Turning back the clock: retrospective administration orders

The recent case of James William Stares v Elgin Legal Ltd [2016] EWHC 2523 (Ch) is notable as it considers whether a former administrator can apply for an administration order and, if such an order can have retrospective effect.

Elgin Legal Ltd (Elgin) was a company incorporated by a solicitor that focused primarily on legal aid work. An Administrator was appointed over Elgin on 29 August 2013 with the primary purpose of engaging former employees to reconcile Elgin’s files so debts could be recovered from the Legal Aid Agency (LAA). This was considered likely to achieve a better result for creditors than if Elgin were wound up, as the Solicitors Regulatory Authority would have required delivery up of Elgin’s client files if it entered liquidation, thereby rendering it more difficult for the office holder to pursue the LAA claims.

Instead of expiring after the usual 12 month period, the administration was extended by creditors in August 2014 for 6 months and again by the Court until 4pm on 1 March 2016 (Expiry Date). Owing to an administrative error, the Administrator’s appointment expired unintentionally on the Expiry Date and so the (now former) Administrator sought an administration order appointing him as Elgin’s Administrator.

The applicant’s standing

The first issue to be considered was whether Elgin’s former Administrator had stand to make the application. Mr Justice Snowden held the Administrator was entitled to make an application in his capacity as a creditor for his unpaid fees. The rationale for this was that Schedule B1 to the Insolvency Act 1986 (Schedule B1), which governs the law of administrations, did not allow former administrators to make administration order applications. However, relying on Re Lafayette Electronics Europe Ltd [2007] BCC 890, an administrator could be a creditor, which is one of the classes of people who are able to apply for administration orders.

Were the grounds for an administration order met?

The Court then had to consider whether to make an administration order. In doing so, the Judge determined the relevant criteria (namely that Elgin was insolvent and an administration order was likely to achieve a better result for creditors than if the company were wound up) were met and an administration order should be made.

Retrospective effect?

The final issue was whether the order should take effect from the date of the hearing (25 August 2016) or be backdated to the Expiry Date so there would be no intervening period of time during which no administrator was in office.

In considering the authorities and the facts of the case, Mr Justice Snowden declined to make a retrospective order. The Learned Judge considered that if he made such an order it would have an unequal and potentially unfair effect on Elgin’s creditors. In particular, he observed that if a retrospective order was made, those creditors whose debts attracted interest would lose out on interest accrued between the Expiry Date and the August hearing.

Comment

A few interesting points arise from this case. Firstly, although Mr Justice Snowden did not have to determine the question of whether Schedule B1 permits retrospective administration orders, he doubted the Court had such a power. The Judge cited cases such as Re G-Tech Construction Ltd [2007] BPIR 1275 which allowed for such a possibility, but emphasised that the judgment in G-Tech was an incomplete draft which had not been approved by the author before he died, and in any event did not refer to previous authorities which supported the general proposition that retrospective orders should only be made if the underlying legislation contained “very strong and explicit words” permitting them. It therefore appears as though retrospective administration orders will remain the subject of judicial debate until an appropriate case finally determines the issue.

Secondly, it could be said that by claiming to be a creditor for professional fees, and then subsequently being appointed as the Administrator with power to adjudicate upon that claim, a conflict of interest arises. It is not clear whether argument was heard on this point during the Elgin hearing and the judgment does not address this point. However, Mr Justice Snowden referred to Lafayette Electronics, where a conflict issue was debated and appropriate safeguards were inserted into the resulting order. It may therefore be the Elgin administration order dealt with the possibility of a conflict arising, but it is certainly something to which administrators will need to be alive when claiming to be creditors for the purposes of an administration or liquidation appointment.

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 – Associate, or any member of our Restructuring & Insolvency Team.

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