What to do when creditors fail to participate in an administration (Parmeko case)

16 Jan 2014

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When is an application to the court under the Insolvency Act 1986, Sch B1, para 55(2) necessary? In Re Parmeko Holdings Ltd (in liquidation) and other companies [2013] Lexis Citation 120, [2014] All ER (D) 39 (Jan) the court considered what administrators can do if creditors fail to vote on the administrators’ proposals.

How did the issues arise in this case?

The administrators of the four companies entered into pre-pack sales in respect of some (but not all) of the business and assets of the companies upon their appointment as administrators. Following this, creditors' meetings were arranged at which the administrators' proposals were to be put to the creditors for approval.

No creditors either attended the meetings nor sent any written proxy or vote so there was no vote cast in favour or against the proposals.

What are the relevant statutory provisions in this case?

The Insolvency Act 1986, Sch B1, para 49(1) (IA 1986) requires the administrator of a company to put together proposals for achieving the purpose of the administration. The proposals must include the information set out in the Insolvency Rules 1986, SI 1986/1925, r 2.33 (IR 1986) and be sent to the creditors of the company as soon as reasonably practicable after the company enters administration and in any event, within eight weeks of the company entering administration (IA 1986, Sch B1, para 49(5)).

The proposals are sent to creditors together with an invitation to attend an initial creditors' meeting where the creditors may vote to approve the administrator's proposals or approve the proposals with modifications to which the administrator consents (IA 1986, Sch B1, para 53(1)). Where the creditors fail to approve the administrator's proposals, the court has discretionary powers to order any of the below (IA 1986, Sch B1, para 55(2)):

provide that the appointment of an administrator shall case to have effect from a specified time
adjourn the hearing conditionally or unconditionally
make an interim order
make an order on a petition for winding up suspended by virtue of IA 1986, Sch B1, para 40(1)(b)
make any other order that the court thinks appropriate

What were the proposals in the current case?

The proposals were in a relatively standard form covering the matters required by IR 1986, SI 1986/1925, r 2.33. The first objective was for the administrators to 'continue to manage the business affairs and properties of the all the companies in the group in accordance with objectives 2 and 3 of the statutory purposes of administration'. The court understood this to mean that the administrators intended to continue to trade the remaining parts of the business that had not been sold and otherwise realise such assets as were remaining. A view could then be taken as to whether distributions could be made to unsecured creditors and what the exit route should be.

The proposals also dealt with a variety of standard matters such as consenting to the administrators making payments to creditors and approval of the administrators remuneration on a time cost basis.

What did the judge say?

His Honour Judge Cooke (sitting in the High Court, Birmingham) was of the view that the court's powers under IA 1986, Sch B1, para 55(2) is to give directions to the administrators in circumstances where there may be some real question as to the route that the administrator should follow. This would only arise where the proposals put to the creditors were of a specific nature such that the administrators would be required to exercise their powers in one particular way rather than another so that the failure of the creditors to participate in the vote would give rise to a real question as to what course the administrators should follow.

HHJ Cooke was of the view that such a question had not arisen. That unless and until the proposals have been approved by the creditors, or directions have been given by the court, the administrators have the extensive powers under IA 1986, Sch B1 and have the authority to 'exercise them in such a manner as [they] consider best for fulfilling the purposes of the administration'. That, in effect, what the court has been asked in the current situation was to confirm the administrators should continue to manage the business and affairs of the company in their discretion and in accordance with their powers under IA 1986. In such a situation, an application to the court under para 55(2) was not required.

In this respect, the court distinguished the approach in Re BTR (UK) Limited [2012] EWHC 2398 (Ch) where His Honour Judge Behrens decided that in circumstances where the creditors rejected proposals, there is an obligation on the administrators to seek the direction of the court as to what to do pursuant to para 55(2).

HHJ Cooke was also critical of the formulation of the proposals. For example, the proposals set out the possible exit mechanisms but did not give a proposal as such for the creditors to vote on (albeit that IR 1986, SI 1986/1925, r 2.33 requires a statement of how it is envisaged that the administration will end). Additionally, the administrators already have power to make distributions to secured and preferential creditors and did not require sanction of the creditors or the court. HHJ Cooke also questioned the appropriateness of inviting creditors at the commencement of the administration to agree a date upon which the administrators should be discharged from liability.

There was some good news for the administrators as HHJ Cooke felt it was appropriate for the court to approve the basis of remuneration since the creditors had failed to do that themselves and had failed to appoint a creditors committee (IR 1986, SI 1986/1925, r 2.106).

Why is the case important for R & I professionals?

The case confirms that an application to court under IA 1986, Sch B1, para 55(2) is not necessary where creditors fail to participate in vote to approval an administrator's proposals. However, whether an application might be necessary will always be a matter of fact in each case and will be required where the administrator is seeking the approval of the creditors to pursue one particular option over another.

While this clarification is to be welcomed, where creditors fail to engage with the administration process, an application to court is likely to be necessary at some point to determine the matter of remuneration. While an administrator may be happy to delay this application so that the court may also direct on substantive proposals, a period of uncertainty will exist for the administrator.

It is worth noting that the consultation on the modernisation of the rules relating to insolvency rules ends on Friday 24 January 2014 so there is still time to propose amendments to the rules to deal with this uncertainty. The consultation can be found here.