Ace Telecom Ltd, Re

An administration order requires a realistic evidential basis for concluding that an administration objective can be achieved. Where the proposed business will not rescue the company or produce a better return than liquidation, the order should be refused. A disputed asset, such as a VAT repayment, must offer a credible prospect of recovery and administration must provide a relevant advantage over the available liquidation route. Past liabilities and assets can ordinarily be realised in liquidation where administration is unnecessary. The court may reject speculative trading proposals involving narrow margins, substantial new liabilities and uncertain funding.

Applications were made for administration orders in respect of Ace Telecom Limited and N2J Limited. The companies admitted that they could not pay their debts. Their former solicitors opposed the applications and had presented winding-up petitions.

The companies proposed a year of trading and relied principally on substantial VAT repayments disputed by HMRC. The court had to decide whether either statutory administration objective was realistically achievable and whether administration would produce a better result for creditors than compulsory or voluntary liquidation.

1. The applications for administration orders in respect of both companies were dismissed. The companies could not demonstrate credible evidence that either proposed administration objective could be achieved.
2. The applicable threshold required the court to be satisfied that the company was unable to pay its debts and that there was a real prospect that the purpose of the administration could be achieved, following AA Mutual Insurance Co Limited [2005] BCLC 8. Insolvency was admitted, but the second requirement was not met.
3. The proposed trading was unsuitable. Its narrow profit margin exposed creditors to substantial new liabilities, tax and national-insurance costs, uncertain debtor payments and unforeseen expenditure. The projected profits would not rescue the companies or provide a better return for existing creditors.
4. The VAT repayments were heavily disputed by HMRC on alleged missing-trader fraud grounds. The evidence did not establish any realistic prospect at that stage of recovering the repayments. The directors’ proposed funding was non-binding and unsupported by evidence of their ability to fund the recovery or of its likely cost.
5. Even if the VAT repayments were recoverable, the companies had not shown that administration would achieve a better result than liquidation. The relevant assets were trade debts and the VAT claims, and those could be recovered in liquidation.
6. The court rejected the submission that administration was preferable because it would avoid a possible £100,000 charge arising on compulsory liquidation. That advantage did not justify administration where voluntary liquidation could also avoid the charge. Concerns about investigation of directors’ payments did not justify administration because the relevant office-holders had equivalent investigative powers and duties.