Administration appointments: does failure to give notice under Schedule B1 render the appointment void?

27th October 2020

Strategic Advantage SPC v Tokenhouse VB Limited and others [2020] EWHC 003171 (Ch) is the most recent case in a long line of cases grappling with the consequences of non-compliance of prescribed conditions for the out-of-court appointments of administrators, introduced in September 2003 by Schedule B1 to the Insolvency Act 1986 (Schedule B1). The issue that the Court had to decide was whether a failure to comply with the notice requirements of paragraph 26(1) of Schedule B1 is a fundamental defect which invalidates the appointment of the administrator, or whether it is merely an irregularity that is capable of remedy.

What were the facts?

In 2018, Strategic Advantage SPC (the Applicant) and Tokenhouse VB Limited (the Company) entered into a facility agreement (as subsequently amended by a deed of variation) under which the Applicant made funding available to the Company. The Company’s liabilities under the facility were secured by a fixed and qualifying floating charge created by a debenture, registered at Companies House in August 2018.

In July 2020, the Applicant gave notice to the Company that, due to missed repayment dates, all sums advanced by the Applicant to the Company including interest had become immediately due and payable. At that point the amount outstanding to the Applicant was in excess of £21 million.

When no settlement of the debt was forthcoming, the Applicant proceeded to apply for an administration order in respect of the Company. Following service of the application on the Company, the Applicant was informed that the Company had entered into a moratorium under Part A1 of the Insolvency Act 1986, as introduced by the Corporate Insolvency and Governance Act 2020. Consequently no administration application could be made, no notices of intention to appoint under Schedule B1 could be filed, and no administrator could be appointed under paragraph 14 of Schedule B1.

Following discussions between the Applicant and the monitor appointed in respect of the moratorium, the Applicant agreed to withdraw its administration application. The monitor subsequently ended the moratorium, and the directors of the Company appointed their own administrators without first giving notice of intention to appoint to the Applicant.

The issue

Paragraph 26(1) of Schedule B1 provides that notice of intention to appoint an administrator must be given in the prescribed form and that a person who proposes to make an appointment under paragraph 22 shall give at least five business days’ written notice to any person who is or may be entitled to appoint an administrator of the Company under paragraph 14.

There was no dispute in this case that notice of intention to appoint was not given to the Applicant. The breach of Schedule B1 meant the Applicant did not have the five business days’ notice, which would have enabled it to agree the appointment of the proposed administrators, or to make its own appointment under paragraph 14 of Schedule B1, or (if appropriate) to seek directions from the court including by challenging the right to appoint. The Applicant’s unchallenged evidence was that it would have appointed its own administrators had notice been given.

The Court had to decide whether this failure to comply with paragraph 26(1) of Schedule B1 resulted in the appointment being void.

Decision of the Court

The Court held that the failure to give notice of intention to the Applicant did not mean the appointment by the directors was void. Instead, it held that it was an irregularity that was capable of remedy, if appropriate.

The Court went on to consider whether the irregularity ought to be cured by replacing the administrators appointed by the directors with the administrators proposed by the Applicant.

The Court concluded that it was right to cure the breach of paragraph 26(1) of Schedule B1 by appointing both of the Applicant’s nominees as administrators, taking into account (amongst other things) that:

• the fact that there has been a breach of paragraph 26(1)(a) of Schedule B1 is an important factor with considerable weight;
• the application to cure the breach was made promptly;
• the administrators were of the opinion that replacement will be seamless (one of the Applicant’s nominees having been appointed as a joint administrator to “hold the ring” until the reserved judgment was handed down);
• the administration is most likely to be concerned with investigation and recovery, not a rescue as a going concern.

The judgment contains a very useful analysis of all the case law to date and explores “the tension between: (i) the normal meaning of the words used within those provisions strongly suggesting that non-compliance with their out-of-court procedural requirements should prevent an appointment being effective; and (ii) the fact that this may have a disproportionate result when compared with the prejudice caused by breach and, even more importantly, may adversely affect a company’s ability to achieve the purposes it would have been likely to achieve had the appointment been valid.“.

The judge, ICC Judge Jones, focused on the consequences of non-compliance and whether the failure to give notice of intention was a fundamental breach or an irregularity which had either caused substantial injustice or not. In finding that a failure to give notice of intention to a qualifying floating charge holder is not a fundamental defect, ICC Judge Jones acknowledged that his approach “supersedes” the approach of Honour Judge David Cooke in Re Eco Link Resources Ltd (In CVL) [2012] B.C.C. 731.

WM Comment

ICC Judge Jones stated in his Judgment that it was appropriate to emphasise that his decision does not resolve the conflict of High Court Judge level authority. Instead, it decides which of those decisions is binding upon Judges sitting below High Court Judge level. In those circumstances, ICC Judge Jones suggested that any future case which needs resolution of the conflict should be listed at High Court Judge level. It will be interesting to see whether the approach of ICC Judge Jones will be adopted universally. The approach of ICC Judge Jones (if followed at High Court Judge level) would mean that it is no longer necessary for Administrators to apply for retrospective Court-ordered appointments  to protect their position in circumstances where they have been appointed in breach of paragraph 26(1)(a) of Schedule B1 .