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Amit Gupta obtains permission for administrators to make a distribution before all creditor claims are resolved, together with pre-emptive relief pursuant to s.1157 CA 2006

Amit was recently instructed in an application where the administrators of a company sought permission to make a distribution to an unsecured creditor ahead of at least one other unsecured creditor. The administrators were at one of the “big 4” accountancy firms and were intending to make a slightly unusual exit out of the administration, coupled with prospective relief pursuant to s.1157 of the Companies Act 2006.

The largest creditors by far were pension schemes with a pre-administration deficit of over £130M. The group structure meant that the pension providers had security over shares in subsidiary companies, but even after realisation of that security there would be a shortfall of over £80M. There were also significant trade creditors.

The administrators’ proposals (approved by the trade creditors and the pension schemes) provided for:

  1. The security over the shares to be released in exchange for the net proceeds of sale being paid to the pension schemes (save for £250,000 retained by the administrators, which comprised the proposed distribution); and
  2. All of the trader creditors to be paid pursuant to a deed poll that was entered into between OldCo and NewCo, whereby NewCo would meet legitimate creditor claims. As an assurance, NewCo had entered into a covenant to pay, which was backed by security over assets of NewCo.

Creditor-claims had been advertised for in the London Gazette and as far as the administrators could surmise from the Company’s books and records, all of the Company’s creditors had been paid (except for the pension providers and one other).

There was an outstanding claim by the EC, which was not quite resolved (there being a dispute as to a calculation method but with an open offer to pay in full having been made by NewCo) – this dispute was caught by the terms of the covenant. If the EC claim was not met by NewCo then the EC would have to prove in OldCo’s administration. It was anticipated that the EC dispute would be resolved however by the time of the hearing it had not been resolved. NewCo had a strong track record of paying trade creditor claims.

Theoretically the pension schemes could still have proved in the Company’s administration for the unsecured balance (even though the Company had no realistic way to meet any such proof), which might become more of a reality if the EC dispute was not paid by NewCo; this brought the £250,000 retention into focus and whether the proposed distribution ought to be authorised.

HHJ David Cooke, sitting in the High Court, held that NewCo’s covenant to pay trade creditors could be released (albeit the EC claim had not been met) and that the accompanying security could also be released. He also approved the distribution to the pension schemes even though (a) there was a small prospect other creditors might come forward in the future with claims and (b) where there was no prior court order time-limiting creditor claims. The Judge found there was such a remote prospect of the EC dispute not being resolved or of there being other trade creditors, that the covenant and the security could be released and that the distribution be made.

In addition, HHJ Cooke granted the administrators prospective relief to carry out the above acts pursuant to s.1157 CA 2006, thereby holding the Administrators fault-free in advance of their conduct. Whilst such relief is possible, it is rarely granted. On this occasion, the court took the view that it was appropriate to grant the pre-emptory relief sought because the administrators were trying to bring the administration to an end, they were acting properly and that there was unlikely to be an adverse effect on any trade creditors. Furthermore, NewCo had already met every legitimate creditor claim, totalling over £11M and there was no reason to suppose it could not or would not meet this claim. Finally it was appropriate that the retention held by the administrators, which had been held for 3 years, be paid to the pension providers and that the administration be brought to an end.

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