Hammonds (a firm) v Pro-Fit USA Ltd

In an application for an administration order, the court’s discretion is not constrained by the Companies Court practice applicable to winding-up petitions involving disputed debts or cross-claims. A person may qualify as a creditor if there is a good arguable case that a debt of sufficient amount is owing. The court may consider the application without finally resolving the dispute, but must separately assess whether the company is, or is likely to become, unable to pay its debts and whether administration is reasonably likely to achieve an objective in Insolvency Act 1986 Schedule B1. The existence of a genuine cross-claim remains an important discretionary factor. An alleged transaction at undervalue may justify administration where investigation and potential relief under sections 238 and 240 are materially required.

Hammonds, a firm of solicitors, applied for an administration order against Pro-Fit USA Ltd in respect of unpaid legal fees, including work in progress. USA disputed liability and alleged negligence, asserting a cross-claim exceeding the fees. Hammonds also relied on USA’s grant of an exclusive worldwide intellectual-property licence to an associated company, International, alleging that it was a transaction at undervalue.

The court considered whether Hammonds was a creditor for the purposes of Schedule B1, whether USA was insolvent or likely to become insolvent, whether the administration purpose requirement was met, and whether the application was an abuse of process.

1. Administration jurisdiction. The court held that the purpose of administration under Schedule B1 is the achievement of the objectives in paragraph 3(1), in their statutory order of priority. It is unnecessary to identify in advance with certainty which objective will ultimately be achieved.
2. Creditor status and disputed debts. The winding-up practice concerning disputed debts and cross-claims is not imported into administration applications. A person is a creditor under paragraph 12(1)(c) if there is a good arguable case that a debt of sufficient amount is owing. The court has jurisdiction to hear the application without resolving the underlying dispute.
3. Solvency. Creditor status for standing does not determine whether the alleged debt must be included in the solvency assessment under section 123. The court must assess all the evidence under sections 123(1)(e) and 123(2), and may require the dispute to be determined before making an order. USA was unable to pay its debts as they fell due and was likely to become unable to do so. The financial evidence did not establish balance-sheet solvency conclusively.
4. Administration purpose. The statutory comparison with winding-up remains possible even where a winding-up petition might not succeed because of a disputed debt. The stay, the ability to continue valuable litigation, and the opportunity to investigate and challenge the 2006 Licence gave administration a reasonable prospect of rescuing the company or producing a better result for creditors.
5. Discretion and transaction at undervalue. The 2006 Licence was not negotiated at arm’s length, and no proper valuation advice had been obtained. There was a substantial argument that the rights granted were worth more than the consideration. This materially justified administration so that an administrator could investigate and, if appropriate, seek relief under sections 238 and 240.
6. Disposition. The application was granted. The court deferred the making of the administration order to allow USA to obtain a surrender of the 2006 Licence from International on proper terms.