In a judgement handed down on 29 June 2017, the Court of Appeal overturned the decision of His Honour Judge Purle QC in the case of Rowntree Ventures Limited v Oak Property Partners Limited.
Howes Percival had represented a number of creditors of two companies, Oak Property Partners Limited and Oak Forest Partnership Limited. The creditors were numerous individuals and companies that had invested in rooms in two hotels. The rooms were sold as investments based upon a guaranteed 10% return on investment and also with a guarantee that the sellers would repurchase the hotel rooms after 4 or 5 years at the sale price. The hotels failed to generate the promised 10% return and the investors served notice requiring the sellers to repurchase their rooms. The maturity date on the notices had not yet arrived, however fearing that their position may be prejudiced significantly if pro-active action was not taken, the creditors applied to Court for administration orders in respect of the companies.
In evidence, the sellers acknowledged that they did not have the funds to repurchase the rooms when the notices matured and would be entirely dependent upon re-selling the rooms in order to generate the funds to repay the investors. The investors’ evidence was that, as the guaranteed 10% return on investment had not been achieved and could no longer be offered (the return in reality being closer to 2%), the re-sale value of the rooms was negligible and, in all likelihood, there was no re-sale market for the rooms in any event.
His Honour Judge Purle QC accepted that the companies were, or were likely to become, insolvent as a result of their inability to honour the notices served on them requiring them to repurchase the rooms. The Judge also accepted that the statutory purpose of the administration could be achieved if administrators were appointed. The Judge, however, in reliance on his general discretion, rejected the administration applications on the grounds that the applications were, in his view, premature and that it was possible that property prices could increase and that the rooms could therefore possibly increase in value before the notices matured. The Judge therefore felt that there was a prospect of a successful turnaround of the companies which justified exercising his discretion to reject the applications.
The decision was subject to considerable commentary due to the fact that this was the first reported occasion that the judicial discretion on administration applications had been exercised in this manner. In all previous reported cases where the Judge had exercised discretion on an administration application, the discretion had been exercised to wind up the company rather than grant an administration order.
The investors appealed to the Court of Appeal and the appeal was heard on 29 June 2017. As an aside, on granting permission to appeal (as an application for permission to appeal had to be issued as the Judge had rejected the oral application for permission to appeal at the original hearing), the Court of Appeal had recognised that it was unusual for an exercise of judicial discretion to be appealed but stated that the decision of His Honour Judge Purle QC was highly speculative as to “border on the Micawberism” (which those of you versed in classic literature will recognise as a reference to a character in the Charles Dickens novel, David Copperfield, who continually holds blind faith that “something will turn up”).
The Court of Appeal, on hearing the appeal, accepted that His Honour Judge Purle QC had not exercised his discretion correctly. The Judge had attached too much weight to the speculative prospect of turnaround. The Court of Appeal also held that, if they had been asked to exercise discretion in the circumstances before the Judge, they would have exercised that discretion in favour of granting the administration order as there were no factors pointing against it once the two statutory pre-conditions of obtaining an administration order were met.
Accordingly, the order of His Honour Judge Purle QC was set aside. Due to the fact that both companies had already been placed into voluntary liquidation by the directors prior to the hearing of the appeal, the Court of Appeal was unable to grant administration orders in this case but the costs orders were overturned and the legal precedent reversed.
In summary, the decision shows that, where the two statutory limbs of applying for an administration order are established, namely insolvency and statutory purpose of the administration, it should ordinarily follow that an administration order will be granted unless there are strong factors mitigating against granting an administration order. In this case, there were no strong reasons mitigating against granting an administration order and, in particular, the speculative prospect of turnaround was clearly an insufficient basis upon which to exercise that discretion.
Matthew Collings QC of Maitland Chambers was instructed by Howes Percival LLP to argue the appeal on behalf of the Appellants.