One of the less publicised amendments made under the Insolvency (England & Wales) Rules 2016 (2016 Rules) was a change to the requirements for the appointment of administrators under Schedule B1 to the Insolvency Act 1986 (Sch B1). The recent case of NJM Clothing Ltd, provides a reminder to those appointing administrators to ensure full compliance with the requirements of the 2016 Rules. There are a number of other similar cases in the wings and so insolvency professionals are urged to take note of this ruling.
As is well known, there are two ways in which administrators can be appointed over a company: via a Court application, which involves a hearing, or by filing certain documents with the Court, known as the “out of Court” route. This latter process can be utilised by the company itself, its directors, or certain secured chargeholders (defined in the Insolvency Act 1986 as qualifying floating charge holders (QFCH)). This article concerns out of Court appointments by the company or its directors.
Prior to the introduction of the 2016 Rules, its predecessor, the Insolvency Rules 1986, contained prescribed forms for use in various insolvency procedures. However, the 2016 Rules abolished all prescribed forms, and instead now stipulate what information the relevant documents are to contain. The policy behind this change was to avoid litigation about defects in the prescribed forms (although given the freedom that parties now enjoy to draft documents, it remains to be seen whether this change will reduce or increase disputes over defective documents).
As far as appointments of administrators by a company or its directors are concerned, the relevant provisions can be found in r.3.24-3.25 of the 2016 Rules, which list what needs to be included in a notice of appointment. In particular, r.3.24(1)(j) and r.3.25(2)(k) both require the “date and time of the appointment” to be recorded.
The case of NJM Clothing Ltd concerned a dispute regarding the date and time on which administrators had been appointed. The relevant timeline of events is as follows:
- On 3 October 2017 the directors resolved to take steps to place the company into administration.
- On 4 October 2017 the directors filed a notice of intention to appoint an administrator (NoI) (as there was a QFCH).
- On 17 October 2017 the directors filed a notice of appointment (NoA).
In respect of the date and time of the appointment, the NoA stated that “the administrators’ appointment was made on the date and time this notice is filed with the court”. The company’s major creditor argued that the appointment was invalid on the basis that the appointment should have already taken place before the NoA was filed, in accordance with the 2016 Rules.
His Honour Judge Klein accepted the creditor’s argument, holding that the necessary steps for appointing administrators by a company or its directors were:
- Firstly, the directors must resolve or decide to appoint;
- Secondly, the directors must give notice of intention to appoint;
- Thirdly, the directors must appoint the administrator; and
- Fourthly, the directors must give notice of the appointment by filing the NoA.
The Judge held that in this case the appointment had not taken place at the 3 October board meeting, as the directors had only resolved to take all steps to effect the appointment of administrators, stopping short of expressly appointing the administrators.
However, despite the fact the NoA stated the appointment took place at the same time as the filing of the NoA, the Court was prepared to accept the appointment had taken place immediately before the NoA was filed. On this basis the Court assumed the reference to the date and time (as opposed to stating the specific date and time) was a defect, albeit it was not so substantial to render the proceedings invalid and rectified the position using its general power under r.12.64.
It now seems to be clear that under the 2016 Rules directors have to make the appointment before filing the NoA with the Court. This is straightforward in cases where only an NoA needs to be filed. Where an NoI has to be filed beforehand (as happened in NJM Clothing Ltd), a sensible process to follow would be for the directors to meet twice: once to approve the NoI and a second time to make the appointment. Whether or not an NoI is required, it will of course be necessary to coordinate the timing of the board meeting with Court opening times in order to minimise the delay in filing the NoA so as to enable the appointment to become effective.
Although the Court in NJM Clothing Ltd upheld the administrators’ appointment, the decision has wider implications. For example, this decision (based on the 2016 Rules, which are subordinate legislation) does not seem to sit well with para 31 of Sch B1 (the primary legislation), which states that the appointment is effective once the NoA is filed with the Court. Additionally, it does not answer the question as to what happens if a winding-up petition or administration order application is made between the directors appointing an administrator and the NoA being filed in the Court.
It would seem this is a fast-moving area, with the recently published judgment in Towcester Racecourse Company Ltd considering the same issue. Whilst the ultimate decision was the same, His Honour Judge Paul Matthews took a different view to His Honour Judge Klein in NJM Clothing Ltd, deciding that an NoA would not be rendered defective if it merely referred to the date and time of filing with the Court.
No doubt this is a fertile territory for future litigation – and we are aware of other similar cases currently before the Courts – so practitioners will have to watch this space for further developments.
If you would like to discuss the above in any more detail please feel free to contact Ali Zaidi – Head of Restructuring & Insolvency, David Fendt – Senior Associate, or any member of our Restructuring & Insolvency Team.
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