Invalid Liquidation Appointments

Philip Jones explains that a recent case emphasises the need for insolvency office holders to take great care to ensure that their appointments are valid.

The appointment of an insolvency office holder and ensuring their continuance in office can involve a wide range of technical issues. Holders of a qualifying floating charge who wish to appoint an administrator must ensure that their security is valid and has become enforceable. Where a Creditors Voluntary Liquidation is involved meetings of shareholders and creditors must be properly held to ensure the valid appointment of the liquidator. In administration, the administration ends automatically one year after it begins unless it is properly extended.

In the recent past, a number of cases have been decided which focus upon specific issues which can arise in relation to effecting or maintaining appointments in different insolvency procedures. One such case was Minmar(929) Ltd v Khalastchi and another.In that case a failure by the directors of the relevant company to hold a board meeting in accordance with its constitution was held to invalidate the subsequent appointment of administrators. The further failure to give notice to the company of the directors’ intention to appoint an administrator was also felt to be incorrect, though not crucial to the decision about invalidity.

Philip Jones explains how a recent case dealing with the invalid appointment of a Liquidator in relation to a company emphasises the need to take care when dealing with insolvency appointments.

Case notes: Ineffective appointment of liquidator

In Re Business Dream Ltd the High Court decided that the purported appointment of a liquidator was invalid because of the continuing effects of a Notice of Intention to Appoint Administrators given by directors of Business Dream Ltd(Business Dream).

Business Dream got into financial difficulties. Its directors decided to put the company into administration using the out of court procedure available to directors rather than making an application to court for an administrator to be appointed. As the company had granted a debenture over its assets and undertaking to Elavon Financial Services Ltd (Elavon), in order to do so the directors needed to give a Notice of Intention to Appoint Administrators to Elavon. The directors therefore filed such a notice at court and served it on Elavon.

At the time at which the directors filed their Notice of Intention to Appoint and served it on Elavon they were unaware that HM Revenue & Customs had issued a winding up petition against Business Dream.

After issuing their Notice of Intention to Appoint, the directors decided not to put the company into administration. Instead, they decided that Creditors Voluntary Liquidation was the appropriate route to pursue and held a meeting of the shareholders and resolved to appoint Christopher Brooksbank as liquidator.

Mr Brooksbank arranged a sale of assets to a company connected to one of the directors. Unless the court agrees, a liquidator cannot exercise their powers until the liquidator’s appointment is agreed by a creditors’ meeting. However the meeting of Business Dream’s creditors to consider this had not taken place and would not take place for some time after the shareholder resolution which purported to appoint Mr Brooksbank as liquidator. Mr Brooksbank therefore applied to court for an order authorising him to exercise his power (as the apparent liquidator of the company) to sell the relevant assets.

The problem

The filing at court of the Notice of Intention to Appoint by the directors of Business Dream had the effect that an interim moratorium in favour of the company began. The moratorium prevented creditors enforcing their claims against the company. It also prevented the passing of a resolution by the shareholders to enter into Creditors Voluntary Liquidation. So if the filing of the Notice of Intention to Appoint by the directors had created that moratorium, the subsequent passing of the resolution by the shareholders to enter into Creditors Voluntary Liquidation would be ineffective.

Where a winding-up petition has been issued against a company an appointment of an administrator by that company, or its directors, is not possible other than by applying to court. This meant that the out of court procedure used by the directors when they initially decided to pursue an administration process was not actually available to them (though they were unaware of this at the time at which they began to use that process). Mr Brooksbank therefore argued that because a winding up petition had been issued against Business Dream when the directors decided to appoint administrators (albeit that the directors were unaware of this), the Notice of Intention to Appoint was ineffective. This meant that no interim moratorium applied and that the shareholders could pass a valid resolution appointing Mr Brooksbank as its liquidator.

The court’s decision

The court decided that whilst an out of court appointment of an administrator by directors of a company is prevented by a winding up petition being issued against that company, that is a different issue to giving a Notice of Intention to Appoint an Administrator.

The court decided that directors of a company could issue a Notice of Intention to Appoint even if they were aware of a winding up petition having been issued against the company. On occasion, this might be an abuse of the court process but if that were the case the court had discretion to strike out the notice.In this case, the directors had no knowledge of the winding up petition when they issued the Notice of Intention to Appoint. As a result the court had no discretion to strike out the notice.

The overall result of the above was that the Notice of Intention to Appoint given in this case was valid. This meant that the interim moratorium had taken effect and that the passing of a resolution by the shareholders of Business Dream to enter into Creditors Voluntary Liquidation was ineffective. As a result, the appointment of Mr Brooksbank as liquidator was also ineffective.

Consideration was given as to whether Mr Brooksbank’s appointment could have been made valid if the Notice of Intention to Appoint were struck out. However the court decided that once the interim moratorium took effect the subsequent appointment of Mr Brooksbank as liquidator was invalid, come what may. This could not be remedied by any subsequent removal of the Notice of Intention to Appoint.

Comment

The case emphasises the need to take care when insolvency office holder appointments are made. Some unreported cases have, apparently, taken a different view than that reached in this case and allowed the voluntary liquidation to have effect. Notwithstanding this, the decision appears to be technically correct. Some might argue that by deciding to move to a liquidation process, Business Dream was clearly demonstrating a decision by it not to rely on the moratorium in its favour created by the filing at court of the Notice of Intention to Appoint. If that argument were correct, the prohibition on the passing of a resolution by the shareholders to enter into Creditors Voluntary Liquidation would not apply. If the company had made a decision to waive the moratorium, it should have applied to the court to withdraw the Notice of Intention to Appoint or, more properly, the directors should have done so as they filed the notice. Alternatively the directors could have allowed the moratorium to lapse by waiting for the ten business day period to end after which the moratorium ceases if no appointment of an Administrator has been made. As neither of those approaches had been taken the moratorium remained in force and the appointment of Mr Brooksbank was ineffective.