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20th October 2011

Curing defective administration appointments


20th October 2011

Curing defective administration appointments

On 26 September 2011 Norris J handed down his judgment in the matter of Care Matters Partnership Ltd (in administration) [2011] EWHC 2543 (Ch)] sub nom Solomons and Defty v Cheal and others. This case deals with the increasingly common phenomenon of administrators applying to court for retrospective administration orders as a means of dealing with perceived defects in their appointment. The recent run on cases to which Norris J refers in his judgment has been spurred by the controversial decision in Re Minmar (929) Ltd [2011] EWHC 1159 (Ch) from April 2011. In that case the Chancellor had thrown the insolvency profession into doubt as to the validity of a directors’ appointment by tearing up the received wisdom in cases where unanimity of directors and/or the adoption of a precise and correct procedure according to the company’s constitution had not been fully observed, and also where notices of intention to appoint had not been given to other interested parties such as the company itself, enforcement officers and any party who has distrained on the company or its property.

In Care Matters, Norris J warned that in considering an application for a retrospective administration order, the question of whether an administration order should be made at all should not be confused or conflated with the question of when the administration order takes effect and observed that on the somewhat complex facts of the instant case the only useful purpose of making a retrospective order would have been to allow the administrators to draw their fees, which he said was not in itself a proper basis for an administration order. Until this decision, it had been relatively readily accepted that a retrospective administration order was appropriate to cure a perceived defect in an historic appointment, for example to validate a sale entered into by the administrators at a time when (they subsequently discovered) their appointment was in doubt. Indeed, in our experience this was a very helpful jurisdiction to cure defects such as failure to file notices of appointment within the requisite timeframe after the relevant statutory declaration had been made by a director (see Insolvency Rule 2.16(3). The jurisdiction of course still exists, but this decision will cause prospective applicants a real dilemma as to whether their particular case, or their particular defect is remediable in this way, and may lead to harmful results; for example an administrator may conclude that the risk involved in the application does not merit the additional cost and choose to walk away instead, or the purchaser may decline to continue deferred consideration payments arguing that his title is in jeopardy due to the fact that the SPA was signed by someone whose appointment may be a nullity.

Recognising that the authorities in this difficult area are conflicting, Norris J unhesitatingly gave permission to appeal his decision in Care Matters to a higher court. Unfortunately, however, as we have now learned, the applicants have decided not to appeal given the unproductive costs they have already incurred.

Until these points – including the outstanding points and statutory inconsistencies noted from the Minmar decision – are examined more fully in the courts and/or new legislation enacted to deal with these issues, there will remain an unsatisfactory level of uncertainty in this area. The moral of the story in the meantime from the insolvency practitioner’s perspective (although of course directors will also benefit from comfort in this regard, particularly if they are looking to buy a business back from administrators) is clearly to be absolutely sure of your appointments, taking legal advice and/or representation at the appointment phase if there is any doubt. Beyond that, as soon as the validity of an appointment is called into question, an application must be made very promptly (although not in such a rush as the ducks are not in a row evidentially), and whilst the purpose of administration still subsists. That guidance will, however, be cold comfort to those whose existing appointments are already in doubt where the necessary steps in the administration have already been taken.

Readers may also like to consider this decision alongside the interesting findings of Lord Glennie in the Scottish Court of Session case of Grant Estates Ltd (in administration) sub nom Ruari Grant Stephen Petitioner [2011] CSOH 119, in which it was found that in the case of a qualifying floating charge holder appointment, the directors of the company retained a residual power to bring proceedings to challenge the appointment of administrators. Until this authority, it was unclear that this standing existed, as it does in other forms of formal insolvency proceeding. It would seem that the validity of administration appointments is under the spotlight as never before and the need for caution when making out of court appointments never greater.

If you require any further information on the points raised in this blog or wish to discuss any issues within it, please contact me.

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