Where a company has granted a qualifying floating charge (QFC) and it, or its directors, wish to appoint administrators, then notice of intention to appoint administrators must be given to the qualifying floating charge holder (QFCH).
Paragraph 26(1) of Schedule B1 of the Insolvency Act 1986 requires a person who proposes to make an administration appointment to give at least five business days’ notice to:
- any person who is, or may be, entitled to appoint an administrative receiver of the company, and
- any person who is, or may be, entitled to appoint an administrator of the company under paragraph 14 of Schedule B1.
Paragraph 28(1) of Schedule B1 states that an “appointment may not be made” by the company or directors if notice has not been given to a QFCH. As such, a QFCH should give 5 business days’ notice of the directors’ intention to appoint an administrator. This is to allow them the opportunity to agree the appointment of the proposed administrator or to make its own appointment.
In Re Tokenhouse VB Limited [2020] EWHC 3171 (Ch), the directors took steps to appoint administrators through the out-of-court process but they did not provide the QFCH with notice of intention to appoint administrators. The QFCH therefore applied to Court challenging the validity of the appointment.
The issues which the Court was asked to decide were:
- Whether the failure to give notice to the QFCH meant that the appointment by the directors of the Administrators was automatically void; and if not,
- Whether the breach should be remedied by the appointment of those whom the QFCH wished to appoint.
It was submitted on behalf of the QFCH that the purpose of the notice of intention is to give a QFCH the opportunity to appoint their own administrator or administrative receiver. A breach prevents that from happening which cannot be remedied. Furthermore, case law has established that an appointment is a nullity if there is a fundamental defect and it was said that failure to give notice was a fundamental defect.
It was also submitted on behalf of the QFCH that, alternatively, if the loss of opportunity to appoint administrators is an irregularity then it should be remedied by allowing the QFCH to make its own appointment or the Court should do so.
It was submitted on behalf of the Joint Administrators that the approach of Mr Justice Norris in Re Euromaster [2012] EWHC 2356 (Ch) should be applied. A distinction should be drawn between the provisions which state when the power to appoint arises and procedural requirements which need to happen in order for the appointment to be made. If a breach of the latter were to happen, then the appointment will be irregular rather than void.
The decision
It was concluded that it could not have been the intention of Parliament that failure to give notice to a QFCH would mean that the administration was invalid and incurable. That is because, if the process had to start again, then it will likely be very detrimental because the purpose of administration may no longer be achievable, the chargeholder’s recovery would likely be significantly reduced and it would leave the former “administrators” having misrepresented that the company was in administration giving rise to an number of issues for them and resulting in whatever steps that had taken place up until that point having to be unravelled. It was held that the resulting “limited prejudice” caused to the QFCH should not outrank the seriousness of the purpose of administration not being achieved if the appointment were found to be void.
The Court concluded that the breach should be treated as an irregularity which allowed the QFCH to apply to Court for discretionary relief. That is because automatic invalidity would be at odds with the need for there to be an administration and the intention of a QFCH to appoint an administrator.
In support of the above, the Judge also commented on the fact that Administrators must act in the interests of the creditors as a whole (subject to their functions being to make a distribution to one or more secured or preferential creditor), they must be licensed insolvency practitioners, independent and are officers of the Court. They should not have formed an allegiance to the appointee and are concerned to fulfil their statutory duties and functions objectively. Furthermore, the Court has overall supervisory control of administrations and directions can be sought to cure a breach once it is discovered.
With regard to whether the Court should appoint an administrator of the QFCH’s choosing, the Court was required to consider all relevant circumstances including whether replacement will be conducive to the operation of the administration and the commercial rationale for the relief sought.
At a previous hearing, the Court appointed an administrator which had been proposed by the QFCH as well as appointing one of the original administrators. The Judge then ordered that the original administrator be replaced with a second nominee of the QFCH in order to cure the breach by leaving the two appointees proposed by the QFCH as administrators.
