James McNeil, Mike Pavitt and Lucy Andrews | 27th January 2021

Curable defect or void appointment? An appointing QFCH’s failure to give notice to prior QFCH when appointing administrators

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James McNeil, Mike Pavitt and Lucy Andrews | 27th January 2021

Curable defect or void appointment? An appointing QFCH’s failure to give notice to prior QFCH when appointing administrators


Against a backdrop of conflicting caselaw, the High Court’s recent decision in Re NMUL Realisations Ltd (in administration) held that the appointment of administrators was not void, notwithstanding the failure of the appointing qualifying floating chargeholder (‘QFCH’) to give notice to a prior QFCH of its intention to appoint administrators. In this instance, this failure was deemed a “formal defect” capable of remedy by court order on the basis that no substantial injustice would be caused.

Background

In the event that a QFCH seeks to appoint an administrator via the out-of-court route, the appointing QFCH must first give at least two business days’ written notice of its intention to appoint administrators to any and all of the company’s pre-existing and/or prior ranking QFCHs, pursuant to paragraph 15 of Schedule B1 of the Insolvency Act 1986 (‘the Act’).

The objective here is to allow the prior QFCH time to negotiate, seek assurances, challenge the proposed appointment or make their own administrator appointment; this provision is mirrored – albeit with a slightly lengthier notice period – for out-of-court appointments made by a company or its directors where there are QFCHs, under paragraph 26-27 Schedule B1 of the Act .

The question of whether a failure to give notice of an intention to appoint an administrator to prescribed persons makes the relevant administrator appointment void or simply irregular (and therefore curable by the court) has been the subject of conflicting caselaw. The recent – albeit first instance – judgment in Re Tokenhouse VB Ltd appeared to have partially resolved those conflicts, when ICC Judge Jones held that a failure by directors to give notice to a QFCH of their intention to appoint administrators was not fundamental nor prejudicial but a formal defect or irregularity only, meaning that the subsequent administrator appointment was not automatically invalidated.

Pursuant to Rule 12.64 of the Insolvency Rules (England and Wales) 2016 (‘the Rules’), such an appointment would only be invalid if a person objecting to the appointment could convince the court not only that some substantial injustice had been caused by the formal defect or irregularity, but also that this injustice could not be remedied by a court order (such as an order that the overlooked QFCH’s costs of dealing with the matter be paid by the appointing QFCH or as an expense of the administration).

Re NMUL Realisations Ltd (in administration) (‘NMUL’)

The Facts

Following the financial deterioration of NMUL resulting from its inability to pay sums demanded by a secured lender (the ‘Lender’), the Lender appointed administrators in its capacity as a QFCH. Having made various enquiries, it appeared to the Lender that NMUL had no prior unsatisfied QFCHs and, therefore, it did not serve notice of its intention to appoint administrators on any other party as it appeared to them that the obligation under the Act had not arisen.

However – as is not at all uncommon in our experience – in this case a prior QFCH was subsequently discovered, having been erroneously marked as satisfied by NMUL’s director. The administrators were naturally concerned to ensure that their appointment and any actions taken in reliance upon this were valid, and they therefore applied for an order that their appointment was in fact valid, despite the Lender having failed to give notice to the prior QFCH of its intention to appoint administrators.

Decision

The High Court held that, technically, the Lender should have served its notice of intention to appoint an administrator on the prior QFCH, notwithstanding that the prior qualifying floating charge was marked as satisfied on the NMUL’s charges register, a certificate of satisfaction had been filed with the Registrar of Companies, and the prior QFCH in question had been dissolved (albeit notice should instead have been given to the Government Legal Department as vestee of the dissolved QFCH’s interest, or the Enforcement Receiver).

However, the Lender’s failure to give notice to the prior QFCH in this case was held to be a mere irregularity giving rise to a formal defect in the administrators’ appointment, capable of remedy by court order pursuant to Rule 12.64. In the circumstances, the High Court held there would be no substantial injustice caused in curing the appointment, particularly as it received no objections to the relief sought from the parties on behalf of the prior QFCH nor from the creditors or shareholders of NMUL.

Our comments

The NMUL decision follows the precedent set in Re Tokenhouse and this would appear to be the prevailing direction of travel for the caselaw. However, the High Court was at pains to make clear that the competing rights of various stakeholders in the administrator appointment process must be weighed in a balance which would “depend entirely on the facts of each case” to determine whether “substantial injustice” is caused.

Insolvency Practitioners (‘IPs’), parties who have purchased assets from administrators appointed in such circumstances, and secured lenders will likely be relieved to hear that they can rely on Rule 12.64 if they have made genuine and honest attempts to determine whether other parties are entitled to a notice of intention to appoint administrators – notwithstanding that this decision confirms that QFCHs cannot rely solely on the charges register listed at Companies House. Until comparatively recently, such a defect would have been considered fatal to the appointment and we now have High Court authority which reverses that position and which can be relied upon for the present.

If there is any doubt about a company’s charges register and whether notice of intention should be served, we suggest the QFCH makes additional enquiries and seeks legal advice as soon as possible. In another case, the overlooked QFCH might well object and/or be able to point to some unforeseen substantial injustice as a result of the appointment. Even if such an application can be validated with the consent of the overlooked QFCH and/or a retrospective administration order can be made by consent, the cost, delay and uncertainty involved in such an application should not be underestimated so it will always be better to avoid this scenario if at all possible.

We are able to advise and assist you in relation to any banking, finance and insolvency-related legal issues you may have, including assisting secured lenders with administrator appointments and making applications to court to validate appointments after a formal defect has come to light, and matching your needs to an appropriate IP. Please do not hesitate to get in touch with any member of our Banking and Finance or Corporate Restructuring & Insolvency teams who would be delighted to help.