Key considerations on creditor applications for an administration order: useful guidance from the High Court

Newbury Venture Capital Limited (in liquidation) v Berkshire Homes (Northern) Limited [2018] EWHC 938 (Ch)

This case concerned a rare contested creditor application brought by Newbury Venture Capital Limited (“Newbury”) for an administration order against Berkshire Homes (Northern) Limited (“BHNL”). While the factual matrix surrounding the application is largely irrelevant, the key issue was that BHNL disputed Newbury’s status as creditor (due to various disputes and counterclaims) and therefore Newbury’s ability to make an application for an administration order at all under paragraph 12(1)(c) of Schedule B1 of the Insolvency Act 1986 (“Sch B1”).

High Court commentary

In particular, BHNL’s arguments centred around two principles, which arose from the fact that it maintained that its counterclaims entirely extinguished the debt owed to Newbury:

1. the creditor status of Newbury - i.e. whether Newbury had standing to make the application; and
2. the requirement to prove insolvency - i.e. it claimed it was not insolvent.

The High Court held that in order to have locus standi to make an application under paragraph 12(1) of Sch B1, the applicant must merely be ‘one or more of the creditors of the company’. The judge dismissed the argument that an applicant cannot have standing as creditor where there is a dispute or alleged counterclaim regarding the debt. Instead, he held that the Court has jurisdiction to deal with an administration application without having to resolve any dispute over the debt; but the dispute might be a factor when exercising its discretion whether actually to make the administration order.

However,  the Court stressed that the applicant creditor must also demonstrate that the respondent debtor is or is likely to become unable to pay its debts for the purpose of paragraph 11 of Sch B1.  In a case where the disputed debt in question is the deciding factor as to whether or not the company is or is likely to become insolvent (as was the case here), the Court will need to be convinced that, on the balance of probabilities, the debt is due; the burden of proof is on the creditor. Where, however, the debt is stated in the statutory accounts of the respondent debtor but the respondent alleges the existence of counterclaims which extinguish that debt, this burden will shift to the respondent. Therefore the Court found that it was for BHNL to prove to its satisfaction that the inter-company balance due to Newbury, which was shown in its own accounts, ought to be extinguished because of the alleged counterclaims.

The Decision

On the facts, the Court found that:

• Newbury had established a valid claim as creditor of BHNL and that BHNL had not provided sufficient evidence to extinguish the debt because of its counterclaims - Newbury therefore had standing to make the application for an administration order in relation to BHNL.

• As a result of Newbury’s claim, BHNL was unable to pay its debts (due to the lack of probity regarding the claimed extinguishing counterclaims) and was therefore insolvent.

Accordingly, the Court granted the administration order sought. This is an interesting case which provides helpful clarification on a number of key issues arising in relation to creditor administration applications: namely locus and creditor status, together with the required standard of proof in relation to disputed debts and clarifying which party has the requisite burden of proof in establishing the insolvency of the debtor company.