Context is everything: latest cases on defective administration appointments

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The recent decision of Mr Justice Norris in Re Euromaster Ltd (judgment given on 10 August 2012) seeks to reassure insolvency practitioners by drawing a line under an earlier series of cases that suggested that any failure to comply with the strict procedural requirements for the appointment of administrators meant that the purported appointment was of no effect.

As a result of these earlier cases, the courts were filling up with anxious practitioners seeking retrospective court appointments, the very thing which the Enterprise Act 2002 that made provision for out of court appointments was seeking to avoid.

The principal case that sparked the current debate was the 2011 decision in Minmar (929) Ltd v Khalatatschi. We have previously considered the cases that followed Minmar, some of which supported the strict approach to compliance that was expressed in Minmar, whilst others sought ways to avoid the harsh consequences of automatic invalidity.

It is fair to say that as a result of the often inconsistent views that were expressed in the earlier cases, insolvency practitioners were sometimes left feeling unsure as to whether or not they were validly appointed and therefore whether they might be required to repay fees, or even to unscramble sales that had been concluded in good faith. Hence a rush of court applications for orders to confirm the validity of what had already been done and even a growing tendency to apply to court for the appointment of administrators to avoid any suggestion that there could be a procedural defect in an out of court appointment.

Euromaster is one of four recent cases where the courts have tried to rationalise the earlier decisions and to develop a principled approach to dealing with defective appointments. The other three cases are Re MF Global Overseas Ltd (judgment given on 23 March 2012), Re Ceart Risk Services Limited (3 May 2012) and Re BXL Services (10 July 2012). Taken individually each case could be seen as just one more conflicting decision, but when they are considered collectively it now seems to be clear that the tide of uncertainty has turned and that going forward courts adopt a more forgiving approach where there are procedural defects in the appointment of administrators.

In the first of the recent cases, MF Global, the question was whether the correct administration appointment forms had been used. This was an appointment by directors who, in the absence of a bank with a "qualifying floating charge", were still obliged by the rules to give notice to the company itself. The question was whether the failure to give this notice meant that the appointment was void, or whether it led to a defect in the appointment which could, but only if it was necessary to do so, be waived by the court.

In Mr Justice Mann's view the service of notice in these circumstances was not a necessary precondition for an appointment but if, despite this conclusion, notice was given then the standard notice of intention to appoint an administrator form (form 2.8B), which had been used in that case, could be used to give the notice. Whilst the judge did not need to decide which of the earlier cases to follow, he took the opportunity to make it clear that he preferred the cases that had avoided automatic invalidity.

In Ceart Services, Mr Justice Arnold also sought to avoid a conclusion of automatic invalidity. This was a case like Re M.T.B. Motors Ltd where administrators had been appointed in respect of a regulated company before obtaining the consent of the Financial Services Authority (FSA), as required by section 362A(2) Financial Services and Markets Act 2000.

In M.T.B. Motors, which was not brought to the judge's attention in Ceart Services, the conclusion was that the failure to obtain the FSA's prior consent meant that the appointment was a nullity, but in Ceart Services the judge placed the issue into context by seeking to ascertain the reason for the obligation to obtain the FSA's consent, concluding that "Parliament should be taken to have intended that failure to obtain the FSA's prior consent constitutes a defect in the appointment which is capable in appropriate circumstances of being cured subsequently."

In the judge's view, this defect was cured when the FSA's consent was belatedly obtained and filed at the court.

Of more importance perhaps, Mr Justice Arnold's relatively thorough review of the law in Ceart Services appears to confirm that despite the near identical language which is used in the insolvency legislation where it is stated that things "shall" or "must" be done, the consequences of non-compliance have to be ascertained in respect of each provision separately by reference to the presumed intention of Parliament in respect of that provision. In concluding that this was the correct approach, Mr Justice Arnold took comfort from the earlier decision of Mr Justice Norris in Re Bezier Acquisitions Ltd.

In BXL Services, His Honour Judge Purle QC, had to consider the same defect that arose in Minmar, namely the situation where no notice of the directors' intention to appoint administrators was given to the company.

In a short judgment, the judge concluded that he must follow Ceart Services and that Mr Justice Arnold's "clear choice of the purposive approach…must now be taken to settle the law at first instance." Applying that approach, the judge concluded that a failure to give formal notice of an intended appointment to the company (or indeed to any of the other prescribed persons, such as an enforcement officer) should not invalidate the appointment.

Bringing things up to date, it was left to Mr Justice Norris in Euromaster to review all of the earlier cases and to endorse the new approach that allows a distinction to be made between an appointment that is a nullity and a "merely defective appointment". In Euromaster itself, the defect arose because administrators had, by oversight, been appointed a day late; paragraph 28(2) schedule B1 Insolvency Act 1986 stating that an "appointment may not be made … after the period of ten business days beginning with the date on which the notice of intention to appoint is filed …". In the judge's view, inadvertently filing one day too late does not incurably invalidate an appointment.

It is clear from the above cases that if, as a result of a failure to comply strictly with a procedural requirement, an appointment is defective rather than invalid then rule 7.55 Insolvency Rules 1986 applies, so that the appointment is not "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 injustice cannot be remedied by any order of the court."

Accordingly in Euromaster the judge suggested that in their report to creditors the administrators should identify the defect so that any creditor who considered that it had suffered a "substantial injustice" had an opportunity to raise its concern with the court; albeit where, as here, there is simply a technical defect it is difficult to see what this injustice might be.

However, given that the rules state that a curable defect does not invalidate an appointment, the court will not be inclined to make a blanket order to confirm the validity of an appointment, as opposed to dealing with any application that may be made by a person who can show substantial injustice. Further, as was noted in Ceart Services, even if there is a defect in an administrator's appointment his acts will not be invalidated as he is entitled to rely on paragraph 104 schedule B1 Insolvency Act 1986 which provides that " An act of the administrator of a company is valid in spite of a defect in his appointment or qualification."

The recent cases do appear to have introduced much needed certainty into this area, although it is still important to take great care to comply strictly with all procedural requirements; if only because it is clear from the cases that the courts will not normally be inclined to allow the costs of curing defects to be paid as an expense of the administration.

Also it is much more likely that a third party will be able to argue that it has suffered substantial injustice where there has been no attempt to comply with procedural requirements that are intended to provide it with some level of protection.

Since there remains uncertainty at the margins, not least as to the distinction between curable and incurable defects, no doubt some of the concerns that have been raised in the earlier cases will persist given the number of conflicting first instance High Court judgments that have now stacked ip unless and until this whole area is definitively reviewed by the Court of Appeal.

In conclusion, it now seems to be the case that when compliance with procedural requirements falls to be considered the context is everything and, whatever reasons Parliament may have had when it decided to include a particular requirement, it must be the case, as Mr Justice Norris observed in Euromaster that Parliament should not be taken to have intended that the validity of administration appointments should be a matter of "artificiality or technicality."