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Courts confirm administrators are appointed under paragraph 22 of schedule B1

March 2018

In the recent unreported decision of re NJM Clothing Limited (in administration), the Business and Property Court at Newcastle upon Tyne has confirmed the date and time at which an Administrator is appointed under paragraph 22 of Schedule B1 Insolvency Act 1986 (“Schedule B1” and  “IA” respectively) is a time and date prior to the Notice of Appointment of Administrator being filed at Court.  The Court has also confirmed that failure to include prescribed information does not render insolvency proceedings a nullity and as such is potentially curable under Insolvency Rule 12.64. This is in contrast to the failure to use a prescribed form under the old rules which goes to the validity of the appointment itself and is not capable of cure (Re Kaupthing Capital Partners II Master LP Inc. (in administration) [2010] EWHC 836 (Ch)). 

The facts of the case were that NJM Clothing Limited (“the Company”) was incorporated on 3 December 2016 and traded as a retailer and wholesaler of clothing under the brand Aces Couture. The principal creditor of the Company was Fashion Design Solutions Limited (“FDS”) which designed and supplied garments to the Company at cost as part of a joint venture or partnership arrangement.  There was a board meeting on 3 October 2017 attended by the Directors of the Company and Mr. Stephen Philip Ross who was a proposed Administrator and later became one of the Joint Administrators of the Company.  During that board meeting, the Directors of the Company agreed that a Notice of Intention to Appoint Administrators would be filed at Court, and the notice was filed on 4 October 2017.

On 17 October 2017 Notice of Appointment of Stephen Philip Ross and Matthew James Higgins as Joint Administrators was filed at Court and the Notice was endorsed, after it was filed, with a time and date of “17 October at 14:50”. 

FDS challenged the validity of the appointment of the Joint Administrators on the basis that the Notice of Appointment did not include the date and time of the appointment as required by Insolvency Rule 3.24(1)(j).  FDS relied on the fact that pursuant to paragraph 31 of Schedule B1 the administration only came into effect when the requirements of paragraph 29 are satisfied.  Paragraph 29 requires a person who appoints an Administrator of a company under paragraph 22 to file at Court a Notice of Appointment and such other documents as may be prescribed.  It also provides at paragraph 29(5) that the “Notice of Appointment and any document accompanying it must be in the prescribed form” which FDS considered should be read as a reference to containing the prescribed information.

The Notice of Appointment that was filed at Court provides that “the Administrators were [past tense] appointed at the time and date that this Notice was [past tense] filed at Court”.  The issues in dispute between the parties were the point in time at which an Administrators were appointed for the purposes of paragraph 22 and whether or not a failure to quickly specify that point in time rendered the insolvency proceedings a nullity or whether the defect could be cured under Insolvency Rule 12.64.

Judgment

His Honour Judge Klein concluded that when construing the IA as a whole it was firstly the case that directors, making a paragraph 22 Appointment of an Administrator, must decide that they wish to appoint an Administrator.  They must secondly, give notice of that intention.  They must thirdly, appoint the Administrator and they must fourthly give notice of that appointment.  He concluded that it seems to be the case that the appointment must be effective before the Notice of Appointment is filed at Court and that the appointment must precede the Notice, if only momentarily.

The Court found, however, that the burden of proof was on the party challenging the validity of the appointment to evidence that the time and date of the appointment was at a time other than what was said in the Notice of Appointment.  In essence, they would have to prove that the time and date endorsed on the Notice was incorrect.  The Judge accepted the evidence of the Joint Administrators that they were appointed at the time the Notice of Appointment was filed at Court even if it was momentarily before the time of filing.  He then went on to conclude that the Notice of Appointment was, in fact, defective as it did not specify, except by reference to the date and time of the filing, what the time and date of the appointment was.  Nevertheless, he considered that there was no substantial injustice by the defect or irregularity and that the defect could be cured under Insolvency Rule 12.64.

Analysis

The Court has confirmed that Administrators are appointed prior to the Notice of Appointment being filed at Court.  As such it is prudent to document the time and date that a company or its directors decide and take steps to appoint an Administrator.  That date and time ought to be included in the Notice of Appointment rather than referencing the date and time which would, at some point in the future, be endorsed on the Notice of Appointment by the Court.  It is conceivable that a failure to include this information could result in prejudice (for example if execution over goods has taken place in the meantime in breach of what would otherwise have been a moratorium).  In those circumstances, the defect may not be curable.

Other issues arising out of the application

The other issue arising out of the application that was compromised 3 days before the hearing was the question of what should happen to the Company following FDS’s refusal to agree to the Administrator’s proposals. The application was originally issued by the Administrators under Part 54 of Schedule B1.  In light of VE Vegas Investors IV LLC & ORS v Shiners & ORS [2018], EWHC 186 (Ch) FDS’s position was that the Company should go into compulsory liquidation and that the Administrator’s appointment should be ordered not to continue by the Court.  This is because FDS was concerned that the Administrators had sold assets of the Company at undervalue to an entity in which the former directors now had a substantial involvement and were thought to have had an interest.  In particular, there was an allegation of significant undervalue sale of the Company’s intellectual property assets, namely the brand under which it traded.  This was the subject of other litigation between the purported purchaser of certain assets and FDS.  The Court ultimately did not need to decide on this issue in view of the concession mentioned above but it would appear to be the case that had the Court been asked to decide the issue the Court would most likely have taken the approach that the parties agreed and ordered the Company into compulsory liquidation and for the Administrators’ conduct to be investigated.  The Court ultimately ordered FDS to pay only 50% of the Administrators’ costs to reflect the fact that this issue had been conceded late by the Administrators.     
 

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

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