In Re Tokenhouse VB Limited (formerly VAT Bridge 7 Limited), the High Court held that directors’ failure to give appropriate notice of intention to support an administrator to a qualifying floating charge holder (QFCH) does not automatically invalidate the appointment of administrators. The decision suggests a new approach where the court will look to remedy minor breaches without taking the more draconian step of voiding the entire administration.
According to the Insolvency Act 1986 (the Act), directors of companies can appoint an administrator without the need for court intervention.
To make the appointment, a company must give at least five business days’ written notice to any person who is or may be entitled to appoint an administrative receiver or administrator of the company. The notice must also identify the proposed administrator and be in a prescribed form which is provided in the insolvency rules.
This means that an administration appointment could be invalidated if the appropriate notices have not been given by the company. However, the uncertainty created by conflicting case law looks to have been ended with the recent judgment in Re Tokenhouse VB Ltd.
Re Tokenhouse VB Ltd
In this case, the directors of Tokenhouse VB Ltd (the company) purported to appoint two joint administrators using the out of court process. The directors failed to give valid notice to the QFCH of the company and were in breach of various sections of the Act. The QFCH claimed the appointment was not valid and requested that the court appoint two different administrators as the company’s failure to provide notice had deprived them of the opportunity to appoint administrators of its choosing.
Following an initial hearing the court ordered that one of the original joint administrators should be replaced with one of the administrators proposed by the QFCH pending a final judgment.
The High Court held that whilst there had clearly been a breach of procedure, the original appointment was not automatically void and could be corrected by the court. The judge decided that the breach must fall into one of three categories:
- a fundamental defect (automatically voiding an appointment)
- a non-fundamental breach (that has caused no injustice)
- a non-fundamental breach (that has caused substantial injustice).
The judge held that the breach had not caused any injustice or prejudice and it fell into the second category. The court stated that the administrators would have to be licensed insolvency practitioners with duties to act in the best interests of the creditors, regardless of who they are appointed by and therefore their identity was less important.
Due to the relatively minor nature of the breach it was agreed that the court should remedy the breach rather than void the entire administration. The court replaced the sole remaining joint administrator appointed by the company with another joint administrator requested by the QFCH.
Although directors should ensure they comply with statutory obligations at all times, this decision clearly shows that the court looking to remedy the minor breaches instead of voiding the entire administration. If you are worried about your company’s solvency then you should look to seek legal advice.
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