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Insolvent House Builder Forced Into Administration by Creditor

Being placed in administration by a creditor is obviously a traumatic moment for any company but, as a High Court case showed, insolvency professionals are well used to treading the delicate line between rescuing businesses as going concerns and achieving the best result for creditors.

A venture capital company had enjoyed a close business relationship with a house builder, to the extent that they had shareholders and directors in common. Large sums of money were alleged to have flowed from the company to the house builder in the three years before the company was wound up and placed in liquidation.

In those circumstances, the liquidators claimed that the company was owed about £4.9 million by the house builder and sought an administration order against the latter under the Insolvency Act 1986. In resisting the application, the house builder denied that it was insolvent and asserted that it had the benefit of a number of set-offs, counterclaims and credits as against the company.

In granting the order sought, the Court noted that, if the company's claims were ignored, the house builder’s balance sheet showed net assets of about £330,000. However, even after all the alleged set-offs, counterclaims and credits were taken into account, the Court found that that still left a debt to the company in excess of £1 million. The Court was therefore satisfied on the balance of probabilities that a debt in excess of the net asset figure was due and owing to the company. The house builder was thus unable to pay its debts and was balance sheet insolvent.

The house builder had accused the liquidators of seeking an administration order as a tactical means of enforcing payment of disputed debts. However, the Court was satisfied that the making of such an order presented a real prospect of achieving a better result for creditors than would be the case if the house builder were to go straight into liquidation without having first been put into administration. The Court gave directions for the appointment of an independent administrator, or administrators, who would have no conflict of interest.

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