Appointing an administrator of an FCA or PRA regulated entity under paragraph 22 of Schedule B1 of the Insolvency Act 1986: avoiding the pitfalls

This legal update was co-authored by Nathan Webb of Forum Chambers.

Introduction

All insolvency practitioners will be aware that out of court appointments of administrators can be problematic for a plethora of reasons. However, there is an area of regulation which can present particular challenges: where the company in question is or has been FCA or PRA regulated. This can be a problematic matter for administrators and their legal advisors because even the directors of companies may not be aware that the company is, or has been, FCA or PRA regulated.

In a recent case we encountered just such a situation, with the FCA only contacting the administrator in question some six weeks after the appointment to explain that the company was, in fact, an ‘appointed representative’ such that the administrator’s appointment required the FCA’s consent in order to take effect. This was in circumstances where the usual pre-appointment checks on the FCA’s website did not appear to indicate that the company in question was FCA regulated.

The Financial Services and Markets Act 2000 (“FSMA 2000”)

Sections 362(1) and 362A(1) of the FMSA 2000 provide that s.362A FSMA 2000 applies to, broadly speaking, companies which are or have been authorised persons, are or have been appointed representatives and companies which are or have been carrying on a regulated activity in contravention of the general prohibition. These terms and their applicability are explained in detail in the FSMA 2000 generally and the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.

Where section 362A of FSMA 2000 applies and the directors or the company are seeking to appoint an administrator under paragraph 22 of Schedule B1 of the Insolvency Act 1986 (“IA 1986”), the consent of the appropriate regulator (the FCA or the PRA as appropriate) is required under section 362A(2) FSMA 2000.

Sections 362A(3) and (4) of the FSMA 2000 provide that the consent must be in writing and must be filed with the Court along with the notice of intention to appoint, or where there is no notice of intention to appoint, with the notice of appointment.

The consequences of non-compliance with the FSMA 2000

The leading case in this area is Re A.R.G. (Mansfield) Ltd [2020] BCC 641, in which directors had sought to appoint administrators under paragraph 22 of Schedule B1 of the IA 1986 without appreciating that the company was FCA regulated and that, accordingly, its consent was required. In this case there had been a search of the FCA register but it transpired that the company was on the register under a slightly different name to its legal name.

In a detailed judgment, HHJ Davis-White QC took the view (although it was strictly obiter, as he at [89] approached the matter on the basis it was at least arguable that there was no power to appoint and that a retrospective administration order would be required) at [90] and [119] that there was no power to appoint the administrators without FCA consent and that the appointment was a nullity which could only be cured by a retrospective administration order.

Other important conclusions reached in the judgment include the following:

1. The FCA consent needs to be obtained in order for the appointment to be effective (at [94]) and retrospective consent is insufficient (at [96]).
2. Where a notice of intention to appoint was not required, the written consent has to be filed at Court with the notice of appointment (at [98]).
3. Where a notice of intention to appoint is required, it might be sufficient for the written consent to be filed with the notice of appointment (at [99] and [107]).
4. The written consent has to be obtained and lodged at the latest by (and with) filing of the notice of appointment (at [107]).

In that case the Judge considered at [124] that it was appropriate to make a retrospective administration order on the basis that that there was no specific prejudice to anyone, the administration was and had been beneficial to creditors as a whole and because the breach was inadvertent.

Practical considerations

In our case, neither the administrator nor the company’s sole director were aware at the time of the administrator’s out-of-court appointment under paragraph 22 of Schedule B1 of the IA 1986 on 6 December 2023 (the “Original Appointment”) that the company in question was an appointed representative. In light of the Mansfield decision, immediate steps were taken to procure the FCA’s consent, which was received a few days later but not given retrospectively. An application was therefore made seeking, among other things, a retrospective administration order pursuant to paragraphs 12 and 13 of Schedule B1 IA 1986 together with an order extending the prescribed time period for the administrator to issue his proposals to creditors under paragraph 49 of Schedule B1 of the IA 1986 for up to seven days.

Unusually in this case, the application was made under paragraph 12(1)(c) on the basis that the purported administrator was a creditor of the company. Reliance was placed on the decisions in Re Elgin Legal Ltd [2017] BCC 43 and Bennett v Bosco Investments Ltd [2019] BCC 303, in both of which a person who had been in office as administrator had been treated as a creditor where there were time costs properly incurred while they were in office.

At the hearing of the application Chief ICCJ Briggs was not satisfied, notwithstanding correspondence having been provided to the administrator by the FCA, that the company was in fact FCA regulated, with the result that he was content to make a declaration that the Original Appointment was valid.

He was also content to make a retrospective administration order in the alternative running from the date and time of the Original Appointment. He was prepared to make such an order on the basis the administrator (specifically his service company) was a creditor in respect of time costs, albeit in contrast with Re Elgin and Bosco Investments those time costs did not (on the alternative basis that a retrospective administration order was required) arise from a period in which the administrator had been in office as a matter of law.

It is also worth noting that with in-court applications for an administration order under paragraph 12 of Schedule B1 of the IA 1986 in circumstances where the company is subject to a creditors’ winding up petition but is nonetheless FCA or PRA regulated, whilst consent to the administrator’s appointment is not strictly required under section 362A of the FSMA 2000, it is nonetheless prudent to give the FCA or PRA notice of the application.

In these circumstances, under section 371 of the FSMA 2000, the FCA or PRA would be entitled to appear at the hearing of the winding up petition and the usual order made in these applications results in the dismissal of the petition with the petitioner’s costs payable as an expense of the administration. However, it seems that very often petitioning creditors do not give notice of the petition to the FCA or PRA.

This is particularly relevant with applications for a Validation Order under section 127 of the IA 1986 where under paragraph 9.11.2 of the Practice Direction: Insolvency Proceedings, the applicant must give notice to any person entitled to receive a copy of the pursuant to rule 7.9 of the Insolvency (England and Wales) Rules 2016 (“IR 2016”).

Rule 7.9(4) IR 2016 provides that:

‘If either the Financial Conduct Authority or Prudential Regulation Authority is entitled to be heard at the hearing of the petition in accordance with section 371 of the Financial Services and Markets Act 2000, the petitioner must deliver a copy of the petition to the Financial Conduct Authority or Prudential Regulation Authority (as appropriate)’.

Conclusion

Our recent experience illustrates that the Courts continue to take a pragmatic approach to resolving issues arising out of potentially defective out-of-court administration appointments.

If you are an insolvency practitioner, a preliminary step before taking an appointment will be to ascertain whether the company is or has been FCA or PRA regulated. If it is or has been then written consent should be obtained in advance of the appointment. If there is any doubt then enquiries should be made with the FCA or PRA as appropriate. If, however, the company appears not to have been regulated but the FCA or PRA considers that it is, then the situation can be resolved via either:

1. A declaration to the effect that the company is and was not FCA or PRA regulated; or
2. A retrospective administration order.

If it transpires that an application for a retrospective administration order is required, the insolvency practitioner will need to act promptly as such an order can only made with a year’s retrospectivity: see Re Frontsouth (Witham) Ltd [2011] BCC 635, per Henderson J at [27].

Lastly, insolvency practitioners should note that from 2 April 2024, the FCA’s web form is the best way for regulated firms and insolvency practitioners to notify the FCA of an insolvency event that has occurred or will occur in the foreseeable future.

You can access the new firm notification (SUP 15) web form on the FCA’s website here: Firm notification form (SUP 15) | FCA.

Our Restructuring and Insolvency team has considerable experience in advising businesses, directors and individuals facing financial distress. Should you require any assistance, please contact any one of our partners in the Restructuring & Insolvency team. We are experts in this field and are here to help.

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