NEUTRAL CITATION NUMBER: [2014] EWHC 1576 (Ch)

IN THE HIGH COURT OF JUSTICE	Claim No. 8200/2014
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY
Priory Courts
33 Bull Street
Birmingham
B4 6DS

Date: Friday, 2nd May 2014

Before:

HIS HONOUR JUDGE PURLE QC
Sitting as a Judge of the High Court

IN THE MATTER OF EARTHLY ENERGY LIMITED
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
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Between:
	ROGER GABB	Applicant	
	-v-		
	EARTHLY ENERGY LIMITED	Respondent	

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Counsel for the Applicant (instructed by Gunnercooke LLP): MR M WEAVER

Counsel for the Respondent (instructed by Paget-Brown (UK)): MR S HUNTER
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JUDGMENT

JUDGMENT

1.	THE JUDGE:  This is an application for an administration order, though Mr Weaver for the applicant has asked alternatively for a winding up order.  It is made under the Insolvency Act 1986 Schedule B1 as inserted by the Enterprise Act 2002.  
2.	The applicant is a creditor, a Mr Gabb, who appears clearly enough to be owed a substantial sum of money.  He seeks to appoint two distinguished and highly reputable members of Begbies Traynor, from their Leeds office, as administrators.  Mr Gabb is apparently owed £250,000 in respect of two loans.  He is also a shareholder.  His shareholding is approximately 13 percent, although it may be a little bit less.  In applying for an administration order he does, of course, apply in his capacity as creditor.
3.	The conditions for making an order are set out in paragraph 11 of Schedule B1.  They are as follows: 
“The court may make an administration order in relation to a company only if satisfied—
(a)  that the company is or is likely to become unable to pay its debts, and 
(b)  that the administration order is reasonably likely to achieve the purpose of administration.”
4.	Dealing with those two conditions, it is perfectly plain in my judgment that the company is, as things stand, unable to pay its debts.  It is facing a winding up petition from HMRC in respect of historical tax going back to 2011 of over £100,000.  A statutory demand remains unsatisfied.  The petition was adjourned for an extensive period in January until 19th May 2014.
5.	It may be, and the director of the company Mr Starling has expressed a very optimistic and hopeful wish that it will be, the case that the Revenue will be paid off, or accept a compromise, but, as things stand, they are owed a substantial sum which has not been paid or compromised.  The latest draft accounts for the company for the year ended 31st December 2012 show a very bleak picture with a net deficiency of £479,700.71 taking into account current liabilities and total assets.  That includes in the assets debtors who may not be good, comprising inter-company debt in relation to other companies of doubtful solvency and a directors’ loan account in a substantial sum which likewise may or may not be good.  
6.	Mr Starling, the director who has made a witness statement, has gone through certain individual creditors in some detail, questioning their status, but none of that dispels the very clear impression from the combination of the Revenue debt and the latest draft accounts, even bearing in mind that they are only a draft, of heavy insolvency.  He says that looked at commercially, the company is balance sheet insolvent.  In reaching that conclusion, however, he appears to rely exclusively upon a claim which he says is worth up to £33 million now being pursued in litigation or other claims imminently to be proceeded with against others.  A section 994 petition has indeed been presented by the company and is proceeding through the courts against another company said in some way to be an associate of the petitioner with whom there has been a falling out.  
7.	Earthly Energy Limited, the company with which I am concerned, entered into what can loosely be termed “joint venture arrangements” through a joint venture company, Greenlight AD Power Limited, the other shareholder in addition to Earthly Energy Limited being Greensphere AD One Limited.  In broad terms, put colloquially, Mr Starling’s complaint is that those within Greensphere AD One Limited have stolen the business opportunities of the joint venture company and therefore of Earthly Energy Limited.  
8.	I can form no view on those claims, save to note that they exist and appear to have the benefit of after-the-event insurance which may give rise to complications in the event of some insolvency process hereafter ensuing.  
9.	However that may be, returning to paragraph 11 of Schedule B1, there is no doubt, in my judgment, that the first condition is satisfied.  I therefore turn to the second condition: would an administration order be reasonably likely to achieve the purpose of administration?  The purpose of administration in this case is said to be to achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up without first being in administration.  It is to be noted that the comparison I am called upon to make is not whether the creditors would be better off if the company was kept in being, neither in liquidation nor in administration, but whether the company would be better off in administration first rather than an immediate liquidation.  It may be that a liquidator will be appointed.  The HMRC petition is due back in London and liquidation is sought as an alternative in this case, though that is very much Mr Weaver’s fall-back position.  
10.	Mr Weaver’s client’s position is supported by a detailed witness statement of one of the proposed administrators, Mr Reid, who has clearly given the matter full and independent consideration.  He expresses concern that if there is any delay in his appointment that may prejudice any eventual realisation, as Mr Starling could attempt to put assets beyond the reach of creditors.  It is only right to say that I can see no basis for that particular allegation, though I do not criticise Mr Reid for highlighting the possibility.  There always is that possibility and experienced insolvency practitioners come across it only too often.  It is not, however, without more a satisfactory basis for concluding that the statutory test is met.  	
11.	Mr Reid produced an estimated realisation schedule comparing the likely realisations in an administration with those in a compulsory liquidation.  As is well known, ad valorem and official receiver costs become chargeable in a compulsory liquidation, which is not the case in an administration.
12.	However, even with that, Mr Reid’s estimates are that the realisation costs in an administration will be higher than in a liquidation.  The total administration costs that he estimates for an administration are £75,000, whereas in the case of a compulsory liquidation the total realisation costs are £51,000 including ad valorem and official receiver costs.  Mr Reid has not provided in his realisation schedule anything in respect of the pending litigation or for the costs of pursuing it, but I have no reason to believe that the costs will be different in an administration than they will be in a compulsory liquidation in that respect.  The costs might or might not be more than if the company was not put into an insolvency process at all but, as I have said, that is not the comparison I am called upon to make.  It may be a relevant consideration when I come to exercise my discretion, if that point arises.
13.	The reason that a better outcome is forecast for the administration route rather than the compulsory liquidation route is because of lower expected realisations for goodwill, motor vehicles and computer equipment, stocks, trade debtors, other debtors and directors’ loan accounts.  It is not at all clear to me, in the particular circumstances of this case, why there should be a different level of realisation for any of those items.  Mr Weaver explained to me, as Mr Reid confirms in his witness statement, that it was thought that the company was still trading so that there was the potential for the company to continue to trade in administration.  However, the company is not presently trading.  Therefore the impact of ceasing to trade which might (I assume) lead to lower realisations in some respects, has already occurred.  In those circumstances it does not seem to me that I can be satisfied that an administration order would be reasonably likely to achieve the purpose of administration.
14.	Mr Weaver points out that the threshold is a relatively low one.  It has long been established that it is not necessary, in order to establish a reasonable likelihood, to get anywhere near to demonstrating that result as a matter of probability.  It is merely that there must be a real prospect of that being achieved.  Although the threshold is a low one, it is nonetheless a real one, and in my judgment it has not been surmounted.
15.	In those circumstances, I do not have power to make an administration order.  It is unnecessary for me, therefore, to consider whether I would have made one in the exercise of my discretion and whether considerations advanced by the company based upon allegations of abuse of process would have caused me to refuse the application.  I merely say that I am not satisfied that this particular application was an abuse of process or that there was any improper motive in bringing it.  It is right to say that, simply because some serious allegations have been made in that regard, which have not been made good.
16.	I turn to consider whether or not to grant a winding up order.  I am not prepared to grant a winding up order today.  It seems to me that preference should be given to the petition which was issued a considerable time ago.  Any winding up order today made on the administration application would not relate back to the presentation of the petition, unless I transferred the petition in and made an order on that petition.   However, HMRC are not here to seek a winding-up order and it may yet be that some accommodation with them will be reached.  The court having control of the winding up petition, which thought fit to grant the adjournment to May 19th,  should be the court to decide whether or not a winding up order will then be made on the petition.  
17.	Moreover, although it was conceded that for the purposes of making an administration application the applicant had standing notwithstanding the assertion of a counterclaim against him (which I am bound to say has not been made good or even arguably good on the evidence I have seen, but which may conceivably look different with further evidence) the existence of such a counterclaim, if one can be assembled, might cause a very different approach to be taken towards the question of standing or the appropriateness of making a winding up order upon the application of this creditor, were winding up the only application being made.  All that can be gone into, if it becomes appropriate to do so, on the hearing of the winding-up petition.  
18.	In those circumstances, all applications made before me today are dismissed.  
MR 	HUNTER:  My lord, I understand that.  I am in some difficulty not having anything by way of a schedule, but having been successful it would have been my submission appropriate for my client to have their costs of being here today but, as I say, I have no schedule to deal with that and so I would simply ask for costs to be assessed if they cannot be agreed.
THE	JUDGE:  Why do you not have a schedule?

MR 	HUNTER:  I am afraid I cannot answer that question.

THE	JUDGE:  Mr Weaver, there is an application for costs without a schedule.

MR 	WEAVER:  Yes.  The only obvious point I would make is this was, of course, a class action, and my lord has found there is nothing inappropriate in making the application.  Your lordship has found—

THE	JUDGE:  I found it is not an abuse.  You have not lost that.

MR 	WEAVER:  Yes.  My lord, on behalf of the creditors, because it is a class action.  This is not one party against the other litigation.  In those circumstances, whilst your lordship has declined to make any order, it is—

THE	JUDGE:  Are you supporting the petition?

MR 	WEAVER:  My lord, I do not know, I am afraid.  I simply do not know.  Might I turn my back just for a moment to see if I can find out?

THE	JUDGE:  Yes.

MR 	WEAVER:  No, sorry, my lord, I do not know.  I simply do not know.

THE	JUDGE:  Yes.

MR 	WEAVER:  In those circumstances, it is difficult really to see why Mr Gabb ought to bear the brunt of this application which was made for the benefit of all creditors.  That was the stated purpose of it.  Whilst your lordship has not been content that the statutory purpose can be achieved, you were perfectly content that this is a heavily insolvent company and therefore it was not an inappropriate application to make.  I might say the company has escaped by the skin of its teeth, given its insolvent position, and in those circumstances your lordship may feel that it is not appropriate for the company to have the benefit of a costs order against Mr Gabb.  

I pause before one deals with the costs.  In fact, no, I will deal with it.  I am going to ask for permission to appeal.  I will deal with that after the costs issue.

THE	JUDGE:  Yes.  Thank you.  I am going to order the costs to be paid by the applicant.  I have some sympathy for the applicant.  The applicant chose to make an application knowing the hurdles that had to be surmounted and knowing of the existence of the winding up petition, and the applicant has been unsuccessful.  The fact that an order, if made, would have inured for the benefit of creditors generally and that I would have to approach this from the class point of view is, in my judgment, neither here nor there.  The starting point is still that the successful party gets his costs and, although the court may make another order, there has to be some specific justification which in my judgment is not present in these circumstances.  So I will order the costs to be assessed if not agreed.  

	When could you get a costs schedule in?  I am prepared to assess them summarily on paper.

MR 	HUNTER:  I am grateful for the indication.  I would have to check with those instructing me but I cannot imagine that it would take longer than hours.

THE	JUDGE:  I am just trying to avoid the cost of a detailed assessment.  What do you say, Mr Weaver?

MR 	WEAVER:  Yes, I would rather not proceed down the mechanism of a detailed assessment if your lordship is happy to deal with it on paper.

THE	JUDGE:  I will deal with it by summary assessment but you can have seven days to put in costs submissions on paper.  Mr Weaver, you have seven days to answer them and then I will adjudicate upon them.  You will obviously have to serve yours on Mr Weaver and vice versa.  Only two lots of submissions, please.  It should be reasonably straightforward.

MR 	WEAVER:  My lord, as I indicated a moment ago, as quickly as I possibly can, we do seek permission to appeal your lordship’s order.  We do say that the evidence in front of your lordship ought to have come to the conclusion that a better realisation is available to creditors.  Apart from the figures, of course, the lack of any delay in an administrator being able to pursue assets is something that ought to have swayed your lordship’s mind, we say, to make the order.  Alternatively, at the very least, given the woefully insolvent position of the company, we say that your lordship ought to have wound this company up immediately rather than leaving it to the vagaries of the petition in two weeks’ time.  In those circumstances I seek permission to appeal.

THE	JUDGE:  You will have to ask elsewhere, Mr Weaver.  I think this is something which, at least in the first instance, the Court of Appeal would expect my assessment to prevail, but if you can persuade them that I have gone potty, good luck.  

MR 	WEAVER:  I am grateful, my lord. 

MR 	HUNTER:  Would it be of assistance if I typed a minute of your lordship’s order?

THE	JUDGE:  If you agree it with Mr Weaver.  I am sure Mr Weaver will be very co-operative in agreeing it.  It is not a difficult order.  Thank you, Mr Weaver.  

MR 	WEAVER:  I am grateful.

[Hearing ends]