secretary in June 2009, and that a Mr Dyer of Dyer & Co were consulted thereafter. Mr James Jackson also states that “throughout 2009, since there was little trading activity, [A-Spire] did very little… Additionally, I know, from reading the evidence and spoken to Mr Ensor, that they either resigned or were terminated by the Company an/or Mr Ensor on about 1st July 2009.”[60]However Ms Shapiro’s account of the work done is not limited to work done up to the end of July 2009. Whilst the total claim of A-Spire might be too high, I do not think it is justified to reduce it as far as the respondents seek.[61]On the whole I think it would be realistic to allow a sum of £20,000 to account for Mr Parsons’ £30,000 claim and the balance of A-Spire’s claim over that accepted by the respondents.[62]Finally I turn to Ms Lyons who took on the work of project managing the re-development of the Property. She is Mr Parsons’ partner and co-habitee. She has submitted a proof which claims £41,255 made up in the following way. First she identifies all sums which she has expended on behalf of the Company in pursuance of the project. These amount to about £61,000. She then adds a sum of £24,500 paid to Cripps Harries Hall, solicitors and charges of £15,360 and £4340 for car-related expenses. She thus arrives at a total expenditure of £105,000.[63]Mr Higginson launched a serious attack on the claim by Ms Lyons. He described the claim for £24,500 paid to Cripps Harries Hall as bogus and fraudulent. He said that she had been paid the money by the Company to pass on to Cripps Harries Hall, and so she was making a false claim against the Company. I was surprised when Mr Higginson launched this attack on Ms Lyons, given that not the slightest indication of such a suggestion was made in the evidence or in his skeleton argument, and despite the fact that the respondents have had the relevant documents for some time. I suspected that there might be an innocent explanation for the theory which Mr Higginson was constructing. Indeed that turned out to be the case, as Ms Lyons had given credit for the £24,500 in the account which she submitted. The allegation of fraud should not have been made.[64]The £15,360 claimed for project management is however more questionable as there was never any agreed basis for her remuneration. She was offered, at one point, a choice between a £5,000 flat fee and 10% of project costs. However the figure of £15,360 is based on an hourly rate.[65]The administrator’s approach has been to assess Ms Lyons’ claim provisionally at about £18,000. He has deducted a £15,000 paid to her by the company for which she does not appear to have given credit. He has also disregarded the sum of £15,360 and substituted a figure of £9,000 based on 10% of project costs. For present purposes I cannot fault this approach.[66]It can be seen thus far that the Company is of doubtful solvency even on a balance sheet basis. Assets 650,000 Less Bank and respondents 531,425 Tax (respondents’ figure) 33,200 Director 11742 Creditors (respondents’ figure) 33,205 Respondents’ claim 6899 Parsons and A-Spire (say) 20,000 Ms Lyons 18,000 Total liabilities (654471)[67]On this view of the Company, it is marginally insolvent on a balance sheet basis.

Tax

[68]The above figures only allow for contingent tax liability in the figure calculated by the respondents. The respondents have brought into the calculation trading losses up to January 2010. These reduce the net gain from £368,000 to £158,000 and the corresponding tax at 21% from £77,280 to £33180, a reduction of £44,000.[69]By section 12(7ZA) of the Income and Corporation Taxes Act 1988 an accounting period ends and a new one begins immediately before the day the company enters administration. As pointed out in The Law of Administrators and Receivers of Companies by Lightman and Moss at paragraph 18-017: “One of the consequences of an accounting period ending when the company goes into administration is that trading losses arising pre-appointment can (unless carried back or set-off against other profits of the period in which they arose) only be carried over and used against profits of the same trade. Trading losses can only be set against capital gains of the same (subject to certain limitations, earlier) accounting periods. Consequently, those losses will not be available to an administrator to use against capital gains arising during the course of the administration, and which are of course an expense of the administration."[70]It follows that the contingent liability for corporation tax, if arising on a disposal of the Property in the course of the administration, cannot be diminished by reference to trading losses incurred in previous accounting periods. The respondents’ figure for contingent tax liability is accordingly understated by some £33,000.[71]It follows in my judgment that the Company was in fact insolvent on a balance sheet basis.

How should the discretion be exercised?

[72]Once one has established the above picture of the Company I do not think there is much difficulty in how the discretion should be exercised. If the charging order remains in place there is a real risk that it will operate to the disadvantage of the creditors as a whole, as there would appear to be a shortfall of assets over liabilities. I have no doubt that if this position had been made clear to Master Foster he would not have come to the conclusion that the administration was a sham, but would instead have had regard to the moratorium, and declined to grant the respondents security.[73]To the extent that there was jurisdiction to make the charging order, I exercise my discretion under section 3(5) of the 1979 Act to set it aside.

The Respondents’ Application

[74]The second application is an application by the respondents for orders pursuant to paragraph 74(1) and/or (2) and 81 of Schedule B1 of the Insolvency Act 1986.[75]The application does not state the relief sought. Mr Higginson made it clear that he was not seeking the immediate removal of the joint administrators. In substance he was merely seeking an order that they get on with the process of the administration, including selling the Property, and then that they cease to be administrators.[76]Paragraphs 74(1) and (2) provide:
“(1) a creditor or member of a company in administration may apply to the court claiming that - (a) the administrator is acting or has acted so as unfairly to harm the interests of the applicant (whether alone or in common with some or all other members or creditors), or (b) the administrator proposes to act in a way which will unfairly harm the interests of the applicant (whether alone or in common with some or all other members or creditors). (2) a creditor or member of a company in administration may apply to the court claiming that the administrator is not performing his functions as quickly or as efficiently as is reasonably practicable.”
[77]The court has extremely wide powers under subparagraphs (3) and (4). Ultimately it may “provide for the appointment of an administrator to cease to have effect”.[78]Paragraph 81 is in the following terms:
“(1) on the application of a creditor of a company the court may provide for the appointment of an administrator of the company to cease to have effect at a specified time. (2) an application under this paragraph must allege an improper motive - (a) in the case of an administrator appointed by administration order, on the part of the applicant to the order, or (b) in any other case, on the part of the person who appointed the administrator.”
[79]It was never clear to me why it was necessary for the respondents to make a claim under paragraph 81 given that they could obtain all the relief which they sought under paragraph 74 without the need to establish an improper motive. Given that the Company was unable to pay its debts as they fell due, and was facing a claim by its principal unsecured creditor for over £200,000, it seems to me that the decision to place the Company into administration is not really open to this type of censure. The case only gets off the ground if it is established that Mr Parsons knew the company to be solvent. But this is not established by the evidence, and was in fact not true.[80]The real substance of the allegation is that the administrators have not got on with their job quickly enough, a complaint that sits easily within paragraph 74(2). I think there is some force in this, mitigated to some extent by the demands which this litigation has placed on the administration. However the future progress of the administration will be regulated by a number of matters:(a) the speed at which it is possible to progress the sale of the Property and(b) the decisions taken in relation to pursuing Mr Parsons in respect of the sums allegedly diverted from the Company. The administrators are well aware that they must get on with these matters as quickly as is consistent with their efficient completion, and that they must adjudicate on the various proofs of debt as soon as practicable. I cannot see that is desirable or practicable for the Court to set deadlines for this to happen. If there is evidence of further unexplained delay then the respondents will be at liberty to apply.

Conclusion

[81]I propose, on the administrators’ application, to make an order setting aside the charging order. I will make no order on the respondents’ application.

Cited in 2 later judgments