What should administrators consider before seeking relief?

The court's decision in the recently decided case of Re Business Environment Fleet Street Ltd (In Administration) [2014] EWHC 3540 (Ch), [2014] All ER (D) 334 (Oct) highlights how important it is for administrators to properly analyse the circumstances they face to ensure the relief they seek is both appropriate in the circumstances,  and that it is a relief that the court has jurisdiction to give.

Stephen Atherton QC of 20 Essex Street, who acted for the first and second Respondents, considers the issues that arose.

Original News

The adminstrators applied under the Insolvency Act 1986, Sch B1, para 72 (IA 1986) to dispose of certain assets. The Companies Court held that it had no jurisdiction to grant the application where it was not persuaded on the balance of probabilities that a chattel leasing agreement had given possession of the assets to the company.

What were the key features of this case?

The key features of the case were:

  • the proper interpretation of the contract between the company (in administration) that owned the leasehold (and sublet serviced offices space to its tenants) and the company (within the same group of companies) which provided the staff, assets and ancillary services necessary for the business of providing serviced office space to operate
  • as part of the process of contractual interpretation it was also necessary to characterise/classify the nature of the obligations and the true nature of the relationship created as between the parties to the contract by reference to the terms of the contract

 What were the issues in relation to the administrator's claim?

The administrators' principal application was for an order under IA 1986, Sch B1, para 72 as against the company which contended that it had title to the goods. Such an order, if made, permits an administrator of a company to sell assets which are in the possession of the company in administration under a hire-purchase agreement as if all the rights of the owner under the agreement were vested in the company.

The administrators also sought an order for the sale of the relevant assets under IA 1986, Sch B1, paras 67 and 68. Paragraph 67 provides that the administrator of a company (on his appointment) is permitted to take custody or control of all the property to which he or she thinks that the company in administration is entitled. Paragraph 68 allows the court (in certain circumstances) to provide an administrator with directions as to how he or she is to conduct the administration of the company.

As regards the first limb of the administrators' application the issues were as follows:

  • Did the agreement in issue constitute a 'hire-purchase agreement'?
  • In other words, did the agreement fall within the definition of such an agreement as contained in IA 1986, Sch B1, para 111, which is in the following terms: '"hire-purchase agreement" includes a conditional sale agreement, a chattel leasing agreement and a retention of title agreement...'?
  • Did the agreement constitute a 'chattel leasing agreement' defined in IA 1986, s 251 as meaning: 'an agreement for the bailment...of goods which is capable of subsisting for more than 3 months'?

The essential question therefore was: Was the agreement a chattel leasing agreement, ie did a bailment exist in relation to the relevant assets and pursuant to that bailment was the company in administration in possession of the relevant assets?

It should also be noted that there was a long-running dispute as to which of the companies had title to the relevant assets.

How did the court approach the arguments in this case?

The court began by accepting that the issue as to title in the assets was not before it, but that for the purposes of the present application it had to assume that the assets were owned by the company against which the application had been commenced.

The court further accepted that the burden was on the administrators to establish that the relevant agreement was a 'chattel leasing agreement' and that therefore there existed a bailment of the relevant assets pursuant to which the company in administration had possession of those assets.

The court concluded that the following questions arose on the administrators' application:

  1. Did the court have jurisdiction under IA 1986, Sch B1, para 72 to grant the application? As a subsidiary question, did the assets come into the possession of the company in administration pursuant to a chattel leasing agreement?
  2. Alternatively, did the court have jurisdiction under IA 1986, Sch B1, para 68 to grant the application?
  3. If the answer to (1) or (2) was yes, should the court in the exercise of its discretion, grant the application?

What did the court decide? And what is the significance of this decision?

The court concluded that it had no jurisdiction to make the order sought by the administrators under IA 1986, Sch B1, para 72. First, the court considered the proper interpretation of the relevant agreement (applying the now well established tenets of construction for commercial contracts). The court determined that the effect of the agreement was, on the balance of probabilities, not to give possession of the relevant assets to the company in administration. On the assumption that the relevant assets belonged to respondent company, either it had retained possession or it had transferred possession to the subtenants.

As regards, IA 1986, Sch B1, paras 67 and 68, the court concluded that it could not order the sale of the assets on the basis that the administrators (subjectively) thought that the assets belonged to the company in administration. If the effect of the relevant paragraphs was to enable the court to order a sale of assets in such circumstances this would confer on the court and the administrator an exorbitant jurisdiction to convert property belonging to third parties, simply because it happened to be desirable on the balance of convenience. Whether IA 1986, Sch B1, paras 67 and 68 were read on their own or in conjunction with IA 1986, s 234 (the effect of which is to relieve an administrator from a liability which he would otherwise have for conversion of a third party's assets where he has acted reasonably) they do not give the administrator licence to convert third party chattels, nor do they serve to extend the court's limited powers (eg under IA 1986, Sch B1, para 72) to override the rights of third parties.

The court went on to consider whether, assuming it did have jurisdiction under one or other of the limbs of the administrators' application, in its discretion it should exercise that jurisdiction in favour of the administrators. By reference to a number of authorities relevant to the exercise of the court's powers under IA 1986, Sch B1, para 71--which permits the court to enable an administrator to sell property which is subject to non-floating charge security--the court accepted that in exercising its discretion it had to embark upon a 'balancing exercise'. By reference to that balancing exercise, and on the facts of the case, the court concluded that even if it had had jurisdiction it was not satisfied that the balance of convenience lay in ordering an immediate sale of the relevant assets.

 What are the practical lessons for restructuring and insolvency practitioners?

The case illustrates that it is important for administrators to subject the circumstances they face to proper analysis in order to ensure that the relief they are seeking is appropriate and is relief which the court has jurisdiction to give. And, assuming there is jurisdiction, that the circumstances are such that the court will grant the relief which they seek.

What are your final observations?

In the course of its reasoning the court applied the reasoning in a case (Re David Meek Plant Ltd; Re David Meek Access Ltd [1994] 1 BCLC 680) concerning the forerunner of IA 1986, Sch B1, para 71 (ie IA 1986, s 15--now repealed) to the effect that the application of IA 1986, Sch B1, para 71 is not precluded by the relevant agreement having been terminated either before or during the administration.

In addition, the analysis of the Court of Appeal in Re Atlantic Computers Systems Limited [1992] Ch 505, [1992] 1 All ER 476 (another case concerning IA 1986, s 15) as regards the identity of the party in possession, although referred to in the course of the hearing was not specifically addressed. However, by finding that the respondent company, as an alternative to the respondent company having possession of the relevant assets, may have parted with possession of the relevant assets to the subtenants of the company in administration, the court effectively distinguished Re Atlantic Computers Systems Limited by reference to the facts of the case before it.

About the author

Stephen Atherton QC's practice comprises international and domestic corporate insolvency and restructuring, personal insolvency, company law, banking, general off-shore and international commercial litigation, civil aspects of international and domestic commercial fraud and international and domestic asset tracing. In Re Business Environment Fleet Street Ltd (In Administration), Stephen was counsel for the first and second respondents.

Further Reading

If you are a LexisPSL subscriber, click the link below for further information on charged property in administration:

The Administrator and Charged Property (Subscriber access only)

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First published on LexisPSL Restructuring and Insolvency

Interviewed by Kate Beaumont

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor

 

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