England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY

		Birmingham Civil Justice Centre The Priory Courts 33, Bull Street, Birmingham
		18th March 2013

JUDGE PURLE:

1. In this case I have to determine whether Mr. Fender of Sanderlings LLP was validly appointed administrator of Care People Limited ("the company") on 26^th February 2013 by a qualifying floating chargeholder, Ultimate Invoice Finance Limited ("Ultimate"). Ultimate made a written demand dated 25^th February 2013, requiring repayment by the company of certain sums within, in one place, two days, and, elsewhere in the same demand, by return.
2. The issue that arises is whether or not, at the time of Mr. Fender's appointment, which was completed at 12 noon on 26^th February by the filing of notice of appointment in court, the charge was enforceable and, if not, what consequences follow. Paragraph 14(1) of Schedule B(1) of the Insolvency Act 1986 contains what appears, on the face of it, to be a perfectly general power vested in the holder of a qualifying floating charge, to appoint an administrator of the company. It is accepted that the present charge, which supported factoring arrangements, is a qualifying floating charge. Despite the generality of paragraph 14, paragraph 16 goes on to provide: "An administrator may not be appointed under paragraph 14 while a floating charge on which the appointment relies is not enforceable".
3. I should mention that paragraph 15 additionally provides that a person may not appoint an administrator under paragraph 14 unless (a) he has given at least two business days' written notice to the holder of any prior floating charge which satisfies paragraph 14(2) or (b) the holder of any prior floating charge which satisfies paragraph 14(2) has consented in writing to the making of the appointment. I mention that because it has been held recently by Judge David Cooke in Re Eco Link Resources Limited [2012] BCC 731 that a failure to comply with paragraph 15(1) has the effect of rendering any ensuing appointment a nullity. In reaching that conclusion Judge Cooke adopted the approach of Norris J, advanced in Re Virtualpurple Professional Services Limited [2012] BCC 254 to consider the purpose of the particular requirement and ask the question whether Parliament could have intended the appointment to be valid notwithstanding any failure to comply with the requirement in question. Judge Cooke concluded that the requirement of written notice to the holder of any prior floating charge was so fundamental that the appointment was void.
4. More recently, in Re Euromaster Limited [2012] BCC 754, Norris J considered the question of whether an appointment made by directors outside the appointment window specified in paragraph 28(2) of Schedule B(1) was invalid. That paragraph provides:

"An appointment may not be made under paragraph 22 after the period of ten business days beginning with the date on which the notice on intention to appoint is filed under paragraph 27(1)"

5. Similar language is used ("an administrator may not be appointed") in both paragraph 15 of Schedule B1 (considered in Eco Link) and paragraph 16 (which I am now considering). In Euromaster, Norris J, adopting again the same purposive approach as he had adopted in Virtualpurple, and which was followed by Arnold J in Re Ceart Risk Services Limited [2012] BCC 592, and which I also followed in Re BXL Services [2012] BCC 657, as did Judge Cooke in Eco Link, concluded that an inadvertent appointment outside the 10 day window was not a nullity. He observed in paragraph 30 that the use of the same or similar words by Parliament does not mean that the same result follows in each case. He suggested elsewhere that procedural defects, as contrasted with a case where there was no power of appointment, did not result in a nullity, but an irregularity.
6. In Re Care Matters Partnership Ltd [2011] BCC 957, Norris J, in considering whether or not the actions of an administrator could be validated under paragraph 104 of Schedule B1, distinguished between cases where there was simply no power to appoint because, for example, there was no valid charge in respect of which the power under paragraph 14 of Schedule B1 could be exercised, or the persons purporting to appoint an administrator under paragraph 22 were not directors at all, and a case where there is power to make an appointment but the power has been defectively exercised through some irregularity in procedure. He ruled that in the latter case paragraph 104 was available. Subsequently, a similar distinction has been made in considering the potential applicability of Rule 7.55 of the Insolvency Rules 1986 when considering whether or not an appointment is valid. 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"

7. Norris J in Euromaster, retreating somewhat in paragraph 38 from his own previously expressed views in Re Blights Builders Limited [2007] BCC 712, considered that, in the particular case before him, Rule 7.55 could be applied to validate what might otherwise be an invalid appointment. (He did not go on actually to make an order giving explicit effect to Rule 7.55, as he did not consider that an application to which the creditors were not parties was an appropriate occasion upon which to do so.) Likewise, in Re Assured Logistic Solutions Limited [2012] BCC 541, I expressed the view, with which Norris J subsequently agreed in paragraph 34 of Euromaster, that formal defects might, depending on all the circumstances, justify the court in setting an appointment aside, or removing an appointee, but that would not necessarily be the case, and Rule 7.55 would apply.
8. Often, points like the present, as in Euromaster, arise on an application made by the administrator alone, and there are no other active parties. This case is to that extent unusual as both the qualifying chargeholder (one of the company's main creditors) and the company have participated. There has been full argument on both sides. The administrator has taken a neutral position, offering assistance through Mr Brown, who has helpfully referred me to a number of the authorities. The company positively asserts that the formal defects and irregularities upon which it relies are incurable. In those circumstances, I must address rule 7.55. Strictly, if that rule applies, a validating order may be said to be unnecessary. The emphasis in the wording of the rule is the other way round. The insolvency proceedings (which an out-of-court appointment produces) are not invalidated in the absence of substantial irremediable injustice. The court does not need to validate the proceedings; they are simply declared by the rules not to be invalid unless there is substantial irremediable injustice. It seems to me that, if I ultimately conclude that the appointment in this case was irregular but not a nullity, I should then go on to consider whether or not Rule 7.55 applies.
9. The enforcement provision of the debenture in this case was clause 8. That provided as follows: "We shall be entitled to make demand for payment of the secured monies at any time… after the occurrence of any of the following events and if such demand is not met in full, (or on or after the enforcement date without any demand) we shall be entitled to enforce (in whole or in part) the charges created by this deed…" The secured monies were defined (in summary) as including monies which were presently due or which might fall due in future or upon the fulfilment of some condition. The secured monies in the main, if not wholly, fell due under another detailed agreement referred to as the D.P.A., standing for "debt purchase agreement". Under the D.P.A. a service charge of 15 per cent fell due automatically upon certain events occurring, which corresponded broadly, though not entirely, to the events which entitled Ultimate to make a demand. In addition, there were other post-termination charges which fell within the definition of secured monies, though in fact there has been no termination in this case.
10. Moving back to clause 8, the enforcement clause, the three relevant triggers relied upon in this case are (a) "Your breach of any your obligations under this deed or in the agreement or any other agreement with us … (c) your failure to give us such information as may reasonably be requested as to your business affairs or assets and … (q) if, in our opinion, a material adverse change occurs in your financial condition…." It is (a) and (q) that also appear in substance in the D.P.A. as well.
11. Evidence was put in by a representative of Ultimate specifying real matters of concern triggering one or other of (a), (c) and (q). They were not rebutted in any detail by the director, though issue was formally joined. In my judgment, it is tolerably plain that, if none of the other clauses applied, (q) did because there is no doubt that Ultimate did reach the opinion, rightly or wrongly but in good faith, that the financial condition of the company had changed materially and adversely. There were real concerns over liabilities to the Inland Revenue which were not being met despite the advance of monies from Ultimate for that purpose. Accordingly, the demand was made for a sum of, in round figures, £130,000 on 25^th February.
12. Under the terms of the charge, as the demand was posted, it was to be considered as served 48 hours from the time of posting (clause 18.2). It may well be that it arrived at the company's premises before then. There is no evidence one way or another about that but that is what the charge says. This must have been appreciated by Ultimate on the day they came to make the appointment because they repeated that demand by transmitting it by e-mail at 11.54am. Under clause 18.2(c) of the charge that demand was considered served at the time of transmission, i.e. 11.54am on the actual date of appointment, just six minutes beforehand. This naturally attracted the complaint of the company that they were not given proper time to deal with the demand which was expressed, at least on one reading, as a two day demand and on another reading as a demand for payment by return. Six minutes was not enough to put in motion anything to satisfy the demand, even assuming the e-mail immediately came to the attention of some relevant person at the company's address, which was a Methodist church. It may well be that the demand was not wholly good either, in that a 15 per cent fee, (called a "collect out fee") of around £50,000 inclusive of V.A.T. was included in the demand, even though no such fee actually fell due without a termination, though it was of course still secured. There was another £13,000 or £14,000 where there might be some dispute on the edges, because this was a running account. Nonetheless, there was a substantial liability.
13. There is no suggestion anywhere in the evidence that the company was able to meet the unchallenged part of the demand. Nonetheless, it cannot be said, in my judgment, that the demand should, at the time of the appointment at 12 noon on 26^th February, by then have been met, given its terms. Even if I ignore the reference to two days, at least enough time, which is more than six minutes, had to elapse for the unchallenged part of the demand to be met, assuming the company could meet it. The probability, therefore, is that the appointment was not properly made at the time, but was irregular. I will proceed on that basis.
14. However, I cannot ignore the fact that the company was simply not in a position to meet the unchallenged part of the demand, within 2 days or at all. What occurred at worst therefore was a premature appointment.
15. In my judgment, that premature appointment is properly characterised as a defective exercise of an undoubted power of appointment, which is procedural in nature but not fundamental to the existence of the power. I do not consider that the requirement of paragraph 16 is of such fundamental importance as to render the appointment a nullity. It is undoubtedly a factor I should have very much in mind when considering whether or not to set the appointment aside, along with the Rule 7.55 criteria of substantial irremediable injustice.
16. I am mindful also that administration is a class remedy in respect of which the interests of all creditors have to be taken into account. There is obvious potential for injustice where an appointment is made against a company prematurely. In the present case, however, unless the company can dispel the clear impression that I have from the evidence that that is all it was - a premature appointment - and that the company could not and would not have met the unchallenged part of the demand in time, a valid appointment would have followed at most two days later. In those circumstances, it seems to me that the prejudice to the company is very limited and there is no substantial injustice. It is only substantial injustice which is capable of invalidating an appointment under Rule 7.55. There is, however, room for real prejudice to creditors if an undoubtedly insolvent company is taken out of administration. In my judgment, as the company has suffered no substantial injustice, I propose to declare the appointment to be valid, notwithstanding the defect, and (so far as I need to) to waive the defect.
17. I shall now hear argument as to the consequences of this ruling.