Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Re Parmeko Holdings Limited: when are administrators’ proposals “futile”?

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Re Parmeko Holdings Limited & Ors (In Administration) (6 September 2013) ([2013] EWHC B30 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/B30.html

Recipients of R3 Recovery News will have seen a report on this case by Amy Flavell of Squire Sanders. In her article, Amy referred to the fact that the judge passed comment on the proposals “casting doubt on the utility or effectiveness of a number of standard form proposals” used by many administrators. I’ll cover those comments here.

Background

Firstly, a summary of the case: the administrators sought direction as regards their proposals, which had attracted no response from any creditors at all. Cooke HHJ confirmed that, just as an administrator is entitled to exercise his statutory powers in such a manner as he considers best for fulfilling the purposes of administration before he puts his proposals to creditors, so too can he continue to use those powers in the event that creditors do not vote on his proposals. “If and when proposals are approved then he is required by paragraph 68 to manage the affairs of the Company in accordance with those proposals, but if no such proposals are approved then he is not so constrained and he must act in accordance with his own discretion” (paragraph 11).

This does not contradict with the earlier decision in Lavin v Swindell (http://wp.me/p2FU2Z-k), which involved administrators seeking the court’s direction because creditors had voted against their proposals and Cooke HHJ acknowledged that an administrator also may want to refer to the court in instances where “some specific question arises as to what he should do” (paragraph 13). However, the judge felt that this was not such a case, although he did acknowledge that the administrators required approval of the basis of their fees, which he granted with no particular comment.

The judge’s comments on the proposals

The judge stated that:

• No purpose is served in seeking sanction or direction to make payments, when and if available, to the secured and preferential creditors, as this is a statutory power (paragraph 16);

• He had “grave doubts as to the utility” of placing before creditors the proposals in relation to exit procedures. “The proposals as set out in this case do no more than set out the mechanisms provided by Sch B1 for exit, and leave it to the discretion of the administrator to make any choice between them that may be available in the circumstances as they transpire. That is not, in any positive sense, a proposal at all, nor does it in truth set out anything the administrator ‘envisages’” (paragraph 17);

• Stating that the administrators would become liquidators in any subsequent CVL is the default position unless the creditors nominate someone else, “so putting such a proposal to the creditors achieves little more than conveying information” (paragraph 18);

• Including a permissive proposal that the administrators may apply to court for sanction to pay a dividend to unsecured creditors simply provides “and indication to the creditors of an available option” (paragraph 19);

• “There must be some doubt as to the appropriateness of inviting the creditors at the commencement of the administration to agree a date upon which the administrators should be discharged from liability… It seems to me that the creditors can only sensibly consider this question when they know what the effect will be, which in turn means that they should be in a position to know what has gone on in the administration and form a view as to what if any potential claims might be affected by the release. They plainly cannot in most cases do this at the first meeting of creditors” (paragraph 20). The judge stated that “where as here the creditors have not fixed a discharge date, an application must be made to the court” (paragraph 21) at the appropriate stage.

• He also declined to comment on whether remuneration should be appropriately dealt with by way of proposal or by separate resolution, but he confirmed that the court could deal with it as a separate matter from the proposals.

Cooke HHJ finished by highlighting the need for administrators “to consider carefully what is the utility of an application to the court for directions” and, in his view, “it would be appropriate, if the administrator has to report to the court that his proposals have not been approved by the creditors, simply by virtue of what has been described as ‘creditor apathy’ in that the creditors did not express a view one way or the other, to say in that report whether he considers that anything useful would be served by seeking an order of the court pursuant to paragraph 55.2, and that if he does not, that he does not intend to make such an application” (paragraph 24). Personally, I think it would be a good start if the Notice of Result of Meeting of Creditors, Form 2.23B, provided for disclosure of unapproved proposals, as the current template only provides for approved or rejected outcomes, but this won’t be the first time that some fudging of a standard form has been necessary.

Comment

I think that this decision reveals a difficulty with the Rules around administrators’ proposals. Stepping back for a moment, I wonder if the drafter originally envisaged administrators’ proposals operating in a similar manner to VA proposals. It seems to me that R2.33 is a checklist of items to include in proposals resembling R1.3 and the idea in Para 53 is that the creditors would decide whether to reject or accept, with or without modifications, the administrators’ proposals… which reads very much like S4 regarding CVAs. It seems to me that the Act/Rules suggest a single statement of proposals from an administrator, which creditors are asked to reject, approve or modify as a whole, rather than the evolved practice of providing creditors with two parts: a report on the administration to date and a summary of points sometimes described as the administrators’ “formal” proposals on which creditors are asked to vote (which practice may have been a spin-off from the pre-Enterprise Act administration regime, where much of the detail was annexed to the administrator’s proposals).

However, I think there’s a key reason why this format – of creditors voting on a single statement of proposals – doesn’t really work for administrations: compared with VAs, the process, powers, and purposes of administration are far more well-defined by statute. This doesn’t seem to leave much for creditors to vote on and therefore, as Cooke HHJ observed, there is little point proposing matters to creditors which simply reflect statutory provisions. An example of this conflict arose a few years’ ago when HMRC was in the habit of seeking modifications to proposals that the administration would exit to CVL, but in some cases it was not statutorily possible for this to happen (at least not via Para 83), because the administrator did not think there would be a dividend. I understand that HMRC now seeks modifications that the exit be some form of liquidation, which gets around this problem, but I think it raises an issue: what exactly is up for modification?

The way the Rules are designed, it seems that we risk creditors trying to force administrators to act contrary to statute by seeking modifications to proposals, as statute seems designed so that the entire statement of proposals, covering all R2.33 items, is up for consideration, even though many items are merely for information purposes, either because they are statements of fact or because they simply describe what the administrator is bound to do by statute; I’m thinking, in particular, of Para 3 which describes the hierarchy of objectives, which the administrator must pursue. In some respects, ‘creditor apathy’ may have avoided more applications to court for directions.

Another issue identified by this decision is: what are administrators to do if their way is not clear at the time of issuing the proposals? For example, as Cooke HHJ observed, proposing to creditors that they approve a plan to leave the administrators with full discretion to decide the appropriate exit route is pretty futile. However, if the administrators truly do not know how best to exit when the proposals are due, what do the Act/Rules expect them to do: seek the court’s sanction to postpone their proposals until they are certain or perhaps plump for a sensible exit route and, if that later turns out to be inappropriate, ask creditors to approve revised proposals? Both these options seem a waste of time and expense to me and in conflict with the idea of being up-front and honest with creditors. So, given that R2.33 requires an administrator’s proposals to include “how it is proposed that the administration shall end”, it really does seem to me that the most sensible approach would be to make a best guess at the most likely appropriate exit route and seek to retain the discretion to choose an alternative route (but not exits that clearly will not be appropriate to the case in hand), if things change. I can see that this isn’t much of a proposal, but I suggest that, just as Cooke HHJ felt that creditors should not be asked to agree a discharge date at such an early stage in the administration, so too should administrators not be expected to identify, at the most 8 weeks into a case, the final exit route in all cases.

I wonder if the Rules could be revised so that they more clearly distinguish between what creditors are being asked to approve and what administrators are simply going to do in order to meet their statutory obligations, including importantly, I think, the hierarchy of objectives of administration. If only we could get back to non-prescriptive, non-checklisty Rules that focus on the purpose of reports, proposals, etc…

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