Gabb v Earthly Energy Ltd

An administration order requires satisfaction of both statutory conditions: the company must be unable, or likely to become unable, to pay its debts, and administration must be reasonably likely to achieve its statutory purpose. The comparison is between administration and immediate liquidation, not between administration and continuing business operations outside an insolvency process. The threshold of reasonable likelihood is low, requiring a real prospect rather than probability, but it remains a genuine evidential threshold. Mere assertions that administration may preserve trading value, or that assets might be put beyond creditors’ reach, will not suffice without supporting evidence.

Roger Gabb, a creditor and shareholder of Earthly Energy Limited, applied for an administration order under Schedule B1 to the Insolvency Act 1986, alternatively seeking winding up. The company was heavily insolvent and subject to an adjourned HMRC winding-up petition. The proposed administrators supplied comparative estimates of realisations and costs under administration and compulsory liquidation. The central issues were whether the company satisfied the statutory conditions for administration and whether the court should make a winding-up order notwithstanding the pending HMRC petition.

1. The court was satisfied that Earthly Energy was unable to pay its debts. The substantial unpaid HMRC liability, unsatisfied statutory demand and bleak draft accounts established the first condition in paragraph 11 of Schedule B1 to the Insolvency Act 1986.
2. The relevant statutory comparison was between administration first and immediate liquidation. It was not a comparison with keeping the company in existence outside either insolvency process.
3. Although reasonable likelihood requires less than proof on the balance of probabilities, it requires a real prospect of administration achieving a better result for creditors as a whole. The threshold was low but genuine.
4. The evidence did not establish that administration would produce better realisations. The company was not trading, so the proposed reduction in realisations on liquidation based on continued trading in administration was unsupported. The estimated administration costs were also higher than the estimated liquidation realisation costs. The possibility of delay or asset dissipation, without a proper evidential basis, did not satisfy the statutory test.
5. Because the second condition was not met, the court had no power to make an administration order. It was unnecessary to determine the discretionary or abuse-of-process arguments. The court was not satisfied that the application was abusive or improperly motivated.
6. A winding-up order was not made on the application. Preference was given to the earlier HMRC petition, whose court was better placed to decide whether a winding-up order should follow the adjournment. All applications were dismissed.
7. The applicant was ordered to pay the respondent’s costs, subject to summary assessment if not agreed. The fact that an administration application might benefit creditors generally did not, without specific justification, displace the usual starting point that the successful party receives its costs.