Kebbell & Anor v Hat & Mitre PLC & Ors (As Joint Administrators of Hat & Mitre PLC)

An out-of-court appointment of administrators by directors is not invalid merely because the directors may have exercised the statutory power for an improper purpose. Where the technical requirements for appointment are satisfied, the appointment stands unless the court orders otherwise under Insolvency Act 1986 Schedule B1.

Cash-flow insolvency depends on all the circumstances, including whether finance is immediately available on terms which directors may properly accept. In a balance-sheet solvent company, administrators pursuing rescue may have regard to the interests of members as a whole, the company’s future governance and viable continuation of its business. Paying creditors in full does not necessarily rescue a company as a going concern.

Two shareholders and directors applied for declarations that the appointment of administrators to Hat & Mitre plc was invalid, an order terminating the administration and relief for alleged unfair harm. They contended that the directors had acted for an improper purpose under section 171(b) of the Companies Act 2006, that the company was not cash-flow insolvent, and that the administrators had failed to pursue rescue promptly.

The administrators had been appointed by the directors on 19 December 2018. The applicants did not join the directors whose motives they challenged and allowed the administration to continue for more than a year while engaging with the administrators. The central issues were whether the appointment was a nullity, whether relief was available under Schedule B1, and whether the administrators had unfairly harmed the applicants.

1. Appointment and insolvency. For an out-of-court appointment by directors, the statutory declaration that the company is or is likely to become unable to pay its debts is a matter for the declarant. Its factual accuracy is not a necessary precondition to validity, provided the statutory and constitutional requirements for appointment are met. Cash-flow insolvency under section 123(1)(e) of the Insolvency Act 1986 concerns debts falling due in the reasonably near future and requires consideration of all the circumstances. A need for borrowing, or lack of cash to meet immediate liabilities, is not conclusive. Finance must be immediately and demonstrably available on terms which the directors may properly procure consistently with their duties.
2. Improper purpose. The power conferred by paragraph 22(2) of Schedule B1 derives from statute, not merely from the company’s constitution. An improper purpose may breach section 171(b) of the Companies Act 2006, but does not automatically make the appointment a nullity. The scheme of Schedule B1, particularly paragraph 81, gives the court discretion to terminate an appointment or grant other relief. The appointment therefore stood, and the declaration of invalidity was refused.
3. An application alleging improper motive under paragraph 81 must be properly particularised and ordinarily requires the persons whose motives are impugned to be joined and given a fair opportunity to answer. The applicants’ late and procedurally defective case could not justify relief. Their delay and active engagement with the administration would also have counted against discretionary relief.
4. Unfair harm and rescue. An applicant under paragraph 74 must establish harm to interests as creditor or member, causation and unfairness, in the statutory context. In a balance-sheet solvent company, administrators may have regard to members as a whole, the effect of competing proposals on antecedent claims, future governance and the viability of the business after administration. Facilitating agreement between shareholder factions was within the permissible range of steps directed to rescue. A proposal merely to pay creditors and return control to directors, without a proper business plan, was not necessarily capable of achieving rescue as a going concern.
5. The applicants failed to establish improper purpose, unfair harm or breach of the duty to act as quickly and efficiently as reasonably practicable. Their applications were dismissed. The judge made no final ruling on whether the second or third statutory objectives remained achievable, observing that paragraph 79(2) might require an application if no statutory objective could be achieved.

First-instance decision of the High Court (Chancery Division). No earlier decision or appeal is stated.