Ashfords LLP and Joe Curl of 9 Stone Buildings were instructed by the Administrators (Richard Toone and Jason Malony of CVR Global LLP) in the decision of Mr Justice Tower in Re Hat & Mitre Limited (In Administration). The decision is a salient reminder to majority shareholders that the Court does not consider a fettering of their controlling interest and shareholder position by Administrators as unfair harm when that is done to achieve fairness amongst all shareholders including minority interests.
Facts
Hat & Mitre PLC was a property holding company, with its key assets (a commercial property) valued way in excess of its outstanding liabilities. Whilst the Company was plainly balance sheet solvent it was wholly reliant on rental income from its sister trading company (Maxwell Stamp PLC), which had not been made paid for more than 2 years. The Company was unable to meet certain short term liabilities without external funding and with the sister trading company imminently due to enter an insolvency process an equally split board of directors used the Chairman's casting vote to place the Company into administration. The duly appointed Administrators concluded that whilst the Company could not meet short term liabilities there was a reasonable prospect to achieve the first statutory objective, namely rescuing the Company as a going concern.
In furtherance of the first statutory objective, the Administrators approached all material stakeholders and shareholders to canvas proposals on either reletting its property or a buy-out of other stakeholder interests. However, the demise of the Company had been characterised into two diametrically opposed and warring camps of shareholders, broadly split between the Applicants and their immediate family (who held 72% of the Company's shares) and other minority shareholders who held 28% of the shares. Whilst the Applicants sought to dispute the Administrators' appointment, they were unwilling to agree limited funding for a directions hearing, preferring to enter into a dialogue with the Administrators and minority shareholders to wrestle back control of the Company on the basis of their own proposal to settle certain agreed creditors. Despite being asked to provide a proposal for the reletting of the Property and an all parties meeting to buy out minority shareholders, parties were unable to agree terms to return the Company as a going concern. After more than a year of negotiations, and upon the Administrators placing the Applicants on notice of prima facie misfeasance claims (arising from their former conduct as directors), the Applicants issued the Application.
Findings
Given the above facts, the Application's principal purpose was to obtain a determination that the Company is not or should not be in administration (primarily because it is balance sheet solvent) and as such the Administrators should be removed from office on grounds that they (i) invalidly appointed; (ii) had been appointed for an improper purpose; (iii) were acting to unfairly harm the Applicants' interests; and (iv) were not acting expeditiously. The Court concluded:
- Balance sheet solvency: On any view, the Company was balance sheet solvent. However, it was without any source of readily available monies (having not been paid rent for more than 2 years) and it was accepted by the Applicants that prior to entering administration it required funding (which failed to materialise) and more so once its tenant sister company also entered into administration a month later. Two findings arose, namely: (i) despite its positive balance sheet, a company with acute cash flow difficulties is likely insolvent if there is insufficient evidence of its ability to settle its debts or obtain third party funding for that purpose; (ii) balance sheet solvency connotes a requirement for the Administrators to be satisfied that if the Company was returned it is in a position to trade properly as a going concern, which was not satisfied by the Majority Shareholders' own proposal, nor had they formulated a proposal for a going concern return of the Company that would have benefitted all the Company's shareholders.
- Improper Purpose: The Applicants argued that the Company had been placed into administration for an improper and collateral purpose, namely furthering the interests of certain of the Minority Shareholders, who had control of the board at the material time. However, the Applicants failed to establish a meaningful argument because they neither joined nor allowed Minority Shareholders to file evidence, made factual admissions that the Company's entry into administration might have been improper (but necessarily done for an improper purpose) and delayed making the Application for over a year - when Court felt it ought to have been made prior to the approval of the Administrators' proposals.
- Unfair Harm: The Applicants asserted unfair harm on grounds that: (i) the Company's entry into administration had deprived them of their rights as majority shareholders; (ii) the costs of administration would be paid out of distributions the Majority Shareholders say were due to them; and (iii) if the Property was sold the Majority Shareholders would lose the benefit of an asset they wish to hold onto. Unfair harm was found not to exist primarily because it was found that: (i) the Administrators had given proper consideration to their appointment and immediately offered a directions hearing on the point, which the Applicants did not engage with; (ii) the Administrators had properly engaged with proposals to rescue the Company as a going concern, but that the Applicant's insistence that their own funding proposal (to pay certain legitimate creditors) was not capable of acceptance by the Administrators and required a properly considered funding plan for the Property; and (iii) where a company is balance sheet solvent it is incumbent on administrators to consider the interests of the company shareholders as a whole when considering a course of action and not just the interests of majority shareholders.
- Expedition: The Applicants failed to establish a case and it was found that any delay had been largely caused the Applicants' own indeterminate and singular approach to accepting their own proposal.
Practical Implications for Officeholders and Directors
- Insolvency and Appointment: Absent bad faith or knowledge to the contrary, administrators are entitled to rely on a directors statement of a company's insolvency for the purposes of their appointment. As a matter of proper practice prior to their appointment, administrators should consider documentation supporting the company's insolvency. However, it is recognised that they are reliant on the veracity of the information, documentation and statements provided, which in the case of the Company showed it to be balance sheet solvent, but without monies or funding to meet liabilities due or shortly due, which was sufficient.
- Going Concern Rescue: A proposal to pay certain creditors and restore a company to solvency does not satisfy purpose one. In accordance with Davey v Money [2018] Bus LR, administrators must be satisfied that if a company exits administration it can continue to trade as a going concern. As such, administrators must consult with the directors or persons proposing the restructuring and be satisfied that the business proposal going forward does allow the return of the company to trade as a going concern. It would be incorrect to assume that purpose one could be satisfied by a proposal that all creditors are paid and once that is achieved the company could be restored to the control of its directors.
For more information on the article above please contact Crispin Jones.
