22nd November 2012

Failure to give notice of intention

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22nd November 2012

Failure to give notice of intention


TO APPOINT AN ADMINISTRATOR – re Eco Link Resources Ltd (in CVL)

Issue

Does the failure by a “junior” holder of a qualifying floating charge (QFCH) to give notice to a prior ranking/senior QFCH of its intention to appoint an administrator make its appointment of an administrator invalid/void?

Background

A QFCH can appoint an administrator to a company by using the out of court process as set out in paragraph 14 of schedule B1 of the Insolvency Act 1986 (IA 1986), provided that the terms of paragraph 15 of the IA 1986 are followed.  Paragraph 15 states that a QFCH must give at least two business days notice of intention to appoint an administrator to any senior/prior ranking QFCH.  Also, rule 2.15 in the Insolvency Rules 1986 identifies the prescribed form of notice of intention to appoint and also provides that the QFCH must file a copy of this form at court at the same time as it is sent to any senior QFCH.

Previous court decisions have taken different views on the extent to which defects in the appointment of an administrator would invalid its appointment.  In certain earlier cases a court has come to the conclusion that it can cure defective administration appointments by declaring the appointment to be retrospectively valid as in RE Assured Logistics Limited and others [2001] EWHC 3029 (Ch).  This approach was also followed in RE Ceart Risk Services Limited [2012] EWHC 1178(Ch), where the High Court held that it should examine the defect in procedure that had occurred on a case by case basis and not follow a “blanket/one size fits all” approach. The approach taken in this case departed from the previous approach that had sought to differentiate between mandatory and discretionary statutory requirements which had meant that a failure to adhere to a mandatory requirement automatically invalidated the act in question.

The facts

Company (X) became insolvent at a time when two of its creditors were QFCHs.  The shareholders of X resolved to put X into a creditors voluntary winding up (CVL) and the members and the creditors then agreed on the appointment of liquidators.  X then became aware that the junior QFCH had purported to appoint administrators by following the out of court procedure for the appointment of an administrator.

Implications

If the appointment of administrators was held to be valid, this would then have prevented the appointment of liquidators as the purported appointment of the administrators had happened first. The liquidators challenged the appointment of administrators on the grounds that the junior QFCH had not given notice of the appointment to the senior QFCH as required under paragraph 15.1 and Rule 215 of the IR1 986.  They also noted that there were various defects in the form of appointment filed at court by the junior QFCH.

Decision

The High Court held that the failure by the junior QFCH to give notice of intention to appoint administrators to the senior QFCH meant that the appointment was invalid.  Therefore there had not been a moratorium which prevented the members from putting the company into CVL.

Conclusion

The Court justified its decision by relying on the fact that as there was a requirement for a junior QFCH to give notice of its intention to appointment administrators, this must have been in order to enable a senior QFCH to make its own administration appointment in priority to the proposed appointment by the junior QFCH. If this was correct, then the court had to hold that an administration appointment made in breach of this invalid. As the junior QFCH’s disregard for procedure for the appointment of administrators was a clear and unequivocal breach of the rules and the court had no in about declaring its appointment invalid.