an (un)reality check: update on the appointment of
administrators?
In our extended briefing in December we reviewed the
recent cases in which procedural failures have been held to
invalidate the appointment of administrators and tried to draw some
conclusions.
There have now been three further decisions, two of Mr Justice
Norris and one of Mr Justice Warren, in December that provide
important additional guidance on the approach of the court. Whilst
the decisions of Mr Justice Norris are welcome as they demonstrate
that in applying the rules there has to be some recognition of "the
realities of life", the decision of Mr Justice Warren avoids a
pragmatic approach preferring the more restrictive interpretation
that is found in the earlier cases.
In Re Bezier
Acquisitions Ltd (hearing 17 November 2011, decision 12
December 2011), Mr Justice Norris had to consider whether the
requirement to serve notice of the directors' intention to appoint
an administrator on the company was sufficiently satisfied where
the notice was given to an employee of the firm of solicitors
retained by the company to act for it in relation to a "pre-pack"
sale of its business. The judge had little hesitation in deciding
that this was sufficient under the general provisions for service
of insolvency documents that allow documents to be sent to a
party's solicitor, despite there being a specific requirement in
the rules for administration which states that documents should be
delivered to the company's registered office.
Of more interest, the judge in Bezier took the opportunity to
hold as a "separate and independent ground" that he did not
consider that Parliament had decided that a failure strictly to
comply with the rules of service should invalidate the giving of
notice where the notice was given to a properly appointed agent of
the company; in this case its solicitors. In reaching this
conclusion, the judge expressly applied the distinction between
statutory requirements that are "imperative" as compared with those
that are "directory", as explained by the House of Lords in
R v Soneji (2005), which allows the courts to look at the
consequences of non-compliance and ask the question "whether
Parliament intended the outcome to be total invalidity" (Lord Steyn
in Sonejii).
In the second case of Re
Virtualpurple Professional Services Ltd (hearing 16 November
2011, decision 21 December 2011), Mr Justice Norris had to consider
whether, where there is no debentureholder on which notice of
intention needs to be served, notice of intention still needs to be
given to the company or other prescribed persons? In this respect
the court was being asked to follow October 2010 guidance from the
Insolvency Service which had expressed the view that where there is
no debentureholder there is no independent requirement to give
notice to the company or other prescribed persons.
In Virtualpurple the judge was again keen to place the detailed
statutory requirements in context, observing that administration is
intended to facilitate business rescues and that it is "of the
nature of the commencement of an administration that the
formalities will have to be observed under pressure of time and
circumstance". Accordingly, the judge stressed the importance of
placing the need to comply with formal requirements in the context
of the scheme of administration as a whole. Further, in noting the
power of the court to waive defects in the service of documents
where there is an application for the court to appoint an
administrator, he doubted that the rules should be more restrictive
for an out of court appointment.
As in Bezier, the judge was keen that he should not just rely on
a strict interpretation of the text of the rules as not requiring
notice to be given in these circumstances. Rather he wanted to take
the opportunity to review the underlying principles and in doing so
he concluded, at least so far as the requirement to give notice is
concerned, that the "mere use of the imperative does not mean that
the requirement is an absolute condition precedent necessary to
validity. It by no means follows from the use of such language that
any failure to comply with the requirement means that the entire
process is a nullity." The judge reiterated that in such cases it
is necessary to "focus intensely on the consequences of
non-compliance" to determine whether Parliament "intended the
outcome to be total invalidity" and, at least so far as the service
of notices are concerned, he concluded that the answer would appear
to be "no".
In Bezier (this was not mentioned in Virtualpurple) the judge
noted that if he had decided that the appointment was invalid by
reason of a failure to give proper notice to the company then he
was invited to consider making a number of alternative orders that
would address the issue. The "ultimate 'fall back'" in this respect
was a request for an order that if the administrators had not been
validly appointed as such then they should be treated as having
been "appointed as agents for the purpose of effecting a sale of
Bezier's assets". Whilst in the circumstances the judge did not
have to consider an order in these terms, he did not reject the
possibility so it may be something to bear in mind in an
appropriate case.
In reaching his decision in both Bezier and Virtualpurple, the
judge acknowledged that the application was not being made to
correct any mistake by the directors and their advisers but to
"quell any concerns about the validity of the sale by the
administrators" given the "state of the law". Accordingly the judge
thought that this was a "proper case" for the costs of the
application to be paid as an expense of the administration and so
this case should be contrasted with the decision of the same judge
in Re Law for All (Oct 2011) where he refused to make an order that
the directors' costs be paid as an expense of the administration
where the directors had failed to serve a notice of intention on a
debentureholder (see our December 2011 bulletin).
As noted above, the purposive approach of Mr Justice Norris
needs to be contrasted with the decision of Mr Justice Warren in
National Westminster Bank v Msaada (hearing 28 November 2011,
decision 21 December 2011) which represents an independent attempt
in the context of the administration of a partnership (rather than
a company) to reconcile the conflict in the earlier cases. In
reaching his decision, Mr Justice Warren spent a considerable
amount of time dissecting and rejecting the earlier decision in
Hill v Stokes that had been followed by Mr Justice Warren in
preference to the reasoning of the Chancellor in Re
Minmar (see generally our December
briefing and June briefing). Accordingly he held that even
where there was no requirement to give notice to a "qualifying
floating charge holder" (QFCH) there was an independent obligation
to give notice to those prescribed by the rules; namely an
enforcement officer, a person who has distained on company
property, the supervisor of a voluntary arrangement or where
application is made by the directors, the company.
Following Minmar, the judge held that, since there is no period
of notice specified in the legislation in respect of prescribed
persons, a "reasonable period" should be given which should mirror
the minimum of five business days' notice to which a QFCH is
entitled. However in reaching his conclusion that this period of
notice is appropriate whether or not there's a QFCH, the judge
appears to have overlooked that this period is very commonly
abridged (in particular in "pre-pack" situations) with the QFCH
giving its immediate consent to the appointment. In the judge's
view this notice requirement would not undermine "the general
legislative intent of providing a swift implementation of an
administration" because a company could always consent to short
notice given by its directors, whereas enforcement officers and
creditors distraining are only an issue in "a minority of
cases".
In Msaada, having held that the partnership's members had failed
in their obligation to give reasonable notice to the supervisor of
a partnership voluntary arrangement, Mr Justice Warren concluded
that the appointment was invalid. What he did not do was to engage
in any consideration of whether, following Mr Justice Norris's
approach, invalidity would have been intended by Parliament in
these circumstances. In this respect, he may have been influenced
by the fact that in the case that was before him the purported
eleventh hour appointment of an insolvency practitioner who could
have had no realistic opportunity to form a view about the
partnership's affairs appeared to have been part of an attempt by
the members to block the legitimate expectations of the group's
bank as the major creditor. Even though Mr Justice Warren declined
to make an award of costs against the invalidly appointed
administrator (he awarded part of the costs against the members),
he made it clear that in view of the uncertainty caused by Minmar
the "safe and sensible thing" for the insolvency practitioner to
have done was to "ensure that notice was given … to eliminate the
risk of an invalid appointment" (see the subsequent costs judgment
in Msaada,
delivered on 5 January 2010). This therefore seems to be putting
down a marker that insolvency practitioners must check that
formalities have been complied with before they are appointed as
administrators.
Whilst the decisions of Mr Justice Norris might have provided
some comfort where there has been an historic failure to comply
strictly with the procedural requirements for the appointment of
administrators, the previous doubts have now been compounded with
the contradictory stance of Mr Justice Warren. It seems, therefore,
that unless and until the Court of Appeal has an opportunity to
express its view an application to court may still be required in
most, if not all, cases where there has been non-compliance with
the rules. It will then be for the courts to decide if the Minmar
approach of strict compliance is correct or whether some failures
will not invalidate an appointment if that appears to reflect the
intention of Parliament.
On balance it seems that we have taken two steps forward and one
step back so far as this rather sterile debate is concerned and
this has led some commentators to conclude that pending
clarification the most prudent approach is to avoid making
directors' appointments out of court wherever possible pending
further clarification by the courts. Is this further complication
and potential reason for delay really part of the "rescue culture"
that Parliament intended?
