Scottish Court of Session Decisions

Petitioner: Mr Hill; Balfour + Manson LLP

First and second respondents: Mr Sellar, Q.C.; Dundas & Wilson CS, LLP

Third respondents: Mrs Wolffe, Q.C.; Brodies LLP

28 June 2011

[1] The petitioner is a director of Grant Estates Limited. The first and second respondents, Thomas Campbell McLennan and Kenneth Robert Craig are the Administrators of the Company appointed by the third respondents, The Royal Bank of Scotland, on 25 February 2011 pursuant to a floating charge created in favour of the Bank on or about 17 October 2007.

[2] The petitioner has commenced proceedings challenging the validity of the appointment of the Administrators. He contends that many, if not all, of the transactions executed by the Bank purportedly pursuant to a loan agreement with the Company were invalid. They consist mainly of Swaps which the petitioner says were not authorised by the Company and in respect of which the Bank did not give relevant statutory notices. Since the issue remains contentious and may, at some date in the future, be the subject of evidence at a proof, it would not be appropriate for me to go into any further detail at this stage. Suffice it to say that on the basis of his challenge to these transactions, the petitioner contends that there was no sum due to the Bank so as to entitle them to appoint Administrators pursuant to the floating.

[3] The present petition is brought under paragraph 74 of Schedule B1 to the Insolvency Act 1986. That paragraph provides that a creditor or member of a company in administration may apply to the Court claiming that the Administrator is acting or has acted or proposes to act in a way which would unfairly harm his interests. There is a question as to whether this is a means by which the appointment of an Administrator, as opposed to his actings or failures to act, can be challenged. That question is not before the Court at present. However, the choice of this route is readily understandable in circumstances where the petitioner had, when first instituting proceedings, no legal representation nor, as it then seemed to him, the ability to instruct legal representation on behalf of the Company. He himself had no right to represent the Company in such an action: see Secretary of State for Business Enterprise v UK Bankruptcy Limited 2010 SLT 1242.

[4] That particular problem has, it seems, now been overcome. Mr Hill appeared before me on behalf of the petitioner. There was some discussion as to the ability of a company to bring proceedings to reduce the appointment of an Administrator, the problem being that in terms of paragraph 64 of Schedule B1, neither a company in administration nor an officer of such a company may exercise a "management power" without the consent of the Administrator, a "management power" being defined to mean "a power which could be exercised so as to interfere with the exercise of the Administrator's powers". Mr Hill submitted that that prevented the Company bringing proceedings to reduce the appointment of the Administrators. To my mind it does not have that effect. What is prohibited is the exercise of a power which, reading short, interferes with the exercise of the Administrators' powers. But an action which calls into question whether the Administrators were validly appointed, and therefore whether they had any powers to exercise, is, to my mind, plainly not caught by his prohibition.

[5] Mr Sellar, Q.C., for the Administrators, and Mrs Wolffe, Q.C., for the Bank, brought to my attention the decision of Plowman J in Re Union Accident Insurance Co Ltd [1972] 1 WLR 640, in which it was held that, notwithstanding the appointment of a provisional liquidator, the board of directors of a company retained the residuary power to instruct solicitors and counsel to oppose the petition for winding up the company, and also to act in interlocutory proceedings including a motion to discharge the provisional liquidator. Plowman J tested the matter by considering what he called "the other side of the coin", namely whether the power which the board of directors was said to have lost was one which had been assumed by the liquidator. If it had not, that might be a good reason for saying that the board retained it. That reasoning is applicable here. I was also referred to some cases in which a company, acting at the instance of the board of directors, sought to reduce the appointment of a receiver: see e.g. Elwick Bay Shipping Co Ltd v Royal Bank of Scotland Limited 1982 SLT 62 and Toynar Limited v Whitbread Limited 1988 SLT 433. Those cases appear to me consistent with the general proposition that the board of directors has a residual power to challenge the appointment of a provisional liquidator, receiver or Administrator as the case may be. I see no reason why the case of an Administrator should be any different from that of a provisional liquidator or receiver in this respect.

[6] Accordingly, it seems to me that an action brought in the name of the Company at the instance of the board of directors of the company to reduce the appointment of the first and second respondents as Administrators of the Company would, in principle, be competent.

[7] In the present action, which first came before the court in May of this year, the Administrators were directed to limit their intromissions with the affairs of the Company until further order. That was designed to enable the petitioner, with his fellow directors, to instruct proceedings by the Company of the type already mentioned. Whether through a failure to understand what was required or for some other reason, such proceedings have not yet been brought. Mr Hill told me that he had instructions that the Company would bring such proceedings and that they would be brought within 14 days. On that basis I made an order that the parties to those proceedings should appear before the Court at a hearing (at whatever stage those proceedings had reached) to take place at the same time as the hearing in the current petition. The position as regards the direction given to the Administrators can be revisited at that time, in light of the progress made in this and the new proceedings.

[8] I should mention one other point which was argued vigorously before me by Mr Hill on behalf of the petitioner. He referred to paragraph 14 of Schedule B1 to the Insolvency Act 1986. Schedule B1 was inserted to provide a regime for Administration. Paragraph 14(1) entitles the holder of "a qualifying floating charge in respect of a company's property" to appoint an administrator of the company. Paragraph 14(2) of Schedule B1 defines a qualifying floating charge as follows:

"(2) For the purposes of sub-paragraph (1) a floating charge qualifies if created by an instrument which -

(a) states that this paragraph applies to the floating charge,

(b) purports to empower the holder of the floating charge to appoint an administrator of the company,

(c) purports to empower the holder of the floating charge to make an appointment which would be the appointment of an administrative receiver within the meaning given by section 29(2), or

(d) purports to empower the holder of the floating charge in Scotland to appoint a receiver who, on appointment, would be an administrative receiver".

It was accepted by Mr Hill that the floating charge in the present case met the requirements of (b) in that it purported to empower the holder of the floating charge to appoint an administrator of the company. Mr Hill argued, however, that that was not sufficient: the charge also had to comply with (a) and state that paragraph 14 of Schedule B1 applied to the floating charge. He argued that such express notification as to the application of paragraph 14 of Schedule B1 was essential to give extra protection to directors or others acting on behalf of the company when creating a floating charge in favour of the Bank. Since the charge did not contain a reference to paragraph 14, it was not a qualifying charge, there was no power to appoint an Administrator under it, and the appointment should be reduced on that ground alone.

[9] I reject that submission. On the clear wording of paragraph 14(2), a floating charge qualifies if (a), (b), (c) or (d) are satisfied. The word "or" shows that the four sub-paragraphs are disjunctive. Only one of them need be satisfied for the floating charge to qualify as a qualifying floating charge in terms of paragraph 14(1). Mr Hill placed before me no authority or textbook suggesting that any other manner of construction was appropriate. Further, as Mrs Wolffe pointed out, a conjunctive approach to those four sub-paragraphs would negate the whole point of the provision. Sub-paragraphs (c) and (d) enable a floating charge to be a qualifying floating charge if created prior to the provisions dealing with Administration. But if the floating charge also had to state, in terms of (a) that paragraph 14 of Schedule B1 applied to it, an administrator could never be appointed under a floating charge which pre-dated the bringing into force of that Schedule.

[10] Accordingly, I reject Mr Hill's motion, made at the Bar, for the appointment of the Administrators to be reduced on that narrow ground.