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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Safe Business Solutions Ltd v Cohen & Anor (As Joint Administrators of Algrave Ltd & Ors) [2017] EWHC 145 (Ch) (13 January 2017) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2017/145.html Cite as: [2017] EWHC 145 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		Royal Courts of Justice, Rolls Building Fetter Lane, London, EC4A 1NL
		13/01/2017

Mr Registrar Briggs:

1. By an application dated 16 June 2016 the Applicant, Safe Business Services Limited (in liquidation) ("SBS") seeks an order pursuant to paragraph 43 of Schedule B1 to the Insolvency Act 1986 to commence legal proceedings against Algrave Limited and 726 other companies in administration (the "Companies").
2. At the hearing on 12 January 2017 I gave permission to commence proceedings upon certain conditions. What follows is the reasoning for the permission.

Background in brief

3. The Companies were managed by Managed Service Companies ("MSC") set up for the purpose of facilitating the supply of self-employed consultant services. A company known as Safe Solutions International Limited ("SSIL") provided accounting, administration and payroll services to each MSC. The corporate structure used for the self-employed was designed to reduce taxation but in April 2007 a change in legislation eradicated or reduced the advantages. On 29 September 2008 Saphire Blue Directors Limited (the corporate director of SBS) obtained an administration order in respect of the Companies and, Mr Cohen and Mr Newgate were appointed joint administrators (the "Administrators"). The evidence in support of application for the administration order informed the court that the Administrators would prepare accounts and demonstrate that less tax was liable in respect of each of the Companies.
4. The Administrators' first report to creditors dated 18 November 2008, explained that the 'financial statements of the Companies have not been updated for a significant period', £4,05,741.09 had been collected in, investigations were to be carried out regarding VAT liability due to HMRC, and:

"Prior to the Court application for the Administration of the 728 companies I provisionally agreed my remuneration with the major creditor which we estimated to be £1,750 plus VAT per company inclusive of disbursements"

5. By a claim form dated 3 June 2015 issued in the Queen's Bench Division, SBS (through the joint liquidators) claim that the Administrators, acting in their personal capacity entered into a contract to pay SBS £500 plus VAT to produce financial statements or accounts for each of the Companies. The Administrators deny that there was a personal contract for services and have asserted that if there was such a contract at all it would have been formed between the Companies and SBS. The claim was transferred to the Chancery Division and listed for a costs and case management conference. Master Teverson ordered that the Companies be joined to the proceedings and an amended particulars of claim be filed and served subject to permission to lift the moratorium pursuant to paragraph 46 of Schedule B1 to the Insolvency Act 1986. The case was subsequently transferred to the Companies Court.

The rival contentions

6. Mr Cohen has produced a witness statement specifically dealing with the application to lift the moratorium. He states that "we are essentially neutral on the Application and should not be taken to arguing against permission." The major creditor (HMRC) was on notice of the application and chose not to attend or be represented at the hearing. Mr Cohen explains:

"Our position is…we never entered into any agreement, whether with SSIL [owner and controller of SBS] or SBS, for the work to be undertaken."

7. He says that even if there was a contract it was not performed. Mr Brockman, acting on behalf of the Administrators, submitted that only one set of accounts for one company had ever been produced to the Administrators. He says any contract was subject to SBS producing sample accounts for 10 of the Companies. The samples would be subjected to some scrutiny after which the Administrators would be at liberty to engage or not engage SBS to carry out the work for the remaining Companies.
8. Mr Brockman submitted that if he was wrong and a contract had been formed with between SBS and the Companies the application to lift the moratorium has not been made promptly. The delay would cause prejudice to creditors. The prejudice was not identified other than the Administrators would not be able to exit the administration as soon as they had hoped.
9. Mr Bacon on behalf of SBS submits that there is an obvious dispute and the court should not conduct a mini trial to determine whether or not a contract was formed. Mr Bacon was pushed on some of the finer aspects of the contractual relations and he adeptly explained that his case had alternative arguments. He argued that SBS had made considerable losses as a result of the Administrators failure to pay in accordance with either the pleaded contract or, a reasonable price for work done (an unjust enrichment claim). He argued that SBS engaged personnel in England and India to carry out the work as there was a time pressure. He argues that the Administrators knew and allowed SBS to engage third parties in the knowledge that expenditure would be incurred.
10. Mr Katz as liquidator of SBS did not cover the issue of delay. Mr Bacon has explained the best he can, the reasons for the delay during oral argument. SBS sought to agree the position in 2009/10 with the Administrators but it entered into administration and matters were halted until proceedings were issued in 2015. He says that in the period after administration SBS was dissolved and had to be restored to the register. It then entered into insolvent liquidation. The liquidators entered into correspondence and sought to agree the position with the Administrators.

Lifting the moratorium

11. By paragraph 43(6) of Schedule B1 to the Insolvency Act 1986 no legal process (including legal proceedings, execution, distress and diligence) may be instituted or continued against the company or property of the company except with the consent of the administrator or with the permission of the court. Although there have been a number of cases dealing with the moratorium since the introduction of administrations by the Insolvency Act 1986, streamlined by the Enterprise Act 2002, the decision of Lord Justice Nicholls (as he was) in Re Atlantic Computer Systems Plc [1992] Ch 505 is seminal. As such extracts are worth repeating. He said (at 542)

"…so far as possible, the administration procedure should not be used to prejudice those who were secured creditors when the administration order was made in lieu of a winding up order…the underlying principle…is that an administration for the benefit of unsecured creditors should not be conducted at the expense of those who have proprietary rights which they are seeking to exercise, save to the extent that this may be unavoidable and even then this will usually be acceptable only to a strictly limited extent"

12. The Court of Appeal took the opportunity to provide guidelines on the exercise of discretion (I shall set out the relevant guidelines in summary only):

(1)     It is for the person seeking leave to make out a case for him to be given leave.

(2)     The purpose of the prohibition is to enable or assist the company to achieve the purpose of the administration, and the purpose of the power to give leave is to enable the court to relax the prohibition where it would be inequitable for the prohibition to apply;

(3)     In all other cases the court will have to carry out a balancing exercise, balancing the legitimate interests of the party seeking permission (leave) and the legitimate interests of the other creditors of the company. This is particularly so where the applicant has a proprietary interest to protect or realise;

(4)     permission should normally be given if refusal would cause significant loss to a party holding a proprietary interest. This loss should be balanced against any loss suffered by anyone else as a result of the permission;

(5)     the court will consider matters such as: the financial position of the company, its ability to pay the rental arrears and continuing rentals, the purpose of the administration, the period for which the administration order has already been in force and is expected to remain in force, the effect on the administration if permission were given, the effect on the applicant if permission is refused, and the history of the administration;

(6) These factors are important not only to the question of whether or not permission should be granted but to any conditions that may be attached.

13. It is worthy of note that the High Court has found that there is jurisdiction to lift the moratorium after an administration has come to an end. In Gaardsoe v Optimal Wealth Management Limited [2013] Ch 298, [2013] BPIR 59 John Martin QC considered paragraph 43 of Schedule B1, and retrospective permission after the cessation of the administration. He reasoned:

"In my view there is jurisdiction to do so. The paragraph applies to a company in administration, as precluding the grant of permission once the administration has ceased. It seems to me, however, that those words do no more that set out the ambit of the paragraph. Indeed, without them it would not be clear that the para 43(6) inhibition applies only in administration. Paragraph 43(6) does not itself say when permission may be granted and I do not read para 43(1) as imposing any time limit. It will no doubt be exceptionally rare that the court will be asked to give permission after the administration is over, not least because there will seldom be any point in doing so, but the jurisdiction nevertheless in my view exists to do so in an appropriate case."

14. His alternative reasoning was that no permission was required. Paragraphs 42(1) and 43(1) of the Schedule state that the moratorium applies to a company in administration. I agree that no permission was required. The restrictions set out in paragraph 43 would serve no purpose after an administration came to an end. To exit or end an administration is to bring to an end the statutory code that regulates office holders and binds creditors. It is usual for a company to exit administration by entering into liquidation or by going straight to dissolution. In respect of the former a new code governs and in relation to the latter the company ceases to exist. But I need not decide the point. The case merely illustrates the wide powers assumed by the court when permission is sought pursuant to paragraph 43 of Schedule B1.
15. The Deputy went on to consider a considerable delay in the issuing the application but he did not, in the circumstances, find that the delay tipped the balance away from a grant of permission. A different response was made in relation to a delay of 8 months in Fashoff (UK) Limited v Linton and another [2008] 2 BCLC 362, but in that case the Judge found that if permission was provided there was a likelihood that the purpose of the administration would be impeded. This last factor will have weighed against permission.
16. The authors of Lightman & Moss (5^th ed) comment (9-022):

"The Act provides no guidance as to when the administrator or the court should allow the moratorium to be lifted in favour of a particular claim. But the case law provides guidance as to the principles to be applied….The correct approach depends upon the nature of the claim being asserted by the applicant, but two principles may be said to apply across the board. First it is for the applicant to make the case for the moratorium to be lifted. Secondly, an applicant seeking an order lifting the stay will need to demonstrate that its underlying claim is seriously arguable."

17. This provides a principled approach to an application such as the one before the court today. The last observation regarding a seriously arguable case comes from the decision in Re Polly Peck International Plc (in Administration) (no 5) [1998] 3 All ER 812. In that case the Court of Appeal found that a claim based on a remedial constructive trust was not seriously arguable as a matter of law. I am not convinced that a seriously arguable test is appropriate and would myself prefer the well-used test of reasonable prospects of success. This formulation negates any argument that a different standard of proof is required. In addition, it has the benefit of consistency with the CPR summary judgment test, and the test for setting aside a statutory demand pursuant to rule 6.5(4)(b) of the Insolvency Rules 1986: Ashworth v Newnote [2007] BPIR 1012.
18. An impediment to the purpose of an administration arising from the relaxation of the paragraph 43 restrictions is an important consideration, and significant in this case. Two cases are instructive. First, in Innovate Logistics Limited v Sunberry Properties Limited [2008] EWCA Civ 1261 the administrators had sold the company's warehouse and distribution business (but not the lease of a cold store it held on a long lease) on day one. The purchaser was granted a licence to occupy the store. The purchaser agreed to assist the administrators to collect existing and considerable book debts (which did not form part of the sale agreement). The landlord sought permission to forfeit the long lease on the ground that the licence was a breach of covenant. The judge thought that the purpose of the administration had been achieved and gave permission. The Court of Appeal found the judge had erred as one of the purposes was the collection of the debtor company's book debts. In order to collect the book debts, the lease had to remain vested in the debtor company to permit the purchaser to trade under the licence granted by the administrators. The landlord could not demonstrate that it would be inequitable for it to be prevented from commencing proceedings. This is the first category of case which I shall call "purpose yet to be achieved".
19. The second case is the judgment of Briggs J in Lazari v Jervis [2012] EWHC 1466. Briggs J (as he was) had no difficulty in lifting the moratorium so that a landlord could re-enter as the purpose of the administration had been achieved at the time a pre-pack sale had been completed. He held that strictly speaking there was no need to engage in the balancing exercise required as the administrators had not identified any prejudice to the administration if permission to forfeit were to be granted. The landlords were able to demonstrate that they would lose the opportunity to secure a new lease for a higher rent. This is another category of case: "purpose achieved".

Conclusions

20. In my judgment the starting point is the status of the administration at the time of the court hearing. The Companies have remained in administration since the consolidated order of 29 September 2008. In the course of submission Mr Brockman, having taken instructions, accepted that the purpose of the administration had been achieved.
21. Accordingly, this case falls into the category of case considered by Briggs J (purpose achieved) rather than the category of case considered in Innovate (purpose yet to be achieved). There is strictly speaking no requirement to carry out the balancing exercise weighing the interests of creditors (seeking to achieve the purpose of the administration) and the particular creditor (seeking to further his private law interests). The interests of a creditor seeking to prove his case by commencing proceedings to obtain a dividend in circumstances where (i) the purpose has been achieved (ii) there is a surplus and (iii) other creditors are both limited and not opposing provide powerful and compelling reasons to grant permission.
22. If I am wrong and the balancing exercise requires consideration the private law interests of SBS are to be weighed against the collective interests of the creditors in the context of the purpose having been achieved. As no prejudice arises I would reach the same conclusion.
23. Dealing with the issues raised by Mr Brockman concerning delay, Mr Bacon accepts that it is not possible to describe the permission application as having been made in prompt fashion. The delays are unfortunate but will not affect the operation of the administration. The only arms-length creditor does not object and Mr Cohen has described his position as neutral.
24. I agree with Mr Brockman that there would be little point in granting permission to commence or continue legal proceedings if such proceedings were doomed to failure (the second principle enunciated in Lightman & Moss). The court should not make an order in vain. In my judgment this case can be easily distinguished from Re Polly Peck International Plc (in Administration) (no 5). It is probably simplistic in its analysis but there are perhaps two different types of constructive trust. The first is known as the institutional constructive trust; the second a remedial constructive trust. The former arises by operation of law and the court merely declares that the trust has arisen at some point in the past (according to the circumstances). The latter is not known to English law although it is recognised in other common law jurisdictions. It works in reverse to an institutional constructive trust. Liability is first determined. The court may then fashion (in its discretion) a remedy by imposing a remedial trust. Such a trust may have a significant effect on third parties by varying proprietary rights: Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (in administrative receivership) and others [2011] 1 BCLC 202.
25. The strength of the present case cannot be so easily dismissed. Mr Bacon carefully took the court through the amended particulars of claim. Although some questions were raised by Mr Brockman and may require further consideration in the future, Mr Bacon explained that SBS's case is based on an oral agreement that the Administrators (or the Companies) would pay a fee for the work SBS was to undertake. Paragraph 5 of the amended particulars of claim reads:

"A note of a meeting on 10 December 2008 records that there was an agreement on SBS's role in preparing accounts, financial information and returns on behalf of the Administrators, a process which it was said would need a supervisor and contact point and temporary staff in India and UK." (sic)

26. A quote of £500 for each company was subsequently sent to the Administrators. The pleading continues:

"It was known by both parties that SBS would have to engage personnel in England and India to carry out the work and would have to do immediately in order to achieve the very tight timescale in which the Defendant required the work to be carried out. SBS did so and both parties proceeded on the basis that there was an agreement to pay SBS £500 per company, alternatively that there was an agreement for the work to be done and that the only detail left was as to whether a fixed fee could be agreed." (sic)

27. Mr Brockman took the court to evidence where the Administrators asked for samples, were not happy with the work and asked for more detail. Mr Bacon says that the work was done, and done to the knowledge of the Administrators. This is a question of fact and cannot be determined at a hearing for permission to lift the moratorium. The court cannot go behind the pleaded case without the evidence being tested in cross-examination unless documents undermine the case or the credibility of the assertions made are otherwise unreliable. In this regard the observations of Pattern J in Portsmouth v Alldays Franchising Limited [2005] BPIR 1394 are apposite:

"…….. the mere fact that a party in proceedings not involving oral evidence or cross-examination asserts that certain things did or did not occur, is not sufficient in itself to raise a triable issue. That evidence inevitably has to be considered against the background of all the other admissible evidence and material in order to judge whether it is an allegation of any substance. Once the court considers that the evidence is reliable in that sense, and not some attempt to obfuscate the real issues by raising a series of hopeless allegations then it does, of course, become necessary to consider what the legal consequences of it are…."

28. In Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd's Rep 601 the court was asked to decide whether the claimant and the defendant had made a contract. The claimant was a trading house carrying on business in Padua and the defendant an American trading group. On appeal to the Court of Appeal Lloyd LJ summarised the relevant principles concerning the formation of a contract by correspondence or whether all terms had to be agreed in order for a contract to be formed:

i) In order to determine whether a contract has been concluded in the course of correspondence one must look to the correspondence as a whole;

ii) The parties may intend that the contract shall not become binding until some further term or terms have been agreed or they may intend to be bound forthwith even though there are further terms still to be agreed or some further formality to be fulfilled;

iii) If the parties fail to reach agreement on such further terms, the existing contract is not invalidated unless the failure to reach agreement on such further terms renders the contract as a whole unworkable or void for uncertainty.

29. Mr Brockman says that SBS has "no hard evidence to support the underlying contract". There are at least five matters that require determination as a matter of fact. In no particular order, the first is whether (following disclosure) it can be said that having regard to all the correspondence a contract had been formed. Secondly, if the correspondence fails to reveal a contract whether an oral agreement was reached at some point (as tendered by Mr Bacon) between 5 December and 10 December 2008. Thirdly, the identity of the contracting parties. Fourthly, whether the parties intended that a contract would only be formed following a condition being reasonably fulfilled (for example, the samples rendered had to comply with an accounting standard). The last, whether a price had been agreed and if not whether the failure to agree renders the contract void for uncertainty or unworkable. There may be other questions of fact that require determination, such as whether or not the work was done and if so whether it was of a standard.
30. These questions of fact make the case very different from a case that may be struck out for disclosing no cause of action. A defence needs to be filed on behalf of the Companies, disclosure and inspection are required, and witness statements of fact produced and exchanged. In my judgment, having in mind the questions of fact that require determining, and the inability at this stage to go behind the pleaded case, SBS has a reasonable prospect of success. If I am wrong about the test, SBS has, at the present time, a strong arguable case.
31. I shall grant permission but the permission will have the conditions I have canvassed with counsel.
32. Order accordingly.