Clarke Willmott - high court guidance on the out of court appointment of administrators
Posted 27 July 2010 - 4:08pm by WikiJob
The High Court has given guidance in relation to the out of court appointment of administrators by directors and, in particular, whether the practice of issuing successive notices of intention to appoint (“NOI”), if an appointment was not made following the initial NOI, is acceptable.
Under paragraph 28(2) of Schedule B1 (of the Insolvency Act) the appointment of an administrator must be made within 10 business days from the date on which the NOI is filed at court under paragraph 27(1).
However, particularly in a pre-pack situation, it is not uncommon for directors to find that, for a variety of reasons, by the time that 10 business days is about to expire they are not yet in a position to make the appointment of an administrator. As they cannot, after the expiry of the 10 day period, make the appointment based on the first NOI they may have filed a second notice of intention to allow the 10 day period to start again.
There is nothing in the Act or the Insolvency Rules 1986 (as amended) to specifically prevent the practice of filing successive notices of intention to appoint.
However, the practice is clearly open to abuse by unscrupulous directors obtaining back to back moratoria with no immediate intention to make the appointment within the prescribed 10 business day period, or possibly even at all.
The facts
In the case of Cornercare Limited (the “Company”) the directors intended to place the Company into administration through an out of court appointment with the business and assets being sold by “pre-pack” sale immediately upon appointment of the administrators.
An NOI was filed but the proposed buyer then unexpectedly encountered difficulty with funding for the acquisition of premises that it intended to occupy. This meant that they were unable to proceed with the acquisition of the business and assets and therefore the proposed appointment of administrators could not proceed within the prescribed 10 day period under paragraph 28(2).
A short while later, the funding issues were resolved and the question arose as to whether the directors could issue a second NOI and appoint out of Court even though the relevant period on the first NOI had expired with no appointment having been made.
Judgement
The matter was heard before HHJ Purle QC who confirmed that paragraph 28(2) “does not … prevent a fresh notice of intention to appoint from being served and filed, resulting in a fresh 10 day appointment window”.
He considered the contrary argument, that this could give rise to abuse by unscrupulous directors, but considered that the court has adequate power to deal with such abuse by:
restraining the lodgement of further NOIs unless followed by an actual appointment; and/ or
in an extreme case vacating and removing from the file any abusive notice of intention and granting a blanket order for permission under paragraph 43 during the unexpired period of the illicit moratorium.
HHJ Purle QC considered that it was open to the directors to serve and file another notice of intention to appoint. However, because of the time elapsed and the requirement for the notice of intention to be served and for a further 5 business days to elapse before an appointment could be made, counsel sought an Administration Order instead.
In the circumstances, HHJ Purle QC considered the requirements of paragraph 11 to be satisfied and made an immediate Administration Order. He did, however, note that “the courts deal with some care with pre-packs, but in this case the SIP16 material is annexed to the report of the proposed administrators..."
It was clear in this case that the funding difficulties that delayed appointment were seen to be a “good reason” why a repeat NOI was not an abuse.
Summary
This case will give practitioners some comfort that successive filing of NOI's is an acceptable practice unless it is deemed to be an abuse of the process.
The case is helpful in clarifying the following points:
1 There is nothing in the Act or Rules to prevent successive filing of NOIs;
2 Where there is no “good reason” for the delay, successive filing might be considered to be an abuse and the Court can act to prevent further NOIs being filed unless followed by an appointment or, in extreme cases, might even expunge an abusive notice and effectively remove the protection of any moratorium;
3 Where an administration order is sought for the purpose of achieving a “pre-pack” sale of the business, the Court will expect to see as much of the information required by SIP 16 as possible to be annexed to the application (as required by Judge Cooke in Re Kayley Vending [2009]B.C.C.578).
Our advice is still to exercise caution in filing successive NOIs. A second NOI where there is good reason for the delay is likely to be upheld but, beyond that, it will become increasingly difficult to demonstrate to the Court that there is no abuse.