Moss Groundworks Ltd, Re Insolvency Act 1986

When considering an administration application involving a proposed pre-pack sale to existing management or connected persons, the court must remain alert to abuse of the administration procedure. The merits of the sale will generally be for the administrator, and an administration order does not ordinarily amount to court approval of the sale. However, where there is a significant risk of abuse, the court must refuse the order. The assessment is one of fact and degree, made on limited information and without hindsight. Compliance with SIP 16 is likely to assuage concerns in many cases, while deficiencies require fuller explanation. Independent administrators and creditors’ rights may provide sufficient protection where the risk is not significant.

This was an adjourned application for an administration order in respect of Moss Groundworks Ltd. The proposed administration contemplated a pre-pack sale to a company connected with the company’s existing management.

Snowden J had adjourned the application because the material did not establish that the proposal was free from abuse concerns. The concerns included the disparity between the apparent value of book debts and work in progress and the proposed price, truncated marketing, and apparent non-compliance with SIP 16. Further evidence was provided concerning valuation, marketing, the company’s financial position, and the director’s proposal to waive his loan account.

The central issue was whether, in exercising its discretion, the court could properly make the administration order despite the risk that the pre-pack procedure might be abused.

1. Administration order made. The statutory criteria of insolvency and a real prospect of achieving an administration purpose had been established. The remaining question was whether it was appropriate to exercise the court’s discretion.
2. The court must be alert to the possibility of abuse where an administration involves a pre-pack sale, particularly a sale to existing management or persons connected with it. There is a spectrum of cases. At one end, abuse may be clear; at the other, the pre-pack may be the only realistic means of salvaging value for creditors. The assessment is one of fact and degree.
3. The merits of a pre-pack sale are generally matters for the administrator, and creditors may challenge an improper decision during the administration. Nevertheless, where there is a significant risk of abuse, the court cannot simply leave the matter to the administrator. The order must be refused or appropriate directions given.
4. The court ordinarily has limited material assembled at speed and must evaluate the risk without hindsight. The applicant bears the burden of showing that an administration order is appropriate. Compliance with SIP 16 is likely to address concerns in many cases. Where its steps have not been followed, the applicant must explain more clearly why the risk remains insignificant.
5. Further evidence materially reduced the apparent risk. It explained the valuation of the book debts and work in progress, addressed the practicalities of the construction industry, provided a SIP 16-compliant report, and showed further marketing. The director’s agreement to waive his comparatively modest loan account also indicated recognition of creditors’ interests. The administrator’s independence and creditors’ rights were sufficient protection in the circumstances.
6. The administration order was therefore made in standard terms. The costs of the Friday hearing before Snowden J were not made an expense of the administration, because deficiencies in the original material had necessitated that hearing and charging those costs would further reduce the funds available to creditors.

The application was initially heard by Snowden J on 6 September 2019 and was adjourned for further information. It was subsequently adjourned again for want of court time before being determined by the High Court.