Further developments in insolvency appointments

Philip Jones explains that recent cases have confirmed the need for insolvency office holders, and those appointing them, to take great care to ensure that the appointments are valid.

As was described in our article Invalid Liquidation Appointments the appointment of an insolvency office holder can be fraught with difficulties.

During 2012 a number of further cases have been decided which highlight problems when appointing administrators and the effect these may have on the validity of the appointment.

Philip Jones reviews these cases and explains when an appointment of administrators is a “nullity” or simply “defective”, emphasising the need to take care when making such appointments.

Invalid or defective?

When considering any failure to comply with the precise requirements for appointing administrators, a fundamental question is whether the consequence of the failure is that no appointment ever took effect (a nullity) or that an appointment did take effect but is defective.

If the purported appointment is a nullity then the court can do nothing to validate it. On the other hand if an appointment is simply defective, rule 7.55 of the Insolvency Rules provides that insolvency proceedings are not invalidated by any formal defect or irregularity, unless the court considers that substantial injustice has been caused which cannot be remedied by any court order. The rule is relevant to an administration appointment because once such an appointment has been made (even if it is defective), “insolvency proceedings” within the meaning of rule 7.55 will have begun. The appointment cannot therefore be invalidated, except where the requirements of the rule are not satisfied.

It has not been easy to identify which failures make the appointment of administrators a nullity and which mean that it is regarded as defective. Some of the significant failures to date and the effect of those failures are outlined below.

Appointments which were regarded as a nullity include:

• National Westminster Bank v Msaada Group- where members of an insolvent partnership failed to give notice to the partnership of their intention to appoint administrators to it.
• Minmar (929) Ltd v Khalastchi- where directors’ failure to notify the relevant company of their intention to appoint administrators to it made the appointment a nullity (where the company had not granted any qualifying floating charge over its assets and undertaking). It is worth noting, however, that the court expressed this view when giving its decision but the case was actually decided on other grounds.
• Re Eco Link Resources Ltd – where there was failure by the holder of a qualifying floating charge to give the required notice to a prior ranking holder of such a charge of its intention to appoint administrators to the relevant company.

Appointments which were regarded as defective include:

• Peter Lloyd Bootes and others v Ceart Risk Services Ltd- where there was a failure to obtain the prior written consent of the Financial Services Authority (FSA) to the appointment, where the relevant company was regulated by the FSA and therefore the company or its directors should not have appointed administrators without the FSA’s consent.
• Re Bezier Acquisitions Ltd – where directors of a company failed to notify the company of their intention to appoint administrators before making the appointment (where the company had not granted any qualifying floating charge over its assets and undertaking). Whilst it remains unclear whether or not in such a situation it is necessary to give notice to the company (several cases having reached a different conclusion in relation to this issue), the decision in the case was reached on the assumption that giving such a notice was required. In another case (Minmar) referred to above, the court decided the case on another ground but felt that the directors’ failure to notify the company made the administrators appointment a nullity.
• Re Virtualpurple Professional Services Ltd – where there was a failure by directors of a company to give notice to it of their intention to appoint administrators over it (where company had not granted any qualifying floating charge over its assets and undertaking).
• Re Euromaster Ltd- where notice of the appointment of administrators was filed at court after the end of the 10 business day time limit from giving notice of intention to appoint within which the Insolvency Rules require that it should be filed.
• Re Assured Logistics Solutions Ltd and others- where directors failed to notify the company of their intention to appoint administrators over it (where company had not granted any qualifying floating charge over its assets and undertaking).
• Re BXL Services- Failure by a company’s directors to notify it of their intention to appoint administrators (where the company had not granted any qualifying floating charge over its assets and undertaking).

Notices to the company

As can be seen from the above, a particular focus of the courts in recent times has concerned whether or not the directors of a company appointing administrators using the “out-of-court” appointment process must give notice to the relevant company of their intention to make an appointment and, if there is such an obligation, the effect of non-compliance with it.

As can be seen above, some of those cases have decided that notice must be given and that failure to do so will make any subsequent appointment invalid. Others have decided that even if notice should be given, failure to do so will not make the subsequent appointment of administrators invalid but creates a defective appointment which can be validated.

The latest case is the Re BXL Services decision, which indicates that failure to comply with the formal requirements of an out-of-court administration appointment is not necessarily fatal to that appointment. Instead the court has an inherent discretion to decide that the appointment is valid.

The BXL decision suggests that it is settled law that not giving notice of an intended appointment to the relevant company does not invalidate the appointment. In reaching that conclusion it assumes that such a notice is needed. A note of caution may be required. BXL assumes that it had previously been held by another court (in the Ceart case) that if such a notice is required failure to give it will not invalidate the appointment. If that were correct then BXL would resolve the position as it would be clear that an out-of-court appointment by a company or its directors is valid even if notice of intention is not given to the company. Unfortunately BXL assumes that the decision in Virtualpurple, which did decide that there was no requirement to give notice of intention to the company where that company had not granted any qualifying floating charge, was followed in other cases. The problem here is that other cases which have been decided relating to this area did not reach that decision. Instead all they decided was what the effect should be if there were an obligation to give notice but that obligation was not complied with, not that there was no such obligation.

Whilst it may be a conservative view, in a case where no notice has been given, it may therefore be prudent to apply to court to seek validation of the relevant appointment rather than simply relying upon Re BXL Services and assuming that the failure to give notice will not invalidate the appointment.

Comment

It might be argued that, in certain decisions, the courts have indicated a desire to adopt a pragmatic approach to the question of whether an appointment is to be regarded as defective or a complete nullity. Whilst there are some unanswered questions, the decision in Re BXL Services certainly assists in relation to this both in terms of the specific issue concerning the effect of a failure to give notice of intention to appoint administrators to the relevant company and, perhaps, suggesting a continuation of a more pragmatic approach by the courts. Having said this, it relates to one issue namely the effect of failure to give notice of intention to appoint and its precise effect in relation to that issue may not be known until a higher court reaches a decision about it.

Overall the cases emphasise the need to take care when insolvency office holder appointments are made, in particular administration appointments.

Where administration is concerned, the most prudent approach may be to obtain a court approved appointment, particularly if the appointment is likely to prove contentious. Otherwise administrators and their appointors should take great care to try to ensure that all requirements of an out-of-court appointment are satisfied to avoid the cost and time in seeking a court’s confirmation of validity.