Wormleighton & Anor v Salamander Invest A/S & Anor

The court supervising an administration has an unfettered power under paragraph 63 of Schedule B1 to direct that a creditor-requested decision procedure to replace administrators is not held. That power applies even where the administrators were appointed by the company or its directors.

Following rejection of proposals, the court may authorise their implementation only where an administration purpose has a real prospect of achievement. Considerable weight is given to qualified administrators’ commercial assessment, but creditor opposition normally carries substantial weight. The court may discount creditor views where they are affected by collateral benefits, conflicts or other extraneous factors.

The relevant discretion is guided by whether the proposed course is conducive to the proper operation of the administration and justice between all interested persons.

Fortuna Fix Ltd was placed into administration after becoming unable to pay its debts. Its administrators’ proposals sought either to rescue the company as a going concern or to achieve a better result for creditors than liquidation, principally through investigations into potential claims and the preservation or realisation of intellectual-property rights.

The proposals were rejected by the majority creditor, Genesis Technologies Ltd. The administrators applied under paragraphs 55(1) and 63 of Schedule B1. Genesis also requested a creditors’ decision procedure under paragraphs 56 and 97 to replace the administrators. The central issues were whether the rejected proposals had a real prospect of achieving an administration purpose, whether the court could prevent the requested decision procedure, and how that discretion should be exercised.

1. First application. The court refused to authorise implementation of the rejected proposals. The rescue proposal did not identify how Fortuna Fix would be rescued as a going concern. It depended on a series of contingencies, including agreement with Genesis, resolution of litigation and a later workable plan. Once Genesis made clear that settlement was no longer available, the proposal had no real prospect of success.
2. The alternative proposal also failed the real-prospect test. The administrators had not shown that litigation would produce a better return in administration than in liquidation. Nor had they produced evidence of a market for an assignment, transfer or agreed termination of the licence agreement. A valuable asset could not be assumed merely from a provisional valuation or from the existence of contractual rights.
3. The court confirmed that paragraph 55(2) confers a wide discretion, but that discretion is reached only after a real prospect of achieving an administration purpose is established. The court normally places great reliance on the expertise of insolvency practitioners, while considering the creditors’ interests and the weight of their votes.
4. Second application. The court held that it had jurisdiction under paragraph 63 to direct administrators not to seek a decision under paragraph 56, including a decision under paragraph 97 to replace administrators appointed by the company or directors. The mandatory wording of paragraph 56 and the criminal offence for non-compliance did not exclude that supervisory jurisdiction; a paragraph 63 direction would provide reasonable excuse.
5. The discretion is guided by whether the proposed procedure would be conducive to the proper operation of the administration and justice between all interested persons. Relevant matters include the value and nature of creditors’ debts, the commercial rationality and weight of their reasons, conflicts and collateral motives, the administrators’ stage of investigation, and the independence of proposed replacements.
6. Because the proposals had failed the real-prospect test, there was no point in convening a replacement procedure. The administrators’ appointment was to cease as soon as practicable. The court adjourned consideration of compulsory winding-up for 14 days, to allow other creditors to consider the possible loss of the licence asset and make representations about winding-up and the appointment of a liquidator.