Re Hat & Mitre PLC (in Administration)

The applicants, two director-shareholders, sought a declaration that the appointment of joint administrators under paragraph 22 of Schedule B1 to the Insolvency Act 1986 was invalid because the directors who authorised the appointment acted for an improper purpose contrary to section 171(b) of the Companies Act 2006, an order terminating the appointment and an order preventing the administrators from recouping their costs. They also advanced alternative relief under paragraph 74 (unfair harm) and paragraph 81 of Schedule B1. The judge held that where a power to appoint administrators is conferred by Schedule B1 the appropriate remedy for an improper purpose is for the court to exercise the statutory discretions in Schedule B1 (for example paragraph 81 and paragraph 74) rather than to treat the appointment as an automatic nullity.

Applying the statutory tests in Schedule B1 and the s.123 cash-flow insolvency inquiry, the judge concluded that the directors who authorised the appointment were entitled to conclude that the company was or was likely to become unable to pay its debts on a cash-flow basis and that the appointment was therefore within the power conferred by Schedule B1. The court declined to make any finding under paragraph 81 because the allegation of improper motive was not particularised and the alleged directors (said to have the improper motive) were not joined to the proceedings.

On the paragraph 74 claim the judge found that the administrators had acted within their duties, had properly investigated alternatives (including the majority shareholders' funding proposal) and had been entitled to take account of the potential antecedent claims and minority shareholders' position when deciding whether to accept the funding proposal. The application was dismissed.

Background and parties: Hat & Mitre Plc owned a valuable two-part property let to an associated company Maxwell Stamp Plc, which had ceased paying rent. The company’s directors (including the two applicants and two minority directors) met in December 2018; a majority of the board resolved to appoint joint administrators on 19 December 2018. The applicants (majority shareholders and directors) later applied to challenge the administrators’ appointment as invalid, to terminate the administration and to prevent administrators recouping their costs; alternatively they sought relief under paragraph 74 (unfair harm) and paragraph 81 of Schedule B1.

Nature of the application / relief sought: (i) declaration that the appointment pursuant to paragraph 22 of Schedule B1 was invalid because the directors who authorised it acted for an improper purpose contrary to s.171(b) CA 2006; (ii) termination of the administrators’ appointment; (iii) order requiring administrators to bear costs personally and not recoup them from the company; and (iv) alternative relief under paragraph 74 (administrator acting so as to unfairly harm the applicants) and paragraph 81 (appointment to cease to have effect for improper motive).

Issues framed by the court: Whether the directors who authorised the appointment had power to do so in the circumstances and whether any exercise of power for an improper purpose rendered the appointment a nullity or was a matter for the court's statutory discretions under Schedule B1; whether the company was cash-flow insolvent or likely to become so as at 19 December 2018 (s.123 IA 1986); whether the administrators had acted so as to unfairly harm the applicants under paragraph 74.

Reasoning and findings:

• The court explained that for out-of-court director appointments under paragraph 22 of Schedule B1 the statutory form requires the maker of the declaration to believe the company is or is likely to become unable to pay its debts; the declaration need not be factually correct for the appointment to be effective, but the maker must have a conscientious belief.
• Applying the cash-flow insolvency inquiry (s.123(1)(e) IA 1986 and relevant authority), the judge concluded there were solid grounds for directors to conclude the company was or likely to become unable to pay its debts: negligible cash on hand, suspended rent from the sole tenant (MSP), substantial refurbishment needed to re-let, and no immediate, demonstrable funding available on terms that directors could prudently accept.
• The judge held the statutory scheme of Schedule B1 contemplates that challenges on improper purpose are for the court's discretionary remedies in the statute (for example paragraph 81) rather than automatic nullity of the appointment. He declined to grant the requested declaration of invalidity. Paragraph 81 relief was not considered because the allegation of improper motive was not properly particularised and the relevant directors were not joined; it would be procedurally unfair to determine motive in their absence.
• On paragraph 74 the judge found the administrators had acted within their duties. They reasonably investigated options, sought to broker a consensual solution between majority and minority shareholders, and rightly refused to accept the majority’s funding proposal (the Kebbell/Kitchen proposal) because it lacked sufficient mechanisms for ascertaining legitimate liabilities, provided no viable business plan for post-administration management and risked impairing antecedent claims. The administrators’ attention to minority shareholders’ interests and potential antecedent claims was appropriate where the company was balance-sheet solvent but cash-flow impaired.

Conclusion: The application was dismissed: the court would not treat the appointment as a nullity and would not grant relief under paragraph 74 or paragraph 81 on the material before it.

The application is dismissed. The court held that (i) where an administrator is appointed under Schedule B1 the statutory scheme provides discretionary remedies (eg paragraph 81, paragraph 74) for alleged improper purpose rather than automatic nullity; (ii) on the evidence the directors who authorised the appointment were entitled to conclude the company was or was likely to become unable to pay its debts; (iii) the allegation of improper motive could not properly be determined in the absence of the directors alleged to hold that motive and was insufficiently particularised; and (iv) the administrators had not acted so as to unfairly harm the applicants and the paragraph 74 claim was dismissed.