Deadlocked directors & shareholders & The Application to Court for an Administration Order

Where there is a deadlock between shareholders and directors of a Company following a shareholder's or director's dispute an Administration Order can be applied for to break the deadlock and resolve the issues. This note explains the background to an illustrative case and how the Application to Court for an Administration Order was drawn up and made

One such case concerned a UK company which for the purposes of this illustration we will call "UK Ltd". Fifty per cent of the shares in UK Ltd were owned by a UK resident who we will call Mr GB. The other fifty per cent of the shares were owned by a European Community holding company which we will call EC Ltd.

There were only two directors of the UK Ltd - Namely Mr GB and a French representative of EC Ltd by the name of Mr F.

The shareholders and directors got into such a dispute that resulted in UK Ltd ceasing to trade but even after an attempt at mediation the shareholders (Mr GB and EC Ltd) could only agree to disagree. The directors (Mr GB and Mr F) equally could also only agree to disagree.

The rule book of UK Ltd was set out in its Articles of Association. Those Articles were based on Table A of the Companies Act 1985 with certain small modifications to that Table of rules. The effect of the rules laid down in the Articles of UK Ltd was that deadlock could not be avoided. In consequence it was not possible to call meetings of shareholders and creditors for the purposes of placing UK Ltd into liquidation.

In consequence of the failure by EC Ltd to mediate Mr GB made an Application to Court for an Administration Order. We are sometimes asked what does the document that constitutes such an Application contain in terms of information and ho can make he Application. The relevant law is found at:

- Section 8 of The Insolvency Act 1986 which in turn refers to relevant "Paragraphs" 11 - 13 of Schedule B1 to the Insolvency Act 1986 and

- Rules 2.1 to 2.14 of The Insolvency Rules 1986.

So what do these "Paragraphs" and "Rules" actually say?

Overview - Paragraphs 11 - 13 of Schedule B1 to The Insolvency Act 1986

- Paragraph 11

"The court may make an administration order in relation to a company only if satisfied -

(a) that the company is or is likely to become unable to pay its debts, and 

(b) that the administration order is reasonably likely to achieve the purpose of administration"

In the illustrative case study the company was unable to pay its debts as the one director / shareholder had frozen the company bank account and none of the creditors could be paid. In addition it appeared that the company's liabilities exceeded its assets as the value of the company's goodwill (represented by databases) was questionable.

- Paragraph 12

"(1) An application to the court for an administration order in respect of a company (an "administration application")  may be made only by -

(a) the company,

(b) the directors of the company

(c) one or more creditors of the company. the [designated officer] for a magistrates' court in the exercise of the power conferred by Section 87A of the Magistrates' Courts Act 1980 (c 43) (fine imposed on company) , or

(d) a combination of the persons listed in paragraphs (a) to (d)"

In the illustrative cae Mr GB was also a creditor of the company. The Application to Court was therefore made by Mr GB in his capacity as a creditor.

(2) "As soon as is reasonably practicable after the making of the administration application the applicant shall notify - 

(a) any person who is appointed as an administrative receiver of the company,

(b) any person who is or may be entitled to appoint an administrative receiver of the company,

(c) any person who is or may be entitled to appoint an administrator of the company under Paragraph14, and

(d) such other persons as may be prescribed.

(3) An administration application may not be withdrawn without the permission of the Court.

(4) In sub paragraph (1) "creditor" includes a contingent creditor and a prospective creditor.

(5) Sub paragraph (1) is without prejudice to section 7 (4) (b)]"

In the illustrative case Mr GB was also a creditor of UK Ltd and therefore had legal capacity to bring forward the administration application under Paragraph 12 (1) (c).

- Paragraph 13

"(1) On hearing an administration application the court may - 

(a) make the administration order sought,

(b) dismiss the application,

(c) adjourn the hearing conditionally or unconditionally,

(d) make an interim order:

(e) treat the application as a winding up petition and make any order which the court could make under Section 125;

(f) make any other order which the court thinks appropriate.

(2) An appointment of an administrator by administration order takes effect - 

(a) at a time appointed by the order, or

(b) where no time is appointed by the order, when the order is made.

(3) An interim order under sub paragraph (1) (d) may, in particular - 

(a) restrict the exercise of a power of the directors or the company;

(b) make provision conferring a discretion on the court or on a person qualified to act as an insolvency practitioner to the company.

(4) This paragraph is subject to paragraph 39."

In the illustrative case the court at the later hearing appointed an administrator to GB Ltd. As a consequence of the powers conferred on the Administrator he then requested the warring parties to submit sealed tender bids for the goodwill. For the sake of transparency those tender bid envelopes were opened in front of the parties on a set time on a set day and the highest bidder purchased the goodwill. The deadlock between the shareholders / directors was thus broken.

The nitty gritty of the Administration Application - Rules 2.1 to Rules 2.14 of The Insolvency Rules 1986

The gist of these Rules is that:

1. The Application to Court for an Administration Order must be on Form 2.1B (a simple three page form that can be downloaded from www.insolvency.gov.uk) and must be accompanied by a witness statement.

2. So what must the witness statement contain? That is detailed in Rule 2.4 which states,

"(1) The administration application shall contain a statement of the applicant's belief that the company is, or is likely to become, unable to pay its debts, except where the applicant is the holder of a qualifying floating charge and is making the application in reliance on paragraph 35.

(2) There shall be attached to the application [a witness statement] in support which shall contain - 

(a) a statement of the company's financial position, specifying (to best of the applicant's knowledge and belief) the company's assets and liabilities, including contingent and prospective liabilities;

(b) details of any security known or believed to be held by creditors of the company, and whether in any case the security is such as to confer powers on the holder to appoint an administrative receiver or to appoint an administrator under paragraph 14. If an administrative receiver has been appointed that fact shall be stated;

(c) details of any insolvency proceedings in relation to the company including any petition that has been presented for the winding up of the company so far as within the immediate knowledge of the applicant;

(d) where it is intended to appoint a number of persons as administrators, details of the matters set out in paragraph 100 (2) regarding the exercise of the function of the administrators; and

(e) any other matters which, in the opinion of those intending to make the application for an administration order, will assist the court in deciding whether to make such an order, so far as lying within the knowledge or belief of the applicant."

(3) & (4) (These further two sub paragraphs are not really relevant to explain what the required witness statement must contain)

In other words the required witness statement is not all that complicated and a wise applicant would create the first draft of the statement himself so as to minimise solicitor's costs.

Filing the Application in Court

Under Insolvency Rule 2.5 when the witness statement and Form 2.1b have been completed they are filed in court (with a sufficient number of copies for service) 

The court then "seals" the application and the time and date of filing is endorsed on the form and statement.

The court fixes a venue for the hearing of the application and this is also endorsed on each copy of the application.

Service of the Application

The topic of "service" is addressed by Insolvency Rule 2.6.The gist of that Rule is, that all interested parties must be served including the company and the proposed administrator.

In other words other parties are only served after the Application has already been filed in court and after a venue, time and date has been fixed for the hearing.

The Hearing

The hearing procedure is covered by Insolvency Rule 2.12. At the hearing the following (and others noted in that Rule)  may appear and make representations to the court:

- The applicant

- The company

- One or more of the directors

- The person proposed to be the administrator

Costs of the Application for an Administration Order

In relation to the costs of the administration application it is important to know of Insolvency Rule 2.12 (3) which states,

"If the court makes an administration order, the costs of the applicant, and of any person whose costs are allowed by the court, are payable as an expense of the administration."

In other words the costs are borne by the company not by the applicant.

From the above note it is apparent that the key document to be prepared in relation to the application to court for an administration order is the witness statement. It is important that that statement is balanced, fair and thoroughly addresses the issues.

If you are a director or shareholder of a company where a dispute between the relevant parties has arisen and the situation is deadlocked it may be possible to apply to court for an Administration Order to be made.  If you would like to discuss the matter with an Insolvency Practitioner please telephone 01326 340 579 to arrange a free face to face or telephone meeting.