Interactive Digital Systems Ltd v VST Enterprises Ltd

An administration order requires proof that the company is, or is likely to become, unable to pay its debts and that administration is reasonably likely to achieve its statutory purpose. Balance-sheet insolvency requires proper allowance for contingent and prospective liabilities, including discounting for contingency and deferment. The burden is on the applicant. The statutory conditions do not compel an order: the court retains a wide discretion. That discretion may take account of the applicant’s genuine interest, the likely benefit to creditors, alternative insolvency proceedings, the company’s funding prospects and the parties’ contractual arrangements. An application brought by reference to a contingent liability which has not arisen is not enforcement of the underlying agreement and may properly be refused where administration would destroy the realistic prospect of payment.

Interactive Digital Systems Ltd applied for an administration order in respect of VST Enterprises Ltd. The applicant was a contingent creditor under a settlement agreement. A substantial payment would become due only if VST received the first £1 million from a proposed fund raise.

The application followed an earlier adjournment before HHJ Halliwell. Petitioners supporting the application had also presented a just and equitable winding-up petition. The principal issues were whether VST was balance-sheet or cash-flow insolvent, whether administration was reasonably likely to achieve its statutory purpose, and whether the court should exercise its discretion to make the order despite the contingent nature of the applicant’s claim and the contractual settlement terms.

1. Jurisdictional conditions. The applicant established VST’s balance-sheet insolvency on the balance of probabilities. In applying BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL plc and others [2013] UKSC 28, the court had to assess the assets and make proper allowance for contingent and prospective liabilities, including deferment. The evidence showed that VST could not reasonably be expected to meet its liabilities when properly assessed. Cash-flow insolvency was not established.
2. The applicant had standing as a contingent creditor. Administration was reasonably likely to achieve a better outcome than winding-up because an administrator would have greater opportunities to realise value from VST’s assets. The relevant threshold was a real prospect, not proof on the balance of probabilities, applying Hammonds v Pro-Fit USA Ltd [2007] EWHC 1998 (Ch).
3. Discretion. The statutory conditions did not require an administration order. The discretion under paragraph 13 of Schedule B1 was wide and general, and the court could consider a multitude of factors, applying Rowntree Ventures Ltd v Oak Property Partners Ltd [2017] EWCA 1944 (Civ).
4. Clause 2 of the settlement agreement gave the applicant’s sole right as enforcement of that agreement. An administration application based on a payment which was already due, or on an accrued breach, could constitute enforcement. An application based on a contingent liability which had not arisen could not. The distinction was legal, not merely commercial. This factor alone justified refusing the order.
5. The order was also refused because the third payment would realistically never fall due if VST entered administration; the applicant had shown no coherent recovery strategy; VST continued to pursue funding; and the allegations concerning management conduct were better investigated in the just and equitable petition. The abuse principles summarised in Maud v Aabar Block Sarl and another [2015] EWHC 1626 (Ch) were not engaged because the applicant had a genuine interest in investigation and possible recovery.

The administration application was dismissed.