Petitioners: Sellar QC; Dundas & Wilson CS LLP

Station Properties Ltd: Summers QC; DWF Biggart Baillie LLP

Dunedin Building Co Ltd: Ower; Pinsent Masons LLP

12 July 2013

[1] This is an application by the joint administrators of Station Properties Ltd ("SPL") for directions in relation to the administrators' exercise of their power under para 80 of Schedule B1 to the Insolvency Act 1986 ("Schedule B1") to bring to an end an administration where its purpose had been achieved.

[2] The administrators were appointed by the directors of SPL under para 22 of Schedule B1 on 22 April 2010. SPL owned properties at Advocates' Close, Edinburgh, which it sought to develop. It also owned and rented out retail premises at 48 George IV Bridge, Edinburgh and a hotel at 9-13 Market Street, Edinburgh. SPL encountered financial difficulties in its development of a retail unit and flats at Advocates Close. At the date of the administration SPL owed Clydesdale Bank plc ("the bank") about £7.8 million, which was secured by a first ranking floating charge and standard securities over its heritable properties.

[3] Dunedin Building Co Ltd ("DB") carried out construction work for SPL on the Advocates Close development. DB claimed £491,414 on a quantum meruit basis for its work on that development in addition to the sums which SPL had paid it. SPL contested DB's entitlement to any further sums. DB therefore raised legal proceedings in July 2008 and obtained an inhibition on the dependence of its action. In July 2008 Lord Glennie remitted to Mr John Hunter BSc, FRCS to provide an expert report on DB's claim. In April 2010 Mr Hunter produced a draft report. On the basis of the draft report and also advice from their solicitors, the administrators aver that the principal sum which may be due by SPL to DB is about £20,000. DB contests that assessment and asserts that its claim is worth in excess of £400,000.

[4] At the outset of the administration the objective which the administrators undertook, and which they advanced in their proposals to SPL's creditors, was that of para 3(1)(c) of Schedule B1, namely "realising property in order to make a distribution to one or more secured or preferential creditors". In their statement of proposals to creditors under para 49 of Schedule B1 dated 14 June 2010, the administrators referred to the three objectives set out in para 3 of Schedule B1 and stated:

"It is considered that the protection of administration would allow the assets of the company to be realised in order to make a distribution to the secured creditors. Consequently, the primary objective of the administration is objective (c).

Dependent on the level of realisations from the company's assets and the outcome of the legal actions, it is possible that the company could be solvent. In that case it may be possible to rescue the company as a going concern. However, this is currently uncertain and has not therefore been set as the objective of the administration."

At the initial meeting of creditors on 20 June 2010 the creditors approved the administrators' proposals.

[5] In subsequent progress reports until that of 23 May 2013, the administrators reported in varied verbal formulations that they proposed that all creditors should receive full repayment of their debt before the administration would end. The administrators stated that either (i) the directors would obtain funding to enable the administrators to pay off the creditors and thereafter the company would return to their control or (ii) the administrators would pay creditors out of the sale of the company's remaining properties.

[6] The administrators sold the properties which comprised the Advocates Close development in 2011 for approximately £7.8 million. The free proceeds of that sale and the proceeds of other securities have reduced the sums due to the bank to approximately £157,000. Other than DB, which Mr Sellar initially submitted was not a creditor but eventually recognised as a creditor, the amount of whose debt had not yet been ascertained, there are only six unsecured creditors of SPL. The aggregate of the sums due to those six creditors is £127,368.77 and there is also due statutory interest of £59,704. DB has lodged a statement of claim in the administration for £426,691 93 and judicial expenses. The total costs of the administration exceed £700,000.

[7] The administrators aver, based on valuations by Jones Lang LaSalle in July 2011, that the estimated value of SPL's two remaining properties at 48 George IV Bridge and 9-13 Market Street, Edinburgh is £2,285,000. The retail unit is let at an annual rental of £17,160 and the hotel at an annual rental of £210,000.

[8] After discussions with the directors of SPL, the administrators are considering bringing to an end their appointment. In their progress report dated 23 May 2013, which post-dated the presentation of this petition, they explained to creditors that they had discussed the possibility that the directors would secure funding to allow SPL:

"to repay its agreed creditors in full, have sufficient assets to meet disputed creditor claims in full, exit administration and continue as a going concern. The directors have been offered funding which would allow the company to achieve these aims."

The administrators informed creditors that the amount due to DB had not yet been determined and that they intended that the legal action would continue once SPL had "exited administration". They continued:

"In the meantime, the Joint Administrators are liaising with Dunedin to re-engage with John Hunter of Hunter Consulting, an independent expert, to attempt to progress the determination of the sums due to Dunedin.

If the company is unable to exit administration, the Joint Administrators will most likely require to continue with the Dunedin action and then sell part or all of the remaining assets in order to settle creditors' claims."

[9] DB objects to the administrators' new proposals. It is concerned from past dealings with SPL and in particular its director and principal shareholder, Mr Angelis, that, if SPL reverts to the control of its directors, steps will be taken to obstruct the payment of sums found due to it. Ms Ower argues that it is appropriate that the administrators should adjudicate upon DB's claim after Mr Hunter determines what is due. DB's directors and the administrators have bound DB and SPL to abide by Mr Hunter's expert determination of the quantum meruit claim. Under an agreed timetable, he is due to make that determination in the week commencing 7 October 2013. Ms Ower submits that until then and until the administrators adjudicate on DB's claim, they should not bring their appointment to an end.

[10] It is not clear how the directors of SPL are to obtain funding to pay off the bank when SPL's two remaining properties are affected by DB's inhibition. If the bank is paid off, those properties will be unencumbered, except by the effect of that inhibition. Mr Sellar submitted that the continuance of the administration harmed SPL's ability to obtain funding. But Mr Summers for SPL did not found on that consideration. He relied on the continuing high cost of administration as the reason why it was important to end the administration as soon as possible. As the administrators' information about SPL's efforts to obtain funding is likely to have come from SPL and SPL does not support their assertion, I infer that the continuing administration is not the principal obstacle to the directors' attempts to obtain funds.

[11] The administrators founded on Mr Hunter's draft report of April 2010 in support of their provisional assessment of the value of DB's claim. But Ms Ower intimated to the court that DB was to challenge what it contended were errors in that report in its submissions to Mr Hunter under the joint remit of 14 June 2013. Those submissions are due to be produced in late August and early September 2013.

The sought directions
[12] The administrators seek three directions. I consider each in turn.

(a) Para 80 of Schedule B1
[13] Para 80 of Schedule B1 applies only where the administrator of a company has been appointed by the holder of a qualifying floating charge or by the directors of the company (para 80(1)). The relevant provisions in para 80 are:

"(2) If the administrator thinks that the purpose of the administration has been sufficiently achieved in relation to the company, he may file a notice in the prescribed form -

(a) with the court, and

(b) with the registrar of companies.

(3) The administrator's appointment shall cease to have effect when the requirements of sub-paragraph (2) are satisfied."

The administrator must also give notice to the creditors of the company.

[14] Mr Sellar invited me to make a direction

"(a) whether the administrator of a company can think that the purpose of the administration has been sufficiently achieved in relation to that company, within the meaning of paragraph 8(2) of Schedule B1, if that purpose has otherwise been achieved and the administrator reasonably forms the opinion on the information reasonably available to him after full inquiry (including inquiry into claims for payment, which have been made against the company) that the company will, on the administrator's appointment ceasing to have effect under paragraph 80(3) of Schedule B1, be able to pay in full its debts which are at that date due for payment or which become so due within 12 months of that date, and that there is, in any case, no real likelihood that the company will after the expiry of that 12 month period be unable to pay its debts in full when they become due for payment; and

(b) whether the administrator can think that the purpose of the administration has been sufficiently achieved on that basis, irrespective of (i) whether any such claim, if it were established, would result in the company being unable to pay its debts in full, either before or after that 12 month period, and (ii) whether the person making any such claim consents to the appointment ceasing to have effect."

[15] In addressing this request I assume for the moment that the relevant "purpose" is the "objective" set out in para 3(1)(a) of schedule B1, namely the rescue of the company as a going concern. I consider whether that is currently the objective of the administration when I discuss the third direction.

[16] It is clear that in para 80 of Schedule B1 Parliament has given the administrator the task of deciding whether the purpose of the administration has been achieved. As I discuss when I consider the second direction, the administrator does not need to apply to the court before he makes his judgement on that matter.

[17] In the context of a rescue as a going concern, I do not think that much is added by the word "sufficiently". The adverb, for which "adequately" might be a synonym in this context, does not dilute the test of the restoration of the company as a going concern. It may serve as recognition that an assessment of whether a company has become or remains a going concern is a matter of looking into the uncertain future and making an informed judgement. It is an exercise with which many accountants and company directors are familiar when they prepare a company's statutory accounts on a going concern basis. See the relevant Accounts and Reports Regulations (SIs 2008/409 and 410), in each of which para 11 of Schedule 1 provides as an accounting principle the presumption that the company is carrying on business as a going concern. The concept involves the idea of remaining in business and of paying one's debts as they fall due.

[18] The exercise which an administrator carries out in making his assessment for the purposes of para 80 of Schedule B1 is not identical to that of the company director or auditor. The latter is usually making a judgement about whether a company, which is trading, will continue to trade in the future. The administrator is making a judgement about a company which has been insolvent and is asking himself whether it will be able to trade in future. Both exercises are principally an assessment of cash flow solvency. A company can be treated as a going concern if it has secured the continued financial support from another person to meet its debts as they fall due, even if it is balance sheet insolvent.

[19] Before one can treat a company as a going concern one must look into the foreseeable future and decide whether it is probable that the company will be able to pay its debts as they fall due. The appropriate period in the future that the accountant must consider is a question of accountancy practice. Such practice may vary over time. But it must be a prudent assessment. FRS 18 "Accounting Policies" speaks of "going concern" as "the hypothesis that the entity is to continue in operational existence for the foreseeable future". The extent of such foresight may depend on many things, including the nature of a company's business and the market in which it operates. Tolley's Manual of Accounting (para 3.6.8) suggests that, for the purpose of preparing company accounts, the assessment, whether a budget, cash flow forecast or other analysis, must, as a general rule, be for a minimum of twelve months into the future. But the precise period of the going concern assessment may vary depending on the circumstances of the particular company (ISA (UK and Ireland) 570 "Going Concern").

[20] There can be no certainty in the assessment. The task, like that which the Companies Court considered in Re Olympia & York Canary Wharf Holdings Ltd and Others [1993] BCC 866 where the companies sought to exit from administration , involves an assessment of the prospects of a company trading successfully. Referring to that case, Lightman & Moss, The Law of Administrators and Receivers of Companies (5th ed.) stated (at para 27-029 fn 196):

"It is not essential for the company's long-term solvency to be assured, provided the proposed business plan stands a fair chance of success and is in the best interests of the company and its creditors generally."

I agree; and I think that that quotation helpfully points up the need for an administrator to discuss with the directors of the company in administration their proposals for the company's business. I do not see how an administrator can make the required assessment without obtaining a clear understanding of the directors' business plan and cash flow forecasts and forming an independent view, in the light of the best evidence reasonably available, whether that plan and those forecasts are realistic.

[21] Mr Sellar in his formulation spoke of a test of no "real likelihood" in the period beyond one year. He lifted the phrase from s 646 of the Companies Act 2006. I do not think that it is useful to use a statutory formulation from a different provision in this context. The exercise under s 646 is not an identical exercise to the assessment whether a company has become a going concern as it involves looking at the likelihood of causal relationship between a proposed return of capital to shareholders and a possible future inability to pay a creditor's debt. But it is in my view a useful analogy in so far as it points towards a consideration of business plans and likely future cash flow. Norris J's discussion of this approach in Re Liberty International Plc [2010] 2 BCLC 665 was applied in this jurisdiction by Lord Glennie in Royal Scottish Assurance Plc, Petitioner 2011 SLT 264 and by me in Sportech Plc, Petitioner 2012 SLT 895.

[22] It would not be sensible to attempt a precise formulation which would apply to radically different companies. Equally, there is little benefit in a very broadly worded formula. But in my view it is clear what the general approach should be. The administrators need to look to the circumstances of the particular company under their control. If SPL were to exit administration, it would be a company with two principal assets, namely the retail unit and the hotel, both of which are let to third parties and produce rental income. It does not appear to be a complex business but I have no knowledge of how long into the future the rental income is secured by contract, the covenant of the tenants, or the directors' plans for the future. It would be consistent with current accountancy practice to require the directors to produce a business plan and forecasts for at least 12 months and to attempt to look into the future beyond that time to identify whether there was anything which was likely to undermine the company's viability. On the information available to me it appears that the major short term issue is the likely size of DB's claim. If DB were to be awarded a sum measured in six figures, there would be a serious question as to SPL's ability to pay its debts as they fall due, unless SPL had obtained funding to meet that debt.

[23] In carrying out their assessment whether SPL has been rescued as a going concern, the administrators are under a duty to have regard to the interests of its creditors as a whole (Schedule B1, para 3(2)). That duty may on occasion involve the subordination of a creditor's interests to those of the creditors as a whole (Joint Administrators of Rangers Football Club plc, Noters 2012 SLT 599 at paras [57]-[59] and [62]). DB is one of SPL's creditors as it has an award of judicial expenses in its favour. It may soon be a creditor for a substantially larger sum as a result of Mr Hunter's forthcoming determination. DB does not have a veto to prevent the administrators' exercise of their power under para 80 of Schedule B1. But the existence of its claim is a material consideration for the administrators in considering whether SPL has been rescued as a going concern as it has the potential to undermine the cash flow solvency of the company (Tolley (above) Appendix 3A, 2/2‑29). Its claim cannot be disregarded in that assessment unless and until the administrators are satisfied after proper inquiry that the value of the claim together with an award of judicial expenses would not be likely to undermine the cash flow solvency of SPL. If they choose not to wait for Mr Hunter's binding determination, the administrators should take steps to enable themselves to reach an informed and up to date view on the likely value of that claim. As DB has intimated that it is challenging Mr Hunter's draft award of April 2010, I consider that the administrators should (a) call on DB's solicitors to inform them of the challenge and of their best estimate of the value of their claim and (b) obtain legal advice on the claim in the light of that and any other relevant information, before they decide whether SPL has been rescued as a going concern.

(b) Para 79 of Schedule B1
[24] The second direction which Mr Sellar requested was:

"whether, in the circumstances set out in the first direction, the administrators are under no duty to make an application to the court, under paragraph 79 of Schedule B1, for an order that their appointment cease to have effect."

[25] In my view para 80 of Schedule B1 gives an administrator, who was appointed by the holder of a qualifying floating charge or by the company, the power to decide whether the company has been rescued as a going concern. There is nothing in the Schedule or in the 1986 Act to suggest that an administrator must apply to court under para 79 before he may exercise his power under para 80 to bring the administration to an end. In this regard I agree with the view of Blackburne J in Re Ballast plc [2005] BCC 96 where, in relation to analogous provisions, he stated (at para 15):

"The decision whether to send such a notice rests entirely with the administrator ... He must therefore 'think' that the circumstances specified in sub-paragraph (1) are present before he sends such a notice. Whether those circumstances are present is a matter for him, not the court."

In my opinion that approach applies equally to the circumstances and notice in para 80(2). Ms Ower did not suggest otherwise.

(c) Para 54 of Schedule B1?
[26] Mr Sellar also invited me to make a direction:

"whether, assuming that the first direction is in affirmative terms and despite the proposals which the administrators sent to the creditors of the company under paragraph 49 of Schedule B1 referring to a different objective under paragraph 3(1), the administrators are under no obligation to seek to have their proposals revised in accordance with paragraph 54 of Schedule B1."

[27] Paragraph 54, which requires an administrator to summon a creditors' meeting to approve the revision of his proposals, applies where:

"(a) an administrator's proposals have been approved (with or without modification) at an initial creditors' meeting,

(b) the administrator proposes a revision to the proposals, and

(c) the administrator thinks that the proposed revision is substantial."

Mr Sellar, correctly in my view, acknowledged that those three conditions were met in this case.

[28] He submitted however that the hierarchy of objectives in para 3 prevailed over para 54 to allow the administrator to exercise his power under para 80 when he had achieved the primary objective of rescuing the company as a going concern, although he had invited the creditors to approve and they had approved an objective which was lower in the hierarchy. I disagree. If that were correct, a creditor might act on the basis of approved proposals and later find that the administrator changed the objective in a way which harmed his interests. In this case the creditors approved the administrators' proposals based on objective 3(1)(c) (para [4] above). Ms Ower submitted that SPL had refrained from pressing its claim in its court action on the understanding that the administrators would adjudicate on and pay the sums due to it before terminating their appointment. The move to obtain a binding decision from Mr Hunter was a response to the administrators' decision to change their proposals.

[29] In my view in the circumstances of this case, the change from objective (c) to objective (a) is a substantial change, particularly for DB as it may involve SPL reverting to the control of its directors, with whom DB has been in dispute, before DB's claim is determined.

[30] I am not persuaded that the obligation on an administrator under para 4 of Schedule B1 to "perform his functions as quickly and efficiently as is reasonably practicable" provides any justification for bypassing para 54 even if an administrator were of the view that a dissenting creditor would be outvoted at the creditors' meeting. As Ms Ower submitted, the dissenter might persuade other creditors to support his position. Further, in this case, the question whether SPL would have only a minority vote may depend on an updated assessment of the value of its claim.

[31] I consider that if a creditor or creditors acted unreasonably at a para 54 meeting or otherwise prevented the administrators from achieving the top-ranking objective of the rescue of the company as a going concern, it would be open to the administrators to seek the directions of the court under para 68(3) of Schedule B1. They could ask the court to approve the varied proposal without the creditors' consent. If the administrators had asked me to make any such direction under para 68(3) at this stage, I would not have been prepared to do so as the administrators have yet to make an updated assessment of the value of DB's claim for the purpose of deciding whether SPL had been rescued as a going concern.