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Expensive consequences

16 July 07

A case has already arisen, since the Trident Fashions decision recently discussed, of administrators seeking a winding up to avoid further liability for business rates

by Alistair Burrow

It took only three weeks for the first post-Trident Fashions case to reach court. Briefly, Trident Fashions (Exeter City Council v Bairstow and Others [2007] EWHC 400 (Ch): see Journal, April, 43) held that business rates were an expense of the administration. Debate continues about the applicability of Trident Fashions in Scotland, and whether, and how, its consequences should be addressed. One critical aspect is that in England the rating regulations provide that unoccupied property rates are waived in liquidations.

TM Kingdom Ltd, a toy retailer with a number of stores, went into out-of-court administration under the Insolvency Act 1986, schedule B1, para 22. The administrators traded the company and sold four stores as going concerns. After they ceased trading they negotiated the surrender of most of the remaining leases. Two leases remained with issues outstanding when they went to court.

The realisations made were sufficient to pay preferential creditors, but insufficient to discharge the secured creditor. There was no prospect of a dividend for unsecured creditors. Outstanding matters remained which would normally have been addressed by the administrators. However Trident Fashions prompted them to think that these would be better dealt with by a liquidator. That decision meant unoccupied property rates of £5,000 per month were an expense of the administration, which would be waived in liquidation.

The statutory options

Schedule B1 has a number of provisions relating to the ending of administration.

Apart from automatic termination under para 76, para 80 provides that, where an administrator thinks the purpose of administration has been sufficiently achieved, he may file a notice and his appointment then ceases. In consequence the realisations would be returned to the control of the directors unless some other order could be made.

Paragraph 83 provides that on filing notice, the company can move from administration to creditors’ voluntary liquidation. This is conditional inter alia on a belief that a distribution will be made to unsecured creditors. For TM Kingdom, this route was closed.

The moratorium provisions also caused problems. Whilst a company is in administration, no resolution may be passed and no order made for winding up. In any event, ad valorem charges of £100,000 would be incurred on a compulsory liquidation, effectively by the secured creditor, but not in creditors’ voluntary liquidation, which was accordingly the administrators’ preferred route.

Paragraph 79(3) provides that the administrator shall make an application for the appointment to cease if, inter alia, he thinks the purpose of administration has been sufficiently achieved in relation to the company. However, this applies only where the administration is pursuant to an administration order and not to an appointment made out of court. By para 79(4), on an application the court may “(d) make any order it thinks appropriate (whether in addition to, in consequence of or instead of the order applied for)”.

Paragraph 79(1) begins: “On the application of the administrator of a company the court may provide for the appointment of an administrator of the company to cease to have effect from a specified time.” This did not appear to be subject to the condition in subpara (3), and the administrators therefore sought to apply under para 79(1), with a request for an order in terms of para 79(4)(d).

The Kingdom decision

Was para 79(1) confined to the circumstances in subparas (2) and (3) in which the administrator was obliged to make an application? A restricted reading gains some support from the observation of Blackburne J in Re Ballast Plc [2004] EWHC 2356; [2005] 1 WLR 1928 that “the purpose of para 79 is to empower the court, if the circumstances are as set out either in para 79(2) or 79(3), to make an order which will bring the administrator’s appointment to an end otherwise than on the date that it otherwise would”. In TM Kingdom, the judge referred to the repealed s 18 of the Insolvency Act and said: “it would be curious if what was capable of achievement under s 18 of the Act becomes incapable of achievement under schedule B1”. He held that para 79(1) did not prescribe the only circumstances in which an application could be made.

In his view subparas (2) and (3) required the administrator to make an application in specified circumstances, but did not disempower him from making an application otherwise. He held that the administrators could apply for an order that their appointment should cease to have effect, and that the application was well founded in the circumstances. Although all outstanding matters could be attended to during the administration, the penalty for continuing was twofold – exposure to a charge for unoccupied property rates and, incidentally, an inability to disclaim onerous property if the outstanding leases could not be disposed of or surrendered. He made an order ending the administration with effect from the passing of a resolution to wind up the company voluntarily.

Alistair Burrow, Head of Recovery, Tods Murray LLP