England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY

		Birmingham Civil Justice Centre 33 Bull Street Birmingham B4 6DS
		23rd September 2011

JUDGE PURLE:

1. These are applications by, in the one case, the sole director of a company, and, in the other case, the directors of a company for declarations as to the validity of out of court appointments of an administrator made by them. Alternatively, retrospective administration orders are sought, relying upon the practice first adopted in Re G-Tech Construction Limited [2007] BPIR 1275.
2. There is in this case no person entitled to appoint an Administrator by virtue of a qualifying floating charge, or an administrative receiver.
3. The appointments in question were made under paragraph 22 of Schedule B1 of the Insolvency Act 1986, as amended ("Schedule B1"). Paragraph 22 reads as follows:

"22(1) A company may appoint an administrator.

22(2) The directors of a company may appoint an administrator."

4. As has been pointed out by Mr Justice Henderson recently in Re Frontsouth (Witham) Limited [2011] EWHC 1668 (Ch), in the majority of cases adopting standard Articles, the only persons who may act for the company are the directors. It is, therefore, somewhat puzzling as to why paragraph 22 makes a distinction between the company and its directors. By way of contrast, in the parallel provisions concerning an application to the court by the directors, the application, once made, is treated as the company's: Rule 2,3(2) of the Insolvency Rules 1986,
5. There may be cases in which under the constitutional documents of a company there is power in a shareholders' meeting to exercise certain functions of management, including the power to put the company into administration. I cannot myself recall off-hand any instance where, in the case of a trading company, I have seen such a division of powers, but it remains a possibility. There is also the power of the company in general meeting to pass a special resolution amending the articles to give the shareholders power to make the appointment.
6. In the present cases, it is accepted that the appointments were made by the director or directors acting as such. It is not suggested that the appointments took effect as company appointments.
7. Paragraph 26(1) of schedule B1 provides as follows:

"A person who proposes to make an appointment under paragraph 22 shall give at least five business days' written notice to

(a) any person who is or may be entitled to appoint an administrative receiver of the company;

(b) any person who is or may be entitled to appoint an administrator of the company under paragraph 14.

8. The evident purpose of that provision is to give to the charge holder the opportunity to get in first and appoint either an administrative receiver or an administrator (as may be appropriate) of the charge holder's choice. As already mentioned, there was no such charge holder in either of the cases before me.
9. Paragraph 26(2) of Schedule B1 provides:

"A person who proposes to make an appointment under paragraph 22 shall also give such notice as may be prescribed to such other persons as may be prescribed."

10. The word "also" suggests (at least to me) that the requirement to give notice to other persons is additional, and therefore only arises if paragraph 26(1) is first engaged. Where, therefore, there is no relevant charge holder, there is no requirement to give notice under paragraph 26(1) so that the additional requirement "also" to give notice under paragraph 26(2) does not arise either.
11. At the time of the passing of the Enterprise Act 2002 (by which Schedule B1 was added) no other persons had been prescribed. They are now prescribed by Rule 2.20(2) of the Insolvency Rules 1986 as amended ("the Rules"), which provides:

"A copy of the notice to appoint must, in addition to the persons specified in paragraph 26 [i.e., of Schedule B1] be given to –

(a) any enforcement officer who, to the knowledge of the person giving the notice, is charged with execution or other legal process against the company;

(b) any person who, to the knowledge of the person giving the notice, has distrained against the company or its property;

(c) any supervisor of a voluntary arrangement under Part I of the Act; and

(d) the company, if the company is not intending to make the appointment."

12. Paragraph 28(1) of Schedule B1 provides:

"An appointment may not be made under paragraph 22 unless the person who makes the appointment has complied with any requirements of paragraphs 26 and 27 and –

(a) the period of notice specified in paragraph 26(1) has expired, or

(b) each person to whom notice has been given under paragraph

26(1) has consented in writing to the making of the appointment."

13. Paragraph 27 relates to the filing of the notice of intention to appoint and other documents. Consideration of the prescribed form confirms that the relevant notice is to be given to the relevant charge holder. There is no prescribed form for other persons, and paragraph 28 makes no reference to any period of notice expiring as regards other prescribed persons. No period of notice is in fact laid down for such persons. Nor does paragraph 28 provide for their consent. These features indicate to me the correctness of a construction limiting the obligation to give notice "also" to the persons mentioned (but not then prescribed) in paragraph 26(2) to cases where notice of intention to appoint is required under paragraph 26(1). The reference to a "copy" in Rule 2.20(2) also suggests that, where no notice of intention to appoint is required by paragraph 26(1), there is nothing which can be copied and given "in addition" to the persons therein mentioned.
14. If it is correct that the requirement to give additional notice under paragraph 26(2) only arises where paragraph 26(1) applies, it must follow that paragraph 26 does not apply at all in the present case. This appears, at first sight, to be confirmed by paragraph 30, which opens by providing as follows:

"In a case in which no person is entitled to notice of intention to appoint under paragraph 26(1) (and paragraph 28 therefore does not apply) – " the remaining provisions do not matter for present purposes.

15. This conclusion (if correct) does no violence to the language of Rule 2.20(2) as the reference to the persons specified in paragraph 26 requires the court first to construe that paragraph. If paragraph 26(2) applies only where paragraph 26(1) is first engaged, there are no specified persons falling within Rule 2.20(2). No rewriting of the Rule is therefore necessary.
16. However, most recently the Chancellor in Minmar (929) v Khalastchi [2011] EWHC 1159 (Ch) reached a different conclusion, explaining obiter that whilst the draftsman of Schedule B1 may well have assumed that paragraph 28 would not apply except where paragraph 26(1) applied, the Rules, when they came to be made, had a different effect. Notice on the additional specified persons, in that case the company itself, was required. He presumed, in the absence of a specified period of notice, that a reasonable period of notice was required.
17. That case was decided without reference to an earlier decision of Judge McCahill QC in Hill v Stokes Plc [2011] BCC 473, which had not then been reported. Notice of intention to appoint had been given to a qualifying charge holder. This was not therefore a case where the directors could make an immediate out of court appointment. There were, in addition, distrainers who were not sent a copy of the notice of intention to appoint. Judge McCahill QC, for a number of reasons, held that the omission to give such notice did not invalidate the appointment.
18. His first ground was that the first reference in paragraph 28\(1) to paragraph 26 was a mistake, and should have been only a reference to 26(1), and he drew comfort in reaching that conclusion from the fact that, as he put it, "the very process of prescribing demonstrates that the draftsman has used paragraph 26, when he meant paragraph 26(1)". The broader reference to paragraph 26 as including those who were subsequently prescribed thus brought in an element of circularity. He also gave a number of other reasons, all of which are set out in his judgment, and which it is pointless for me to repeat today.
19. This is not a case where notice of intention to appoint was required to be given to a qualifying charge holder. On the construction of paragraph 26 that I have been considering, it is not necessary to find that paragraph 28 is mistakenly expressed, as, on that construction, it is correctly expressed if paragraph 26(2) only applies if paragraph 26(1) is first engaged. The correctness of the first ground for Judge McCahill QC's decision does not therefore directly arise for decision before me today. It remains of significance, however, as, if he is right, the obiter ruling of the Chancellor in Minmar must be wrong.
20. There was a second ground for Judge McCahill QC's decision, which is directly relevant to what I have to decide. He held that, even if paragraph 28 required a copy of the notice to be given to the distrainer, it was clear from the statutory context that failure to do so was not "fatal to the appointment". If that is correct, the present appointments, even if notice to the company was required, were not necessarily invalid. It seems to me that, in the absence of binding contrary authority, I should follow Judge McCahill QC's decision on this point.
21. So far as Minmar is concerned, as I have said, the Chancellor decided, obiter, that service upon the company of a notice of intention to appoint was required in the case of an out of court appointment by the directors, even where there was no qualifying charge holder. He considered that there were irreconcilable inconsistencies in Schedule B1 and the Rules, and understandably took refuge in what he considered to be the clear words of Rule 2.20(2). The main point in that case, however, was that the directors did not act as a body, and that, although there is provision in Rule 105 for "the directors" to include a majority, they must still act in accordance with the company's constitution. There was no meeting of the board, for which all the directors had been given notice. Moreover, the appointment was deliberately made behind the backs of some of the directors. In those circumstances the board had never properly resolved to do anything, and the company had been deprived of a considered decision of the Board acting as such.
22. In my judgment I need not decide today who is correct as between the Chancellor and Judge McCahill on the point of construction of paragraph 28. On the facts before me, all the prescribed documents were filed and an apparently valid appointment was made. Although no prior notice was given to the company, there was in each case a board meeting and all the directors took part in the process. Nothing underhand occurred and the companies (through their boards) were fully aware of and approved of the appointments. In addition, the directors in the one case were also the shareholders, and in the other case the sole director directly or indirectly owned all the shares.
23. Rule 2.23(1) provides: "The notice of appointment for the purposes of an appointment under paragraph 22 shall be in Form 2.9B or Form 2.10B, as appropriate".
24. Form 2.9B is the form for an appointment where a notice of intention to appoint has been issued, and Form 2.10B is the form of notice for the appointment of an Administrator by a company or its directors, where a notice of intention to appoint has not been issued. The prescribed forms, therefore, appear to presuppose that no notice of intention to appoint need be given in the case of an appointment by the company or by the directors, where notice of intention to appoint upon a qualifying charge holder is not required. In the present cases, Form 2.10B was used. This was appropriate, as no notice of intention to appoint was in fact given.
25. Rule 2.25 provides: "Where a notice of intention to appoint an administrator has not been given, the notice of appointment shall be accompanied by the documents specified in Rule 2.20(2)". The relevant document (for present purposes) is "a record of the decision of the directors". That requirement was complied with here, there having been proper resolutions of the directors. The court also also sealed and issued notices of appointment as required by Rule 2.26.
26. Going back to schedule B1, paragraph 29 (read in conjunction with paragraph 30 in a case in which there is no qualifying charge holder) provides for the notice of appointment and various other documents to be filed, including a statutory declaration that (amongst other things) the appointment is in accordance with Schedule B1. Penalties are imposed in the case of a false statutory declaration that the maker does not reasonably believe to be true. These provisions were complied with in this case. If the statutory declarations were inaccurate in treating the failure to give notice to the companies as immaterial, the sanction lies within the penalty regime. I should add that there is no suggestion that the declarants in this case did not believe their declarations to be true. Given the obscurity of the statutory drafting, and the sharp differences of approach between the Chancellor and Judge McCahill QC, it would be difficult to argue that the declarants did not reasonably believe their declarations to be true.
27. Returning to the Rules, Rule 2.23(2) provides that copies of the notice filed with the court shall be accompanied by (a) the Administrator's written statement in Form 2.2B; (b) the written consent of all those persons to whom notice was given in accordance with paragraph 26(1) unless the period of notice set out in paragraph 26(1) has expired (there were no such people here); and (c) a statement of the matters provided for in paragraph 100(2) [of Schedule B1] where applicable. Paragraph 100(2) relates to joint appointments, and has no application in either of the present cases. The only relevant requirement under this Rule, therefore, was to file the administrator's written consent. That requirement was complied with.
28. To summarise: in the present cases, the board in each case acted constitutionally, so that there was a valid resolution to make the appointments, and the appropriate prescribed forms and accompanying documents were filed. On the face of it, therefore, the essential requirements were satisfied. No formal notice of intention to appoint was however given to the company. I find it difficult to believe that Parliament can have intended every defect in the process of appointment, however unimportant, to result in necessary invalidity. This conclusion is supported not only by Hill v Stokes, but by observations of Proudman J in Kaupthing Capital Partners [2011] BCC 338 at paragraph 49. Whilst the Learned Judge in that case ruled that the use of the wrong form was fatal, she did not regard as fatal to the appointment the existence of errors in the form. In the present cases, the correct forms were used, because, whether or not notices of intention to appoint should have been given to the companies, they were not in fact given, so that Form 2.10B was appropriate.
29. The other persons within that Rule, apart from the company itself, are (in summary) enforcement officers, distrainers and voluntary arrangement supervisors. These are people who could be affected by an interim moratorium following service of a notice of intention to appoint on a qualifying chargeholder. It is obviously sensible that such persons should know of the moratorium. It is not, however, easy to see why the failure to give notice to one or more of them should necessarily result in an invalid appointment. They could not, unlike a qualifying charge holder, get in first and make an appointment of their own.
30. The two decisions of Minmar and Hill v Stokes, at least as regards the obiter ruling of the Chancellor, are irreconcilable. I am not strictly bound by either of them. Judicial comity requires me to follow the decision of another Judge of coordinate jurisdiction unless clearly satisfied, or convinced, as it is sometimes put, that that other decision is wrong. I am not convinced that Minmar is wrong, but I am not convinced, either, that Hill v Stokes is wrong, and I cannot follow both. Moreover, they may both be open to question if the construction of paragraph 28 that I have considered is correct.
31. What I propose to do is decide these cases strictly by reference to their own facts, which, as I have said, are quite common. The Form 2.10B is, if the Chancellor is correct, a trap for the unwary because it presupposes, in the absence of a qualifying charge holder, that the directors may appoint out of court without there being any notice of intention to appoint. Whilst I readily accept that the prescribed forms, coming from the Rules, cannot override the proper construction of Schedule B1, the result is unfortunate, to say the least.
32. The question of whether or not minor deficiencies of the kind with which I am concerned here would invalidate an appointment was not considered by the Chancellor in Minmar, and may not have been argued. It may be implicit in his obiter ruling, but that ruling was made against the background of an appointment by directors who had gone behind the backs of other directors, and, therefore, acted in a way which the court would ordinarily regard as improper. In those circumstances, it is perhaps not surprising that those seeking to uphold the appointment did not argue that failure to give notice was an immaterial defect, but limited their submissions to the construction point, which went against them.
33. In my judgment, however, it is wrong to regard failure to give a notice to those additionally prescribed as necessarily fatal to the appointment, thus treating the appointment as a nullity. The failure to give the requisite notice is, however, a material consideration when the court comes to exercise a discretion as to whether or not the court should, in the light of formal defects or irregularities, set an appointment aside, or remove administrators irregularly appointed. The court would then have to look at all the circumstances of the case, but the appointment, once completed by the filing of the appropriate form and documents, and then sealed by the court, would be good, and the onus would be on those challenging the appointment to demonstrate why it should be set aside. The mere failure to give notice to the company in cases such as the present, when the directors are acting as a board and there is no conceivable prejudice to the company, would not be enough to invalidate the appointment without more.
34. Rule 7.55 may also be relevant in this context. That rule provides: "No insolvency proceedings shall be invalidated by any formal defect or by any irregularity unless the court before which objection is made considers that substantial injustice has been caused by the defect or irregularity, and that the injustice cannot be remedied by any order of the court".
35. Rule 7.55 has not hitherto proved to be of significant help in this area of the law. But the cases where it has been held to be inapplicable (helpfully summarised in the Frontsouth decision) may be characterised as cases where the defect in question has resulted in the appointments in question being treated as nullities. If a particular appointment is a nullity become some essential pre-condition has not been complied with, then, as Proudman J. correctly pointed out in the Kaupthing case, no insolvency proceedings ever come into being and rule 7.55 can have no application. The position must in my judgment be different, however, in cases where the irregularity in question is not necessarily fatal to the validity of the appointment.
36. Once, therefore, it is accepted, as in my judgment, I am entitled if not bound to do, following the second limb of Judge McCahill QC's decision, that the failure to give notice of intention to appoint to the company is not of itself sufficient to render an appointment a nullity, then it follows that there are insolvency proceedings on foot. Out of court appointments are treated as insolvency proceedings for the purpose of the Rules. . Rule 12.17(1) in terms regards all company administrations under Part II of the Insolvency Act 1986 as "proceedings". It also seems to me that they cannot be anything other than "insolvency" proceedings. The prescribed forms for use in "insolvency proceedings" (see Rule 12.7 and Schedule 4) include prescribed forms for making out of court appointments. Were it necessary to do so, therefore, I would regard Rule 7.55 of the Insolvency Rules, in the absence of prejudice, as requiring me not to treat the appointments as invalid.
37. In G-Tech and the other cases following it, an invalid appointment has followed from the failure to comply with paragraph 29 of Schedule B1. This is said to be the result of paragraph 31 of the same Schedule, which provides that the appointment of an administrator under paragraph 22 takes effect when the requirements of paragraph 29 are satisfied. The problem typically arises where the wrong prescribed form is used, paragraph 29(5) providing that the notice of appointment and any document accompanying it must be in the prescribed form.
38. In the present cases, there was in my judgment compliance with paragraph 29. As previously indicated, Form 2.10B was the correct form, as no notice was in fact given. It may be (if Minmar is correct) that there were inadvertent errors in the statutory declarations, but they were made, and that was sufficient compliance with paragraph 29, the sanction (where appropriate) for a false declaration being penal. There is clearly not the slightest prejudice to anyone in recognising the validity of these appointments and I will accordingly make the declarations sought confirming the validity of the appointments. It is in those circumstances unnecessary for me to consider the alternative of retrospective appointments.
39. The costs shall be chargeable as part of the costs and expenses of the administration in each case.
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