DKLL Solicitors v Revenue and Customs

An administration order for an insolvent partnership requires satisfaction of two threshold conditions: inability to pay debts and a reasonable likelihood that administration will achieve its statutory purpose. A real prospect is sufficient; the court need not be satisfied that success is more probable than not. A majority creditor has no veto over proposals, and a pre-pack sale does not prevent the statutory objective from being reasonably likely where the court could authorise the sale despite opposition. At the discretionary stage, the court may consider the interests of employees, clients and other stakeholders, alongside creditors’ interests.

DKLL Solicitors, an insolvent solicitors’ partnership, applied for an administration order to enable an immediate sale of its business to a newly incorporated limited liability partnership. The proposed sale was opposed by HMRC, the partnership’s principal creditor, which had presented a winding-up petition and objected to the proposed pre-pack arrangement.

The court considered whether the statutory conditions for administration were satisfied, whether HMRC’s opposition prevented the proposed sale from achieving the purpose of administration, and how the court should exercise its discretion.

1. Threshold conditions. Under paragraph 11 of Schedule B(1) to the Insolvency Act 1986, as modified by article 6 of and Schedule 2 to the Insolvent Partnerships Order 1994, an administration order may be made only if the partnership is unable to pay its debts and the order is reasonably likely to achieve the purpose of administration. The first condition was undisputed.
2. The relevant purpose was achieving a better result for creditors as a whole than would be likely if the partnership were wound up without first being placed in administration, under paragraph 3(1)(b) of Schedule B(1). The evidence of the proposed administrators justified proceeding on the basis that the proposed £400,000 sale would produce substantially more than liquidation. The court placed significant weight on the experience of impartial insolvency practitioners.
3. A majority creditor does not possess a veto over an administrator’s proposals. The decisions in Re T & D Industries Plc [2000] 1WLR 646 and Re Transbus International Limited [2004] 1WLR 2654 established that administrators could complete the proposed sale without a creditors’ meeting or court direction. Re Structures & Computers Limited [1998] 1 Butterworths Company Law Cases 292 showed that even majority opposition would not necessarily prevent court authorisation.
4. “Reasonably likely” means that there is a real prospect of achieving the statutory objective. It does not require a probability exceeding 50 per cent, following Re AA Mutual International Insurance Company Ltd [2005] 2BCLC 8. The pre-pack nature of the transaction did not place the applicants or HMRC in a different legal position.
5. The second threshold condition was therefore satisfied. In exercising its discretion, the court could take account of stakeholders beyond the creditors, including employees and clients. The proposed sale appeared to be the only means of preserving approximately 50 jobs and minimising disruption to clients. The administration order was made.