Well appointed?

Appointing administrators is not perhaps the most exciting area of law '“ but it is highly topical. If your practice involves even a small element of insolvency work, you need to be aware of Minmar (929) Ltd v Khalatschi [2011] EWHC 1159 (Ch) and its consequences.

Administrations were introduced by the Enterprise Act 2002 as a new schedule B1 to the Insolvency Act 1986. The purpose of an administration is to rescue an insolvent company as a going concern. If that is not possible, then it should achieve a better result than if the company were liquidated, or ensure that secured or preferential creditors receive a distribution.

There are two ways to appoint an administrator: through the court, which must be satisfied that the purpose of administration is likely to be achieved (the 'court route'); or, alternatively, a company, its directors, or a holder of a 'qualifying floating charge' over the company's property can appoint an administrator if notice of the appointment is given as prescribed by schedule B1 and the relevant forms filed with the court. This 'out of court route' has proved to be very popular as it is generally quicker and cheaper than the court route, but get it wrong and the validity of the whole appointment comes into question. A series of recent cases has highlighted this risk.

In Re G-Tech Construction Ltd [2007] BPIR 1275, Hart J held that an administrator's appointment was invalid because the incorrect notice of appointment had been used. He refused to retrospectively validate the appointment under insolvency rule 7.55 (which presumes that defective or irregular insolvency proceedings will be valid unless substantial and irremediable injustice has been caused), or paragraph 104 of schedule B1 (which validates an administrator's act in spite of a defect in appointment or qualification). He was, however, prepared to use paragraph 13 of schedule B1 to make a new administration order and apply it retrospectively so as to validate the administrator's actions. G-Tech therefore provided a practical solution to the potentially harsh consequences of a technical breach of the insolvency legislation.

However, in Re Kaupthing Capital Partners II, Master LP Inc [2010] EWHC 836 (Ch) and Minmar, the courts were not so forgiving. In Kaupthing, Proudman J followed G-Tech and found that using the wrong form was 'a fundamental flaw going to the validity of the appointment'. This flaw could not be rectified, despite the 'draconian effects' of the finding.

In Minmar, Sir Andrew Morritt set aside the administrators' appointment, holding that the directors did not have the required authority to make the appointment, and had not given notice to the prescribed parties in the prescribed form, even though it was acknowledged that the forms did not seem to fit the circumstances of the case. He found that the invalidity must be recognised even if it could be 'cured' by a later order as in G-Tech. However, given that these cases involved applications by the company to invalidate the appointments, no such cure was sought.

New tactics

A raft of cases since Minmar has seen the court strive to find a balance between ensuring adherence to the letter of the law and applying it practically and commercially.

Re Derfshaw Ltd [2011] EWHC 1565 (Ch) may provide a solution. In that case, the directors of seven insolvent companies accepted that Minmar invalidated the administrator appointments they had tried to make through the out of court route. Instead, they asked the court to order administration with retrospective effect through fresh applications made through the court route. Morgan J found that each company was unable to pay its debts and that the statutory purpose of administration was likely to be fulfilled. He then noted 'the desirability of making retrospective orders is considerable', and relied on G-Tech for his authority to do so, albeit that he would have preferred 'clearer statutory language' than paragraph 13 of schedule B1.

This approach has since been adopted by Norris J in Care Matters Partnership Ltd (In Administration) [2011] EWHC 2543 (Ch) and Adjei and others v Law for All [2011] EWHC 2672, albeit with differing outcomes. However, in both cases Norris J has expressed his view that a solution might also be found in paragraph 104 of schedule B1, the provision that Hart J refused to apply in G-Tech.

Unsurprisingly, Norris J gave permission to appeal the Care Matters case 'without hesitation', clearly highlighting the need for guidance on this issue from the higher courts.

Until such guidance is received, solicitors assisting companies with administrations will need to advise their clients on all possible routes into administration, and double check that the 'i's have been dotted and 't's crossed whichever route is used.