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Insolvency Law

Expert guidance on all aspects of corporate and personal insolvency

12 JUL 2013

A Year in the Life of Administration

Nicholas Briggs and Catherine Burton

Guildhall Chambers and DLA Piper

The Insolvency Act 1986 shall be referred to as the IA 1986

Schedule B1 to the Insolvency Act shall be referred to as Sch B1

The Insolvency Rules 1986 shall be referred to in abbreviated form (Rules or simply r.)

Appointments

1. At last year's seminar we explained that there was a great deal of uncertainty regarding challenges to out of court appointments. Since the seminar there have been several more cases where the courts have had to decide the consequences of a failure to follow the appointment procedure with precision. In Euromaster Limited [2013] 1 BCLC 273 Norris J noted:

‘This is a complex and technical area of the law containing conflicting decisions, all delivered under pressure of time and after hearing arguments on one side only.'

2. There have also been some decisions that were delivered after hearing arguments from two sides: Minmar, Kaupthing Capital Partners II Master LP Inc and Msaada Group.

The literal and purposive approach to construing the legislative provisions

3. The purpose of introducing an out of court procedure was to streamline the appointment process, reducing time and cost.

4. It is worth remembering how the minister explained the out of court provisions to the House of Commons at the second reading of Bill which received Royal Assent on 7 November 2002 to become the Enterprise Act 2002:

‘...I reassure the House that the intention in company insolvencies is to disengage from active involvement of the courts except in cases where there is a dispute or complexity....in future, both floating charge holders and the company itself will be able to appoint an administrator without a court hearing. The administrator will have extensive powers to deal with cases quickly without reference to the courts.'

5. In Euromaster Limited Norris J commented:

‘The Explanatory Notes to the Enterprise Act 2002 explain (at paragraph 643) that the procedure has been amended to "streamline the process" in particular by "the introduction of non-court routes into administration" because it was recognized that the existing procedure "was to a degree cumbersome". Mr Warents, Counsel for the Applicants, submitted that if this was the policy objective then it would be wrong to riddle the out-of-Court process with a myriad of technical traps which might catch out all but the most cautious of appointors.'

There is authority for the proposition that Explanatory Notes may aid construction of a statute see R (Westminster City Council) v National Asylum Service [2002] UKHL 38, [2002] 4 All ER 654, [2003] LGR 23):

‘The starting point is that language in all legal texts conveys meaning according to the context in which it is used. It follows that the context must always be identified and considered before the process of construction or during it . . . . Insofar as the Explanatory Notes cast light on the objective setting or contextual scene of the statute and the mischief at which it is aimed such materials are therefore always admissible aids to construction. They may be admitted for whatever logical value they have.'

6. Most of the cases where judgments have been delivered under pressure of time have not referred to the Explanatory Notes.

7. The difficulties that have emerged in the reported cases often arise after an appointment is made and regulatory checks reveal an error such as a failure to serve the company or other persons prescribed in r 2.20(2) of the Rules (in Hill v Stokes, to landlords who were distraining (r 2.20(2)(a)) and in Virtualpurple, to the company (r 2.20(2)(d)) as required by para 26(2) of Sch B1). The outcome of the case has largely depended the court's view of para 28 of Sch B1. This paragraph provides that an appointment ‘may not be made under para 22 unless the person who makes the appointment has complied with any requirement of para 26 and 27 of Sch B1'.

8. It is useful to consider some of the limitations on the exercise of the power to appoint administrators out of court. These were explained by Norris J in Euromaster Limited:

‘Paragraph 14 of Sch B1 confers upon the holder of a qualifying charge the power to appoint an administrator. Paragraph 16 of Sch B1 says "an administrator may not be appointed" under paragraph 14 whilst the floating charge on which the appointment relies is not enforceable (either because the instrument is invalid or is void for want of registration, or because no event of default has occurred). Paragraph 17 of Sch B1 says that "an administrator may not be appointed" if there is a provisional liquidator or administrative receiver in office (because it is not possible to have concurrent regimes in place).

Paragraph 22 of Sch B1 confers on the company and on its directors the power to appoint an administrator. Paragraph 25 says that "an administrator may not be appointed" if there is an extant winding-up petition or administration application or an administrative receiver is in office (because again it is not possible to have in place concurrent regimes). Paragraph 28(1) says that "an appointment may not be made" unless the notice requirements set out in paragraphs 26 and 27 have been complied with.'

9. Accordingly the legislative provisions give the directors of a company the power to appoint administrators out of court. In order to do so they have to complete, serve and file the relevant court forms and giving the prescribed notice to prescribed persons. Paragraph 26 of the same Sch B1 provides:

‘26(1) 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; and

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

(2) 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.

(3) A notice under this paragraph must -

(a)      identify the proposed administrator; and

(b)      be in the prescribed form.'

10. The persons described under subparagraph 26(2) are prescribed in r 2.20 which starts by indicating the relevant form:

‘2.20 Notice of Intention to Appoint -

(1)      The notice of intention to appoint an administrator for the purposes of paragraph 26 shall be in Form 2.8B.

(2)      A copy of the notice of intention to appoint must, in addition to the persons specified in paragraph 26, 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.'

11. The prescribed service provisions are dealt with by r 2.23 of the Rules which reads:

‘2.23(1) 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.'

12. One issue has been establishing what is ‘appropriate' in the circumstances of any particular case. Some judges have considered the prescribed forms to assist, but others have decided that the prescribed forms do not assist. The prescribed forms appear in Sch 4 to the Rules and the heading to Form 2.9B reads as follows:

‘Notice of appointment of an administrator by company or director(s). (Where a notice of intention to appoint has been issued).'

13. The comparable heading for Form 2.10B is this:

‘Notice of appointment of an administrator by company or director(s). (Where a notice of intention to appoint has not been issued)'

14. The issue of defective or invalid appointments first came to the attention of the insolvency community in Re G-Tech Construction Ltd [2007] BPIR 1275, where the court found that the appointment of administrators was invalid as the wrong prescribed notice of appointment had been filed at court. The error was accidental, technical and no one suffered any prejudice. The judge said ‘The result [of using the wrong form] was that the court has never received a form in the Form 2.10B which is a necessary pre-requisite of an appointment taking effect under para 31 of Sch B1.'

15. The court found that there was no jurisdiction to waive that error whether under r 7.55 of the Rules, under para 104 Sch B1 or otherwise. The judge did grant an order appointing the administrators with retrospective effect. The question of whether an error could be waived has arisen many times since this decision and (although it may be dangerous to voice a firm view in this area) it could be said that the issue is much clearer: see below.

16. In Blights Builders Ltd [2007] 3 All ER 776 the court was asked to decide a timing point. An out of court appointment was made after a petition had been presented but before it had been sealed and before it had been returned for service. The court held that the petition had been ‘presented' for the purposes of para 25 Sch B1 when it was delivered to court for sealing and issue; as a result the appointment of administrators was invalid. An invalid appointment could not be remedied under the Rule. A practical solution was found.

17. Kaupthing Capital Partners II Master LP Inc [2010] EWHC 836 concerned a limited liability partnership. The issue of the right form arose again. Administrators were appointed out of court but the appointment process was completed by use of Form 2.10B and it should have been by use of Form 1B which was applicable to limited liability partnerships. It was submitted that ‘if the wrong form was used, the appointment was simply invalid for the reasons given by Hart J. In Re G-Tech Construction Ltd....use of the prescribed from is mandatory.' The court found the appointment to be invalid but permitted a retrospective order appointing the administrators to be made. There was no jurisdiction (the court found) to correct any errors ‘since relief can only be granted once insolvency proceedings have begun. If the appointment is invalid, there are no insolvency proceedings. Thus in the case of a fundamental flaw going to the validity of the appointment itself, neither r 7.55 of the Rules, nor para 104 of Sch B1 can be applied.'

18. Hill Pope v Stokes [2011] BCC 473 (Hill v Stokes) was a Bristol case heard by HHJ McCahill QC and involved a notice point. The directors of the company served notice of intention to appoint on a QFCH and on the company itself on 19 October and, with the consent of the QFCH, appointed the administrators under para 22 on 20 October. However, the directors failed to give a copy of the notice to the landlords of four properties occupied by the company, who had distrained (which was known to the directors), and on the bailiffs, as required by para 26 (2) of Sch B1. The error was spotted relatively swiftly in or around the start of November, however the administrators had in the short period since their appointment closed 20 stores, made various employees redundant and sold eight other stores. An application for a declaration as to validity of appointment was made on notice to the company and the QFCH. The court found that para 28(1) of Sch B1 referred to para 26(1) only and in any event a ‘flexible approach' should be taken to its analysis of non compliance. A failure to notify was not a mandatory requirement and non-compliance was therefore not fatal to the validity of the appointment.

19. However in Minmar Limited v Khalatschi [2012] 1 BCLC 798 (Minmar) in which Hill v Stokes was not cited, the Chancellor of the High Court had held, in an obiter passage, that administrators had not been validly appointed where notice of intention had not been given to the company, even though there was no floating charge holder to whom notice under para 26(1) of Sch B1 was required. The main issue in Minmar was whether the failure to obtain a valid board resolution prior to the appointment of administrators, would preclude other directors of the company from making a valid appointment. The court found that the company's internal regulations had to be obeyed.

20. A failure to serve the company was directly in issue in Re Derfshaw Limited [2011] EWHC 1565 where the court made retrospective orders after declaring the appointments (seven different cases were consolidated) invalid for failure to serve the Company.

21. There were subsequent cases[1] of failure to give proper notice to interested persons and in Re Bezier Acquisitions Ltd [2011] EWHC 3299 the court was again asked to consider the consequences of a failure to serve the company. The decision was based on agency so the court found that the company had been served as the notice to appoint was handed to a trainee of the company's solicitor at a meeting. The solicitors were the agent of the Company. The outcome was therefore fact specific but it is the approach of Norris J that stands out: he focused on the consequences of non-compliance and, when taking into account those consequences, considered whether Parliament intended the outcome of non-compliance to be total invalidity.

22. In doing so he relied on R v Soneji [2005] 4 All ER 321, [2006] 1 AC 340 where Lord Steyn outlined the problem to construction of statutes, and an earlier approach to it which had been adopted by the courts (at [14]):

‘A recurrent theme in the drafting of statutes is that Parliament casts its commands in imperative form without expressly spelling out the consequences of a failure to comply. It has been the source of a great deal of litigation. In the course of the last 130 years a distinction evolved between mandatory and directory requirements. The view was taken that where the requirement is mandatory; a failure to comply with it invalidates the act in question. Where it is merely directory, a failure to comply does not invalidate what follows. There were refinements. For example, a distinction was made between two types of directory requirements, namely (1) requirements of a purely regulatory character where a failure to comply would never invalidate the act, and (2) requirements where a failure to comply would not invalidate an act provided that there was substantial compliance ...'

23. Lord Steyn explained that the speech of Lord Hailsham LC in London & Clydeside Estates Ltd v Aberdeen DC [1979] 3 All ER 876 at 883, [1980] 1 WLR 182 at 189-190 led to ‘the adoption of a more flexible approach of focusing intensely on the consequences of non-compliance, and posing the question, taking into account those consequences, whether Parliament intended the outcome to be total invalidity'.

24. When adopting this approach the judge paid attention to the statutory language drawing a distinction between its mandatory and directory nature and commented: ‘As a separate and independent ground I hold that IR 2.8 is to be construed in the sense that Parliament did not intend, that a failure strictly to comply with the rule as to service of the Notice of Intention at the registered office, should invalidate the giving of notice where at a valid meeting of the directors of the company (a) it was resolved that the company enter administration and that Notice of Intention to Appoint be given; and (b) an agent was appointed to act on behalf of the company in respect of the appointment of the administrators (that engagement to include the taking receipt of, and dealing on the company's behalf with, all relevant notices and formal documentation)'. The evidence was that all the directors and shareholders were aware of and consented to the proposed appointment.

25. There was no QFCH to serve in Virtualpurple [2011] EWHC 3487 and the directors appointed without serving the Company. As in Hill v Stokes the court adopted a purposive approach. Reading para 26 and 28 of Sch B1 consistently with other provisions and with an eye on the purpose for which they had been enacted, directors could proceed to make an immediate appointment without giving ‘notice of intention' to the company. Paragraph 28 of Sch B1 provided that an appointment might not be made by a director ‘unless the person who makes the appointment has complied with any requirement of paragraphs 26 and 27'. The reference to ‘para 26' was a reference to para 26(1) alone.

26. The court found that as a matter of strict construction there was a strong indication that the draftsman had contemplated two scenarios. One in which notice of intention had to be given to a qualifying chargeholder and another in which no such notice had to be given. Paragraph 30 of Sch B1 dealt with the contents of the statutory declaration that had to be contained in the prescribed form ‘in a case in which no person is entitled to notice of intention to appoint under para 26(1) and paragraph 28 therefore does not apply'. That indicated that para 28 was intended only to apply where there was someone who was entitled to appoint an administrative receiver of the company or there was a qualifying chargeholder. If that was so then the reference in para 28 to ‘para 26' had to be read as a reference to ‘para 26(1)'. Further, that reading was reinforced by the requirement of r 20.2(1) of the Rules and the nature of the prescribed forms such as form 2.8B, 2.9B and 2.10B. Reading the Rules in that way made functional sense. Furthermore, notice of intention to appoint, with no prescribed minimum period, was without function if the appointment was immediate and the notice of the appointment immediate.

27. But a different approach was taken in National Westminster Bank Plc v Msaada Group (A Firm) [2012] 2 BCLC 342 where there was no QFCH (equivalent) to serve but the partnership was subject to a voluntary arrangement and the partners failed to serve the supervisor. The court rejected each of the reasons relied upon by court in Hill v Stokes (and thus the reasoning in Re Bezier) for concluding that in para 28(1), the reference to para 26 should in fact be read as a reference only to para 26(1), such that there was no need to serve a copy of the notice of intention to appoint on those prescribed persons if there was no qualifying chargeholder who had to be served with notice of intention to appoint under para 26(1). Warren J rejected the purposive approach to construction:

‘In any case, as the Judge himself described matters, the necessary flexibility which he considered desirable was to enable the court to correct minor defects in form rather than substantial defects of substance. Thus the use of the word "must" in various provisions had been taken as directory rather than mandatory. But the wording in the present case leaves no room for that approach. Paragraph 28 is quite clear in saying that an appointment may not be made unless the requirements referred to in paragraph 26) have been satisfied. The question is what, as a matter of construction, those requirements are; and that is not, I consider, a matter which can properly be decided by reference to what the court might see as a "desirable flexibility".'

28. Accordingly, the court found that the persons listed in r 2.20(2) are prescribed for the purposes of para 26(2) even where no notice needs to be given under para 26(1). It found, in concurrence with the reasoning of the Chancellor in Minmar, that the clear words of paragraphs 26 and 28 should be followed. A literal approach and not a purposive approach was appropriate.

29. In MF Global Limited [2012] EWHC 1091 the court expressed regret that there was a divergence of views with Hill v Stokes and Virtualpurple on one side of the line and Minmar and Msaada on the other.

30. There can be difficulties where a company is governed by the Financial Conduct Authority (formerly the FSA). Section 362A of the Financial Services and Markets Act 2000, so far as material, provides: ‘...(2) An administrator of the company may not be appointed under para 22 of Sch B1 to the 1986 Act [or para 23 of Sch B1 to the 1989 Order] without the consent of the Authority...(4) In a case where no notice of intention to appoint is required (a) subsection (3)(b) shall not apply, but (b) consent under subsection (2) must accompany the notice of appointment filed under para 29 of [Schedule B1 to the 1986 Act or para 30 of Sch B1 to the 1989 Order].'

31. In Re Ceart Risk Services Limited [2012] 2 BCLC 645 the company was authorised by the then FSA to carry on non-investment insurance intermediation for retail and commercial customers. On the same date, it was resolved at a general meeting that the company should be placed into administration and that the administrators should be appointed as joint administrators. Also on the same day, the company, without obtaining the consent of the FSA, filed a notice of appointment of the administrators pursuant to para 22 of Sch B1 to the IA 1986. The FSA subsequently wrote to the administrators drawing their attention to s 362A of the Financial Services and Markets Act 2000 (the 2000 Act) and inviting them to write to the FSA as a matter of urgency to provide information and to seek the FSA's consent to their appointment as administrators of the company. The administrators sent two letters to the FSA providing the information which it had requested and seeking the FSA's consent to their appointment.

32. Subsequently the FSA wrote to the administrators giving its consent to their appointment as administrators of the company. Section 362A(4) of the 2000 Act provided that: ‘In a case where no notice of intention to appoint is required (a) subsection (3)(b) shall not apply, but (b) consent under subsection (2) must accompany the notice of appointment filed under para 29 of Sch B1 or para 30 of Sch B1.' The administrators contended that the FSA's consent was subsequently filed with the court, in compliance with s 362A(4)(b) of the 2000 Act. The applicants, who were the sole owner and director of the company and the administrators of the company, applied for a declaration that the administrators had been validly appointed under para 22 of Sch B1 to the 1986 Act, notwithstanding a failure to obtain the prior consent of the FSA to the appointment.

33. The court found that whilst the requirement to obtain the FSA's consent was an important one, it did not follow that it was essential to obtain such consent prior to the appointment of an administrator. If the need to obtain the FSA's consent was overlooked prior to the appointment, it remained possible to seek and obtain the FSA's consent after the event. Accordingly the appointment of the administrators had taken effect when the FSA's consent to their appointment was filed with the court.

34. Since the last insolvency seminar the courts have heard a case where there was failure to give notice to a prior QFCH and another case where there was a failure to serve the company: Eco Link Resources Limited and BXL Services Limited [2012] EWHC 1877 (Ch). In the latter case HHJ Purle QC commented that ‘it was settled law that the failure to give notice of an intended appointment to one of the parties prescribed under para 26(2) of Sch B1 of the Act did not invalidate the appointment, even assuming that such notice was required'.

35. The story in Euromaster Limited was that after administrators were appointed, and after they had effected a pre-pack sale, the administrators noticed that the directors filed the appointment documents at court on the 11th business day after the filing of the notice of intention to appoint. The case therefore raised the question whether the appointment of the administrators was ‘a nullity'.

36. The judge expressed his view that ‘the question to be addressed is whether, if appointment is made in breach of the restriction in para 28(2) the appointment (a) has no legal effect because it is a nullity, or (b) has some conditional effect because it is defective or irregular and the irregularity may be regarded as curable. The court found that it could not answer that question without at least having in mind consideration of whether the use of very much the same language in relation to the imposition of other restrictions means that the same answer must be given in every case, or whether a failure to observe the restriction might in one case lead to a nullity and in another lead to a merely defective appointment.'

37. Norris J reviewed a considerable amount of the case law and found (adopting the purposive approach) that the purpose of the 10-day window prescribed by para 28(2) of Sch B1 to the 1986 Act was to give the directors of an insolvent company the benefit of an interim moratorium in which to consider how to address the actual or imminent insolvency of the company in the event of the holder of a qualifying floating charge deciding not to exercise its power to appoint an administrator, and Parliament could not have intended that an inadvertent appointment one day outside the 10-day window would incurably invalidate the appointment of an administrator. Accordingly, non-compliance with the requirement of para 28 to file notice of appointment of an administrator within 10 business days from the date on which notice of intention to appoint was filed was an irregularity and did not result in the appointment being a nullity. Since the appointment of administrators was irregular, as opposed to being void, the position was governed by r 7.55, under which insolvency proceedings were not invalidated by any formal defect or by any irregularity unless substantial and irremediable injustice had been caused.

38. Accordingly in Virtualpurple the failure to give a copy of the notice of intention to appoint to the required person did not mean that the appointment was incurably invalid, but rather constituted a curable defect. In Euromaster Limited the service of a notice outside of the prescribed time limit did not mean that the appointment was incurably invalid, but rather it constituted a curable defect.

39. The purposive approach appears to be preferred on present authority.

Waiving defects

40. Paragraph 104 provides:

‘An act of the administrator of a company is valid in spite of a defect in his appointment or qualification.'

41. In Ceart Risk Services Limited the court considered as a second point, on the basis that if the court came to the conclusion that the administrators were not properly appointed, whether it could make a declaration pursuant to para 104 of Sch B1, that the administrators' acts prior to the date when they were properly appointed were valid. The court followed the reasoning of Norris J in Re Care Matters Partnership Ltd [2012] 2 BCLC 311 as follows:

‘[6] Where there is a defect in the appointment of an administrator the judges at first instance are agreed that Insolvency Rule 7.55 cannot be used to waive the defect.

[7] In Re G-Tech Construction Ltd [2007] BPIR 1275 Hart J took the view that the only course open was to make a fresh administration order with retrospective effect. In Re Blights Builders Ltd [2008] 1 BCLC 245, unaware of the decision in Re G-Tech Construction Ltd, I took a different course, making a fresh administration order with prospective effect and validating the acts of the administrator who had been defectively appointed under para 104 of Sch B1 to the Insolvency Act 1986. Hart J had also been invited to take this course but had held-"It is certainly the case that that provision plainly may [assist] in assessing the validity of acts done by a person purporting to be an administrator, but it does [not] seem to me to provide in itself a cure for the fact that ... there has been no administration ... if the requirements of para 29 have not been complied with."

[8] For my own part (and with considerable diffidence in differing from Hart J) I adhere to my view that para 104 may supply the answer in many cases. As Lord Simonds said (of similar provisions in s 143 of the Companies Act 1929 and art 88 of the then current Table A) in Morris v Kanssen [1946] 1 All ER 586 at 590-591, [1946] AC 459 at 471: "There is ... a vital distinction between (a) an appointment in which there is a defect or, in other words a defective appointment, and (b) no appointment at all. In the first case, it is implied that some act is done which purports to be an appointment but is by reason of some defect inadequate for the purpose: in the second case, there is not a defect; there is no act at all ... the section and article alike deal with slips or irregularities in appointment, not with a total absence of appointment ..." It may well be that para 104 is of no assistance where there is no power to make an appointment (for example because there is no valid charge in respect of which the power under para 14 of Sch B1 could be exercised, or the persons purporting to appoint an administrator under para 22 are not themselves directors). But it may well be that para 104 is of assistance where there is a power to make an appointment but that power has been defectively exercised through some irregularity in procedure.

[9] Mr Solomons and Mr Defty [the administrators] made (but did not pursue) an application for validation under para 104. Thus the point was not argued before me: and I am conscious (a) that both Proudman J in Pillar Securitisation SARL v Spicer [2010] EWHC 836 (Ch), [2010] All ER (D) 191 (Apr) and Henderson J in [Frontsouth (Witham) Ltd [2011] EWHC 1668 (Ch), [2012] 1 BCLC 818] accepted Hart J's view on para 104 without comment; and (b) that a wider debate ranges around s 232 Insolvency Act 1986. Having reflected on the matter I have decided that the only proper course for me to take in the circumstances is to accept (with the same misgivings voiced by Morgan J and Henderson J) that the jurisdiction identified in Re G-Tech Construction Ltd provides the only answer in the instant case, and to consider whether I may properly exercise it.'

42. Accordingly the court found that notwithstanding the defect in their appointment, the administrators' acts between the date when they took office and the date when the FSA's consent to their appointment was filed with the court were valid. The effect of para 104 of Sch B1 to the 1986 Act was to validate the administrators' acts during the intervening period.

Administration orders

43. Other than out of court appointments this past year has seen the courts give some guidance on applications for administration orders. In Bowen Travel Limited [2012] EWHC 3405, the claimants were the majority of the board of directors of a company (the company). They sought an administration order and an order for the appointment of proposed joint administrators (the proposed administrators). A secured creditor (the creditor), expected to be the largest creditor, contended that the company should go into liquidation quickly so that investigations into the failure of the company and the conduct of its directors could be started without delay. It expressed concern as to the proposed administrators due to a potential conflict and proposed the appointment of another insolvency practitioner as a joint liquidator.

44. The court explained that the first question to be answered on an application such as this was whether there was a real prospect that an administration would produce a better result for the creditors than a winding-up. That question, when answered, did not lead to an automatic order one way or the other because the court was given a discretionary power to make such order as was just in all the circumstances of the case. It was important not to lose sight of the discretion the court had which would be answered when taking into account all the circumstances. On the facts of the case the court made a compulsory winding-up order as an investigation as to the company's failings was important to the creditors.

45. The court reminded practitioners of the importance of ensuring that the court is given full and frank disclosure of information so it can make an informed decision:

‘When the court is asked to exercise its powers under paragraph 13 of Schedule B1 to the Insolvency Act 1986 by making an administration order, it is, in my judgment, essential that the evidence presented to the court is reliable. Implicit in the noun "reliable" in this context is not only that it is accurate evidence and true insofar as it is factual, but also that (1) a clear account is given of all potentially relevant facts and circumstances, and (2) where explanations are given or judgments, estimates or opinions are stated (a) they should be supported by the underlying material, and not contradicted by it, and (b) they should also be credible in the sense of being realistically likely to be true. Such a requirement should be neither onerous nor unreasonable. It requires no more than that an applicant, who, as a director, should know what has been going on at the company, tells the court the informed truth and does not attempt to mislead, including by omission.'

46. The court also made a winding-up order in UK Steelfixers Limited [2012] EWHC 2409 (Ch) where the court conjoined a winding-up petition and application for an administration order and found that voidable transactions after the date of the petition required investigation.

47. More recently the comment in Bowen about sufficient evidence was approved in Integeral Limited [2013] EWHC 164 (Ch) where there was a competition between a winding-up order and an out of court administration appointment. A winding-up petition was presented on 25 July 2012 and an adjournment granted for 6 weeks at the hearing on 10 September 2012. Three days prior to the adjourned hearing on 22 October 2012 the sole director made an application for an administration order pursuant to para 12(1) of Sch B1. The winding-up petition and the application for an administration order came on at the same time on 30 January 2013. The court made a winding-up order on the basis that there were real grounds for believing that the company might have claims against the director which would not be available in an administration, but which might well be available for the benefit of creditors if a winding-up order were made.

48. Of particular interest was the court's scrutiny of the administration proposal which was based on taking action against another company. The court considered the funding proposal and what the insolvency practitioner nominated as administrator thought about the prospects of the purpose of an administration being fulfilled. The court commented that it was of fundamental importance that any insolvency practitioner nominated as a potential administrator (an officer of the court) should give his opinion of the prospects for administration carefully and independently. Here, the supine approach of both practitioners and their failure to acknowledge the fundamental problems caused by some of the documentation together with the shortcomings in the proposals for funding the claim were so serious as to call into question their competence and independence from the sole director.

Investment Bank Special Administration Regulations 2011

49. Last year we spoke about a new administration process that resulted from the introduction of the Investment Bank Special Administration Regulations 2011. As a reminder the Government explanatory notes to the Investment Bank Special Administration Regulations 2011 no 245 (Regulations) explain:

‘The Government believes that there is a strong case for a SAR for investment firms to ensure that there is minimum disruption to financial markets as a result of their insolvency. It is important that client trust property is returned promptly on the insolvency of an investment firm in order to mitigate the possibility that clients are forced into financial difficulties themselves. The prompt return of client assets will also benefit the insolvent firm's unsecured creditors as their claims can be dealt with quicker and administration expenses will be reduced.'

50. In Heis and Others (Administrators of MF Global UK Ltd) v MF Global Inc [2012] EWHC 3068 (Ch) the court was asked whether a default provision in a global master repurchase agreement made between the investment bank and a connected company was triggered by the appointment of special administrators in the UK. The relevant part of the default provision provided that an ‘Act of Insolvency....is the presentation of a petition for winding-up or any analogous proceeding or the appointment of a liquidator or analogous officer of the Defaulting Party.' The issue was whether entry into a special administration was an act of insolvency analogous to liquidation in the context of the master repurchase agreement. The court found that a special administration was not analogous as its sole purpose was not to bring the company's business to an end, collect in and distribute its assets.

51. It was not the correct approach to compare the outcome of a liquidation and the outcome of a special administration in order to determine whether or not they were analogous. They were distinct procedures with different aims and were generally relevant in different circumstances.

Powers and duties

52. In a similar way that companies are creatures of statute so is the law and procedure regarding insolvency. The IA 1986 with its accompanying schedules and the Rules form the frame within which the Insolvency Practitioner operates. The duties of an office-holder will be referable to the Act and the Rules. In a similar way an administrator gains his powers from the Insolvency Act and Insolvency Rules. Nevertheless it would be a mistake to think that all duties and powers arise from the Act.

53. Administrators may be found to be personally liable for defaults for breaches of duty. In MIR Steel UK Limited v Christopher Morris and others [2012] EWCA 1397 the court considered a claim made against administrators personally in relation to a hive down agreement. The case provides a salutary reminder that any exclusion of liability clauses in contracts binding administrators should be carefully and widely drafted. It is also interesting due to the consideration of the rule in Said v Butt [1920] 3KB 497 which was employed in SCI Games Limited v Argonaut Plc [2005] All ER 54 (D); [2005] EWHC 1403 where the administrators were sued for unlawfully interfering in the performance of the debtor company's contractual obligations. As a reminder the rule in Said v Butt is:

‘I hold that if a servant acting bona fide within the scope of his authority procures or causes the breach of a contract between his employer and a third person, he does not thereby become liable to an action in tort at the suit of the person whose contract has thereby been broken.'

54. The claimant was engaged by a steel manufacturing company (the company) to purchase the parts required to assemble a hot strip mill (the mill) to be used by the company for the production of hot rolled steel products. The arrangements in relation to the mill were set out in a contract letter (the mill contract) between the claimant and the company, which expressed that the mill, which was movable, remained the property of the claimant and that the company had no property or other rights in it save the right to use it to roll steel and produce resulting products. In 2007, the company went into administration and administrators were appointed. The second defendant (LL) made an offer to purchase the assets of the company and the administrators were asked to confirm whether they were entitled to dispose of the mill as part of the assets of the company. The administrators did not respond. In the result, an agreement was reached under which LL purchased the assets of the company. It further provided that LL acknowledged the existence of a title dispute in regard to the mill and that LL would be responsible for settling any claim's made against it. Subsequently, the first defendant (MIR) was incorporated, and the assets of the business of the company sold to LL were hived down to MIR under a hive down agreement (the hive down agreement). The parties to the hive down agreement were the company, the administrators and MIR.

55. The hive down agreement provided, inter alia, that MIR agreed that it would be responsible for the ‘settling of any claim made against it' by the claimant in respect of the mill. The claimant issued proceedings against MIR and LL alleging conversion, claiming the delivery up of the mill and seeking damages. Further, the claimant alleged that MIR and LL induced or conspired a breach of the mill contract. MIR applied, pursuant to CPR Pt 20, to have the company and the administrators joined as defendants to the claimant's claim for inducing or conspiring a breach of the mill contract.

56. The claim failed and went to the Court of Appeal where it was contended that the hive down agreement had not precluded the proposed claim for contribution against the company and the administrators.

57. Clause 9.5 was decisive. It provided:

‘9.1 If any of the Assets are or shall be found to be subject to a lien, hire purchase, hire, loan, leasing or rental agreement or other encumbrance, the Purchaser shall take subject to it . . . .

9.3 The Purchaser acknowledges that it has had the opportunity to inspect the records of the Vendor to satisfy itself as to the position regarding the matters referred to in clause 9.1.

9.4 The Vendor and the Administrators warrant that they have not wilfully withheld any materials in their possession nor wilfully failed to supply any details held by them in relation to the interests of Lictor Anstalt in the hot strip mill situated at the Property.

9.5 The purchaser agrees that it shall be responsible for settling any claim made against it by Lictor Anstalt in respect of the hot strip mill situated at the Property.' [Emphasis supplied]

58. The exclusion of personal liability clause included in the agreement provided:

‘16.1 Except as expressly agreed including without limitation as agreed in clauses 9.2, 9.4, 11.2, 15, 22.1 and paragraph 11 of schedule 3, the Administrators shall incur no personal liability in any form. In particular, the Administrators shall incur no personal liability whatsoever under this Agreement or under any deed, instrument or document entered into under or in connection with it.

16.2 This exclusion of the Administrators' personal liability shall be in addition to and not in substitution for any right of indemnity or relief or remedy otherwise available to the Administrators and shall continue notwithstanding completion of this Agreement (in whole or in part).

16.3 The Administrators are parties to this Agreement in their personal capacities only for the purpose of receiving the benefit of the exclusions, limitations, undertakings, covenants and indemnities in their favour contained in this Agreement and for the limited purposes of providing specified undertakings and warranties.'

59. The Court of Appeal found that clause 9.5 above properly construed meant that the administrators were not liable. The court did not go on to consider the interesting argument of Said v Butt. However the first instance decision found that the rule in Said v Butt was decisive in favour of the administrators who as a result avoided liability:

‘As regards the claim for contribution against the administrators this in my judgment has no prospect of success. As earlier discussed, the rule in Said v Butt prevents a claim against the administrators in tort for inducing a breach of contract by Alphasteel. Equally, in my judgment, the same rule will defeat a claim on the same facts but repackaged, as Mr Tamlyn aptly described it, as a claim for unlawful means conspiracy. The essence of the rule is that agents are not to be liable for procuring their principal to act in breach of contract, provided they acted in good faith in the course of their agency, and it should make no difference whether the claim is made for inducing a breach of contract or for an unlawful means conspiracy.'

60. By way of comment the first instance court refused to strike out a similar claim against administrators in SCI Games Limited v Argonaut Plc on the basis of Said v Butt, permitting the claim to continue to trial. It did strike out a claim on this basis in MIR Steel but the Court of Appeal did not need to consider the issue as it found in favour of the administrators based on a construction of the sale agreement. Nevertheless the Said v Butt principle has been considered by the Court of Appeal in a receivership context: Welsh Development Agency v Export [1999] BCC 270. In that case the Court of Appeal dismissed a claim against receivers on the ground that they could not be held liable for the tort of wrongful interference with any contract made by the company in receivership and a third party.

61. In a further word of warning an administrator of two companies was found to be personally liable for legal fees incurred by the companies during their administrations as a result of a failure to join the companies as defendants in the relevant court proceedings: Wright Hassall v Morris [2012] BPIR 654. The defendant administrator (M) was appointed to two companies and instructed the claimant firm of solicitors to act for the companies in certain litigation under conditional fee agreements signed between the claimant and the administrator. In consequence of those agreements, the solicitors sought recovery of their fees. A claim form was served on M which named him as ‘the administrator of [the companies]'. The solicitors obtained a judgment in their favour which they sought to enforce against M in his personal capacity.

62. At first instance, the court held that the judgment was enforceable against the companies and not the defendant personally.

63. On appeal, the Court of Appeal found that the judge had wrongly assumed that by suing M as administrator, the claimant had not been suing him personally. The position had been that the claimant had sued the administrator. At no stage had any order of the court been made whereby the companies had become defendants to the claimant's case. The defendant in the action had remained at all times M as administrator of the companies. Liability could not be imposed against a party not before the court. The proceedings had been an action arising out of a contract. The judgment had been given based on the terms of the contract against the person who had signed it and who had been before the court as the sole party.

64. Further, there was no authority which limited the liability of a defendant sued in representative form so that he was not personally liable on a judgment against him. The companies could only have been parties to the action before the court with the consent of the administrator or by order of the court. Neither of those steps had been taken. Accordingly, the judge had been wrong to find that the judgment had been against the companies as opposed to being against M personally.

65. Administrators are required to give thought and reason to their decisions. This was in point before the court in Lazari GP Ltd v Jervis [2012] EWHC 1466 (Ch). After the company went into administration, the administrators orchestrated a pre-pack sale of the business. As is usual, the purchaser was granted a license to occupy by the administrators and as is usual, permission was then sought from the landlord to assign the lease to the buyer. The landlord refused permission to assign on reasonable grounds and wanted to gain possession so that it could lease the unit to a new tenant (a better covenant). The landlord first asked the administrators for permission to forfeit the lease and then applied to court when the permission was refused.

66. When considering whether to allow a landlord to forfeit and break the statutory moratorium the burden will lie with the landlord to make out its case to satisfy the court that it is inequitable for it to be prevented from commencing the intended proceedings. The court has to conduct a balancing exercise of the legitimate interests of the lessor and the legitimate interests of other creditors of the company. To do this it is usually necessary to compare the financial loss suffered by the landlord, if permission to commence proceedings was refused and the landlord was temporarily denied the relief sought, with the loss suffered by the other creditors if permission to issue proceedings was granted. Account had to be taken of any money paid by the administrators to compensate the landlord.

67. The court in Lazari GP Ltd permitted the landlord to forfeit. Key to the decision was that the purpose of the administration had been substantially achieved as the business had been sold. Further, the administrators were not able to identify what loss the administration would suffer as a result of forfeiture, whereas the landlords were able to demonstrate real prejudice and loss by reason of not securing a new tenant with a good covenant at a higher rent: cf Innovate Logistics (In Administration) v Sunberry Properties Ltd [2009] 1 BCLC 145 where the court noted that great importance is to be attached to the proprietary interests of a landlord, who should not be prejudiced by the way in which the administration is conducted, save to the extent that might be unavoidable and even then, that would usually be acceptable only to a strictly limited extent. The Sunberry case is a good example of equipping the court with all the evidence to make its decision. The court at first instance did not take account of all the facts: that although there had been an early sale of the business it was important to the success of the administration that the purchaser remain in the property to collect book debts. Unlike Lazari GP Ltd there was no tenant waiting to sign up to a new lease at a higher rent providing a strong covenant.

68. The moratorium continued to throw up issues this year and in Colliers International UK Plc v the Governor & Company of the Bank of Ireland the question considered was whether the court had jurisdiction to grant retrospective permission to commence proceedings against a company in administration.

69. The judge considered a considerable number of cases commenting:

‘It appears that from the early 1890s to 1982, it had been the practice of courts not to treat proceedings commenced without permission as a nullity but, in appropriate cases, to give leave for the continuation of the proceedings: see Re Saunders [1997] Ch 60 at 70. However, Milmo J in Wilson v Banner Scaffolding Limited (The Times 22 June 1982) held that proceedings commenced against a company in compulsory liquidation without prior permission were a nullity and could not therefore be continued with permission. This was followed by Rattee J in Re National Employers Mutual General Insurance Association Limited [1995] 1 BCLC 232. The issue arose for decision in Re Saunders, in the context of proceedings commenced against a bankrupt.

Following adversarial argument over three days and a consideration of a large number of United Kingdom and Commonwealth authorities, Lindsay J came to the clear conclusion that the earlier decisions of Milmo J and Rattee J were wrong and that legal proceedings commenced against a bankrupt or a company in compulsory liquidation were not a nullity and that the court had jurisdiction to give retrospective permission for their commencement.'

70. The court noted a recent contrary view taken in Re Taylor [2006] EWHC 3029 (Ch), referred to Bank of Scotland PLC v Breytenbach [2012] BPIR 1, a decision of Chief Registrar Baister and concluded:

‘I have come to the clear conclusion that Re Saunders was correctly decided and that retrospective permission can be given for the commencement of proceedings, whether under section 130(2) or section 285(3) of the Insolvency Act 1986 or under paragraph 43(6) of Schedule B1.'

Administrators' liability and paragraphs 74 and 75 of Sch B1

71. What is the difference between para 74 and 75 Sch B1? Can a claim be pursued under para 74 even after the administration has ended? These are the questions the High Court was asked to consider in Coniston Hotel (Kent) LLP [2013] EWHC 93.

72. The claimants had formed a limited liability partnership (LLP) in order to refurbish a hotel. The claimants had funded a significant part of the work and obtained large loans from a bank. Shortly before completion of the project the bank withdrew credit. The respondents were insolvency and restructuring advisers. They agreed to advise the claimants and the bank about possible ways forward. The claimants needed approximately £900,000 to finish the project. The hotel had been valued at £7.7m. The bank obtained a further valuation which valued the hotel at only £3m. The bank refused to extend the loans, and the claimants appointed the respondents as administrators of the LLP. The hotel was sold for £4.25m and there was a large shortfall in the administration. The claimants' proof was £4m. They issued proceedings under Sch B1 asserting that the respondents had wrongly

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