BRR e-alert: Insolvency Q&A

Business Recovery & Reconstruction E-alert: News & view from the bridge

Q: The directors of a company are looking to appoint me as administrator. There is an outstanding debenture registered at Companies House but I am told it is historic and the debt was discharged in full several years ago. Can the directors immediately appoint me or must they serve notice of intention on the chargeholder?

A: Paragraph 26(1) of schedule B1 to the Insolvency Act 1986, requires that where directors propose to make an appointment of administrators they must give notice to any person who is or may be entitled to appoint an administrator under paragraph 14 (qualifying floating charge holder (QFCH)). The question is therefore whether this requires notice to be given to a charge-holder who is not owed any money by the company.

It might be thought, not unreasonably, that such a charge-holder does not need to be given notice, due to the fact that if no monies are owing to the charge-holder they would not have a power to appoint administrators under paragraph 14.

However, when this question came before the court in Adjei v. Law for All [2011] BCC 963, a different conclusion was reached. It was accepted that the charge was historic, that no monies were due under the charge and that the continued registration of the charge had been overlooked. Nonetheless, the court confirmed that the charge-holder must be served with notice of intention to appoint administrators.

This judgment contradicts an earlier authority which held that notice did not have to be given to a charge-holder who had been repaid (Re OMP Leisure Limited [2008] BCC 67). Which authority should be preferred?

It is of note that the OMP case was in regard to a paragraph 14 (QFCH) appointment and was not referred to in the Adjei judgment. As a result, as Adjei is the more recent judgment and decided under paragraph 26, it is probably the better authority to follow. The wording of paragraph 28 (‘An appointment may not be made under paragraph 22 unless…’) means that a failure to comply with the requirements of paragraph 26 will render the (purported) appointment of administrators invalid.

Therefore, if you are to be appointed immediately I would advise that the directors must satisfy you not only of the repayment of the debt, but also of the discharge of the security. If, however, the security remains registered I would advise it is necessary to serve notice of intention on the charge-holder, and of course on other parties entitled under paragraph 26(2), irrespective of whether there is evidence that the debt has been settled.

Q: Following service of a statutory demand by my client, the company has applied for an injunction to restrain presentation of a winding-up petition. However, my client has not given any undertaking and the company has not obtained an interim injunction. Can my client go ahead and present a petition?

A: If your client has given no undertaking and the company has not obtained any interim relief, then your client’s rights under the insolvency legislation, namely its entitlement to present a winding-up petition, cannot have been compromised (I assume no other insolvency process has been commenced). The legal position is straightforward: if the company wants interim relief, it must seek it. However, we have found that the court counter has refused to issue a winding-up petition in these circumstances. There is no legal basis for that practice and, upon referral of the matter to a registrar, the counter staff were directed to allow presentation of the petition.

Your client therefore could proceed to present a winding-up petition, but must consider carefully whether it should do so.

If there is some merit to the company’s application, the court might not look favourably on the presentation of a petition in the interim. In particular, the company may be compelled to respond to the petition by issuing a second application to restrain advertisement, duplicating costs and possibly requiring a further listing. It is easy to see how a registrar would not be impressed by this sequence of events. There might then be costs consequences for your client and the petition could potentially be struck out.

Having said that, if your client is confident that the company’s application is a mere delaying tactic, they might wish to go ahead and present the petition. Bearing in mind the significance of the presentation of a petition (in particular, for the commencement of the winding up, for the purposes of section 127, and for the appointment of a provisional liquidator) there may be good reason to do so as soon as possible.

If there is a serious concern about dissipation of the company’s assets, your client might consider the appointment of a provisional liquidator.

We would be very interested to hear of any of your experiences. Please do get in touch with our Business Recovery & Reconstruction team if there is anything that you would like to discuss.

This article was originally published in R3's Recovery Magazine.