The High Court has recently demonstrated its right to exercise discretion as to whether an administration order should be made in relation to a company. In Rowntree Ventures v Oak Property Partners Limited, even though the companies were unable to pay their debts and where the statutory purpose of administration was likely to be achieved, the Court exercised its commercial judgment in determining that it was premature to make an administration order.

Background

The two sister companies sold rooms in two hotels to purchasers (“the Applicants”) on long leases, on terms that enabled the Applicants upon the occurrence of certain events to serve notice upon the companies to repurchase the leases. The conditions enabling the Applicants to require the companies to repurchase the leases were satisfied and notice was served upon the companies requiring them to repurchase. Upon the failure of the companies to do so, the Applicants applied for administration orders in respect of the companies.

In deciding whether an administration order should be made, Mr Justice Purle had to consider whether the conditions set out in Paragraph 11 of Schedule B1 Insolvency Act (“Conditions”) had been met. The Conditions are that (1) the companies are or are likely to become unable to pay their debts and (2) an administration order is reasonably likely to achieve one the statutory purposes of administration – those purposes being (i) a rescue of the company as a going concern, (ii) achieving a better result for creditors than would be likely if the company were wound up without first being in administration, or (iii) realising property to make a distribution to one or more secured or preferential creditors.

Mr Justice Purle held that the Conditions had been met. However, he disagreed that it was necessary for the companies to enter administration or liquidation and that in his commercial judgment on the assessment of the facts, another alternative was to allow the companies time to turn their business around without the implementation and costs of an insolvency procedure. This would ultimately have better prospects for the companies’ creditors as a whole. He noted that the process of repurchasing the leases would not be able to occur for another two years which he believed was a long enough time period to allow the companies to turn around their business.

Comment

This judgment has created significant interest as the Courts have traditionally avoided exercising commercial discretion in such matters. One of the concerns is the potential liability of directors of companies that are held to be insolvent but permitted to continue trading, particularly if the company subsequently fails and the Insolvency Practitioner has to determine whether and when they can bring wrongful trading actions against the directors. It will be interesting to see if the Court adopts a similar view in any subsequent administration applications.