Defective Administration Appointments; Heading Towards Consistency

Applications dealing with defects in the appointment of administrators continue without the final answer the insolvency professions have been waiting for, but a measure of consistency of approach appears to be emerging – for the time being.

In Wessely & Anor (Zoom UK Distribution Ltd) v Rubra & Ors [2021] EWHC 800 (Ch) the administrators had been appointed out of court by the company’s directors on 5 May 2020 under para 22(2) Sch B1 Insolvency Act 1986. Under para 26(1)(b) they should have given at least five business days’ written notice of their proposal to appoint to the debenture holder. Para 28(1) has the effect that an appointment under para 22 may not be made unless, inter alia, the notice period has expired or each person to whom it has been given has consented in writing to the making of the appointment. In this case the directors had failed to give the requisite written notice, a fact of which the administrators only became aware on 25 August 2020.

As is well known, Sch B1 does not specify the consequences of a failure to comply with para 26(1)(b). The issue before the court was, then, whether the directors’ failure to give notice to Lloyds, the debenture holder, made the appointment of administrators void or merely defective and therefore capable of cure.

Counsel for the administrators submitted that, although there were conflicting first instance decisions, none was binding on the court; but, she contended, the most recent High Court and Insolvency and Companies Court decisions showed a consistent approach in favour of the view that a defective appointment was to be treated as such and not as void.

Stuart Isaacs QC, sitting as a deputy High Court judge, noted the review by HHJ Davis-White QC of the conflicting authorities on failure to comply with the requirements of Sch B1 in Re A.R.G. (Mansfield) Limited [2020] BCC 641 and the judgment of Arnold J in Re Ceart Risk Services Ltd [2013] Bus LR 116, but ultimately lighted on the decision of ICC Judge Jones in Re Tokenhouse VB Ltd (formerly VAT Bridge 7 Ltd) [2021] BCC 107 which he noted that, although not binding, was “The only decision which is directly in point.” In that case, the qualifying floating charge holder who had not been given the requisite notice under paragraph 26(1)(b) had contended that the wording of the provisions of Sch B1 made clear that the appointment of administrators could not have been effective; the administrators had submitted that Norris J’s approach in Re Euromaster Ltd was to be preferred and a distinction drawn between provisions that defined the circumstances in which the power to appoint arose and provisions which were procedural in character. If there was no power to appoint, then the appointment was a nullity, but if there was a breach of a procedural requirement, the appointment would tend to be treated as irregular. Norris J’s statement that paras 22-25 Sch B1 related to the power to appoint and paras 26-32 related to the procedural requirements meant that the answer to the issue was that the appointment was valid even though it suffered from procedural irregularity.

ICC Judge Jones’s decision had been followed by Deputy ICC Judge Frith in Re NMUL Realisations Limited [2021] EWHC 94 (Ch), in which it was held that the failure of a debenture holder to serve notice of intention to appoint administrators on the holder of a prior security under para 15 Sch B1 was an irregularity capable of remedy under r. 12.64 Insolvency (England and Wales) Rules 2016 meaning the administrators’ appointment was not void.

Stuart Isaacs QC judge accepted counsel for the administrators’ submission that the court should follow the Tokenhouse approach as (1) consistent with Norris J’s decision in Euromaster Ltd as well as the recent approach taken in Re NMUL Realisations Limited, consistency being desirable until the issue could be resolved by the Court of Appeal; (2) proportionate: a qualifying floating charge holder who was not given the requisite notice would still be able to apply to the court for the defect to be cured and have an administrator of its choice put in place but the key consideration was for there to be an administration in the first place; and (3) removing the need for the parties to resort to an application for retrospective appointments. The deputy judge concluded that no substantial injustice had arisen in the case before him; accordingly the administrators were entitled to declarations that their appointment on 5 May 2020 had been valid as were their acts since that date.

Readers may care to note an article on this topic (written before judgment in Zoom UK Distribution Ltd was handed down) by Rachael Earle, counsel for the administrators in the case, in Recovery, Spring 2021, pp 10-12.