A recent court decision has left us with a Hobson\u2019s choice: should we follow what appears to be a flawed decision or ignore it?<\/p>\n\n\n\n
Why do I say that the decision appears flawed? Can the apparent inconsistencies in the Act\/Rules be explained away? What should we do <\/em>now?<\/p>\n\n\n\n The decision in question, Hobson & Coleman v OAS Realisations (2022) Limited ([2024] EWHC 1491 (Ch)), is available at https:\/\/www.bailii.org\/ew\/cases\/EWHC\/Ch\/2024\/1491.html<\/a>.<\/p>\n\n\n\n The Decision<\/u><\/strong><\/p>\n\n\n\n Firstly, it is worth pointing out that, although there were technically two sides to this application, both were represented by the Joint Administrators\u2019 counsel and evidently they were hoping that the court would ratify their past actions. Therefore, the judge heard no opposing arguments.<\/p>\n\n\n\n On the basis of legal advice, the Joint Administrators had moved a company in ADM to CVL under Para 83 of Schedule B1. They had envisaged that there would be sufficient property only to pay a distribution to HMRC as a secondary preferential creditor and they believed that this met the Para 83(1)(b) criterion: \u201cwhere the administrator of a company thinks\u2026 that a distribution will be made to unsecured creditors of the company (if there are any) which is not a distribution by virtue of section 176A(2)(a)\u201d.<\/p>\n\n\n\n The judge agreed, because in his view: (i) preferential creditors are unsecured creditors per S248; (ii) the context of Para 83(1)(b) did not require \u201cunsecured creditors\u201d to mean non-preferential unsecured creditors; and (iii) in any event the Administrators thought <\/em>they would pay a dividend to unsecureds, which is the Para 83 test (i.e. it does not require administrators to reasonably <\/em>think such a thing).<\/p>\n\n\n\n So we didn\u2019t think this before?<\/u><\/strong><\/p>\n\n\n\n No, we didn\u2019t. While of course prefs are<\/em> unsecured \u2013 because they are not<\/em> secured \u2013 since the start of Schedule B1, it was understood that the IS\/RPBs took the view that \u201cunsecured creditors\u201d in Para 83(1)(b) did <\/em>mean non-preferential unsecureds.<\/p>\n\n\n\n The RPBs\u2019 past view<\/u><\/strong><\/p>\n\n\n\n This led to many (even in my limited experience) occasions where IPs were challenged by the RPB for moving an ADM to CVL when it did not appear reasonable to have thought at the time of the move that there would be a non-preferential non-prescribed part dividend. Those challenges led many of those IPs to seek legal advice, which sometimes assisted the IP to continue the CVL notwithstanding the alleged breach of Para 83 but sometimes resulted in IPs having to put their hands in their own pockets to ensure that there were <\/em>sufficient funds for a non-pref non-prescribed part dividend.<\/p>\n\n\n\n Am I bitter at the pivot?<\/u><\/strong><\/p>\n\n\n\n No, of course not (and I hasten to add that I was not the compliance reviewer referred to in the decision, although I probably would have made much the same observations). I have had to roll with more material pivots than this, such as Brumark\/Spectrum Plus and Paramount Airways.<\/p>\n\n\n\n I am strongly in favour of anything that eases seemingly unreasonable ADM restrictions. I have never understood why a CVL should not be a possible exit route in any ADM where there are not compelling reasons for the ADM to continue.<\/p>\n\n\n\n But the problem is that the decision is problematic.<\/p>\n\n\n\n Why did <\/em>we think that a CVL move was restricted to non-pref non-prescribed part dividends?<\/u><\/strong><\/p>\n\n\n\n Probably because in other areas of the Act\/Rules \u201cunsecured creditors\u201d surely does <\/em>mean non-pref unsecureds.<\/p>\n\n\n\n The 2010 Rules<\/u><\/strong><\/p>\n\n\n\n Changes to the 1986 Rules introduced in 2010 reinforced the perception that, where the Rules referred to unsecured creditors, they obviously meant non-pref unsecureds. <\/p>\n\n\n\n For example, old R4.126(1E)(xii) required final CVL reports to state (my emphasis):<\/p>\n\n\n\n \u201cthe aggregate numbers of preferential and unsecured creditors<\/strong> set out separately\u201d <\/p>\n<\/blockquote>\n\n\n\n The phrase \u201cpreferential and unsecured creditors\u201d appeared repeatedly in these 2010 amendments.<\/p>\n\n\n\n Of course, we no longer have those<\/em> Rules, but others are still with us.<\/p>\n\n\n\n The Para 52(1)(b) nonsense<\/u><\/strong><\/p>\n\n\n\n For example, Para 52(1)(b) says that an administrator need not seek a decision on their Proposals where the Proposals include a statement:<\/p>\n\n\n\n \u201cthat the administrator thinks\u2026 that the company has insufficient property to enable a distribution to be made to unsecured creditors other than by virtue of section 176A(2)(a)\u201d<\/p>\n<\/blockquote>\n\n\n\n If \u201cunsecured creditors\u201d here were to include prefs, then it would mean that you would not make a Para 52(1)(b) statement where you thought there would be a pref distribution. But R18.18(4)(b) says that, where a Para 52(1)(b) statement has been made, fee approval (absent a committee) is sought as follows:<\/p>\n\n\n\n \u201cif the administrator has made or intends to make a distribution to preferential creditors\u2026 (ii) a decision of the preferential creditors in a decision procedure\u201d<\/p>\n<\/blockquote>\n\n\n\n So if Para 52(1)(b) were viewed through Hobson, then R18.18(4)(b) would never <\/em>apply, would it? Except, I suppose, if you didn\u2019t think you\u2019d make a pref distribution when you produced your Proposals but then you did when you came to ask for fee approval. But that\u2019s nonsense, isn\u2019t it?<\/p>\n\n\n\n The same goes for R3.52(3), Para 78(2) and Para 98(3) regarding seeking approval for pre-ADM costs, an extension and discharge. You would practically never seek approval from prefs under these provisions, because you would never have made a Para 52(1)(b) statement where you thought you\u2019d be paying a pref distribution.<\/p>\n\n\n\n Is it possible for \u201cunsecured creditors\u201d to mean different things in different places?<\/u><\/strong><\/p>\n\n\n\n Well, yes. HHJ Matthews said as much when he considered the wording of S248: \u201cSo, unless the context otherwise requires, an ‘unsecured creditor’ is a creditor who does not<\/em> hold “in respect of his debt a security over property of the company”\u201d.<\/p>\n\n\n\n This means we needs to consider the context, which could affect the meaning of unsecured creditors.<\/p>\n\n\n\n That\u2019s pretty unsatisfactory, isn\u2019t it? You\u2019d think that the person\/group drafting both Para 52 and Para 83 could have settled on consistent language, wouldn\u2019t you? Alternatively, I\u2019d have thought that Para 52 could be said to be <\/em>part of the context of Para 83, which could lead to a view contrary to HHJ Matthews\u2019.<\/p>\n\n\n\n Also, look again at the wording of Para 52(1)(b) and Para 83(1)(b). They both use almost exactly the same phrase:<\/em><\/p>\n\n\n\n Are we seriously <\/em>living in a world where the distributions in these two paragraphs are measured in completely different ways?<\/p>\n\n\n\n An alternative view \u2013 that \u201cunsecured creditors\u201d in Para 52(1)(b) means the same as the Hobson view of Para 83(1)(b), so casting doubt on many many Proposals and their consequent fee approvals etc. \u2013 doesn\u2019t bear thinking about!<\/p>\n\n\n\n There is another strong reason to question the robustness of the Hobson view.<\/p>\n\n\n\n The killer blow?<\/u><\/strong><\/p>\n\n\n\n The Explanatory Notes to the Enterprise Act 2002, which introduced Schedule B1, include (paragraph 700, my emphasis):<\/p>\n\n\n\n \u201cParagraph 83\u00a0allows the administrator to end the administration and convert the proceedings into a voluntary winding-up. This will occur if the preferential and secured creditors have been paid<\/strong> all they are likely to receive (or such has been set aside for them), and there is money available for the unsecured creditors<\/strong>.\u201d<\/p>\n<\/blockquote>\n\n\n\n That appears pretty cut-and-dried to me and shows that the drafter of the Explanatory Notes intended \u201cunsecured creditors\u201d in Para 83 to mean non-pref <\/em>unsecureds. <\/p>\n\n\n\n Had HHJ Matthews been aware of this Explanatory Note, I would be surprised if his decision would have been what it was.<\/p>\n\n\n\n Other reasons for concern<\/u><\/strong><\/p>\n\n\n\n I think the above are more than enough reasons to distrust the decision. However, I have other reasons, including: the policy objective behind the amendment to Para 83(1)(b) that coincided with a tenuously corresponding change to Para 65; and which creditors move into the frame of fee-approval following a move to CVL that appears unaligned with a policy that this should fall to the creditors with interest.<\/p>\n\n\n\n What are the RPBs\u2019 views now?<\/u><\/strong><\/p>\n\n\n\n I have heard from an RPB staff member that they (and some others) would not have significant concerns if an ADM were moved to CVL in similar circumstances to the Hobson case. Their primary concerns are that IPs: (i) weigh up the costs of the options available to them, e.g. having regard to the cost of a court-ordered extension, and (ii) ensure that their reasons for moving to CVL (or not, where this may be an option) are fully documented for the file.<\/p>\n\n\n\n I think this is, not only a very sensible approach, but also in reality the only reasonable one for the RPBs to take in view of the decision. Of course, this is only the view of individual RPB staff members. It would be risky to take it as read that this would be shared by all <\/em>RPB staff and regulatory committees.<\/p>\n\n\n\n Given the RPBs\u2019 past activities in challenging ADM moves to CVL, I feel it would be extremely valuable if the RPBs \u2013 and\/or perhaps the InsS in a Dear IP \u2013 were to publish something on these lines to give this approach some authority. Such an approach need not have significant regard for any reasons for doubting the robustness of the Hobson decision \u2013 it is what it is. But rather, such a statement would simply give IPs comfort that they could proceed in principle without fear that their RPB might challenge them on this point sometime in the future.<\/p>\n\n\n\n Where does this leave us?<\/u><\/strong><\/p>\n\n\n\n Of the people that I\u2019ve spoken to, many of the compliance managers are very nervous about the decision, whereas many of the IPs are more than happy to follow it. They consider it is unlikely to be challenged \u2013 with which I agree, given that at least some of the RPB staff seem content for IPs to follow it \u2013 and they seem to share my view that blocking a move to CVL never did make practical sense.<\/p>\n\n\n\n Of course, there remains the risk that a judge on another day will take a contrary view. However, given that the application of Para 83 depends on what the Administrator \u201cthinks\u201d, it seems unlikely to me that any future decision of this kind will render such Administrators\u2019 thinking perverse. Thus. I think it likely that any future decision would only have prospective effect.<\/p>\n\n\n\n So yes, on balance, I think it\u2019s safe to follow this decision provided that the Administrator\u2019s thinking is written down contemporaneously. But of course, I am not a solicitor and we all get things wrong some of the time.<\/p>\n\n\n\n My thanks go to some of the R3 GTC members (whose views are not necessarily reflected here) and to the RPB staff member, who all have helped me explore these issues more deeply and finally to commit pen to paper.<\/p>\n","protected":false},"excerpt":{"rendered":" A recent court decision has left us with a Hobson\u2019s choice: should we follow what appears to be a flawed decision or ignore it? Why do I say that the decision appears flawed? Can the apparent inconsistencies in the Act\/Rules … Continue reading \n
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