On 23 and 24 June 2011, sitting in the applications court, I heard a number of applications concerning the administration of Frontsouth (Witham) Limited (“FWL”) and its wholly-owned subsidiary Bridge Hospital (Witham) Limited (“BHWL”). Each application, except for the last one, was made by the administrators (or in the case of BHWL, the purported administrators) of the company, Mr Bruce Alexander Mackay and Mr Matthew Robert Haw, represented by Mr Siward Atkins of counsel. None of the applications was opposed. However, the application by the administrators of BHWL raised a significant point of principle about the extent of the power of the court under rule 7.55 of the Insolvency Rules 1986 to waive a defect in their appointment. If the defect could not properly be waived, the further question arose whether the court had power to make a retrospective administration order to take effect 364 days before the hearing, and (if so) whether the court should exercise that power.

The relevant background facts are helpfully summarised in Mr Atkins’ skeleton argument, from which the following account is largely taken.

BHWL was incorporated in February 2004 to acquire and redevelop an old Grade II listed hospital in Witham, Essex. It is now called Homebridge Village. FWL was incorporated a year later, to act as a holding company for BHWL and to provide management and maintenance services at Homebridge Village.

Homebridge Village comprises two properties: Homebridge Manor, a “retirement hotel” made up of 23 suites offering temporary accommodation for the elderly; and Homebridge Court, a development of 34 independent units of sheltered residential accommodation. Occupation of Homebridge Village was initially restricted by a planning condition limiting it to those aged 55 or more. The development of Homebridge Village was funded by the Bank of Ireland (“the Bank”), which provided facilities to BHWL. The funding was cross-guaranteed by FWL and secured by fixed and floating charges on the assets of both companies.

The redevelopment was not a success, due partly to design defects in Homebridge Court and partly to the fall of the property market in 2008. BHWL managed to sell only one flat in Homebridge Court, in October 2007. The rest of Homebridge Court, and all of Homebridge Manor, remained empty.

In December 2008 the directors sought insolvency advice and were advised to put both companies into administration. On 26 January 2009 they appointed Mr Mackay and Mr Michael Rollings as administrators. The appointments were made out of court pursuant to paragraph 22(2) of Schedule B1 to the Insolvency Act 1986. No issue arises about the validity of the appointments, but by virtue of paragraph 76(1) of Schedule B1 the appointments ceased to have effect after one year unless validly extended. On 27 November 2009 Mr Rollings was replaced as an administrator by Mr Haw.

In March 2009 the administrators appointed GVA Grimley LLP (“GVA”) to market the properties. There was some interest, but it led to the sale of only one further flat in Homebridge Court in November 2009. The age restriction for residents proved to be a serious obstacle in finding purchasers, because the poor quality of the design and refurbishment meant that the units were unattractive to those in the retirement housing market. In June 2009 the administrators applied to the local council to have the age restriction lifted, and in December 2009 the council agreed to remove it. There remained, however, and still remains, a restriction on Homebridge Manor which stipulates that residents must be suffering from illness or injury and in need of care.

Following the lifting of the age restriction, GVA re-launched its marketing campaign in January 2010. The administrators’ year of office was about to expire, so they sought a six month extension of their appointments by consent under paragraph 76(2)(b) of Schedule B1 which provides that “an administrator’s term of office may be extended for a specified period not exceeding six months by consent”. By virtue of paragraph 78(2), the consents required in the case of FWL were the consent of the Bank (as secured creditor) and the consent of the employees (as preferential creditors). Both those consents were duly obtained by 26 January 2010, and there is no reason to doubt that the administration of FWL was thus effectively extended until 25 July 2010.

In the case of BHWL, however, no consents were required from preferential creditors (because the company had no employees), but there were two secured creditors whose consent was necessary: the Bank, and a company called Westbury Homes (Holdings) Limited (“WHHL”) which was a contingent creditor of BHWL under an overage agreement made on 21 March 2003. The effect of the agreement was to entitle WHHL to 20% of the net sale proceeds of Homebridge Manor and 5 of the flats at Homebridge Court in so far as they exceeded £1,650,000. The overage was secured by a duly registered charge, which meant that WHHL was a secured creditor of BHWL for the purposes of paragraph 78 of Schedule B1. Consent was duly obtained from the Bank, but not from WHHL. As Mr Mackay explains in his written evidence, the administrators sought the consent of WHHL in January 2010, before their appointments expired, but received only a holding response at that time. A consent for the purposes of paragraph 76(2)(b) has to be either written or signified at a creditors’ meeting: see paragraph 78(3). Unfortunately, neither of those conditions was satisfied on or before 26 January 2010, and it appears that the need for a written consent was overlooked. Alternatively, the administrators may have taken the view that the silence of WHHL could somehow be construed as consent. In any event, nobody seems to have appreciated that there was a problem, and the administration continued on the assumption that it had been validly extended by consent.

GVA’s renewed marketing campaign still failed to yield satisfactory results, so the administrators then decided to try a different approach. In March 2010 they entered into a 12 month sale and marketing agreement with an established property developer, Fairview New Homes Limited (“Fairview”). The agreement provided for the rebranding of Homebridge Village under the Fairview name, and the marketing of the remaining 32 flats at Homebridge Court. It became apparent that the marketing exercise was not going to be completed within the administrators’ extended term of office, so they applied to court for a 12 month extension for both administrations. Since these would be second extensions, they could not be brought about by consent: see paragraph 78(4)(a) of Schedule B1, which provides that an administrator’s term of office “may be extended by consent only once”. On 30 June 2010 Deputy Registrar Briggs made two orders extending the administrations to 24 July 2011. The applications were made on the footing that the first extensions had been validly made, and the failure to obtain the written consent of WHHL does not appear to have been drawn to the court’s attention.

The agreement with Fairview was a success, and it led to the sale of leases of all the remaining 32 flats at Homebridge Court. A sale of the freehold reversion has also been agreed with a company called Crabtree Property Management LLP, which is expected to complete at the end of July 2011. When that has been done, the administrators will need to find a buyer for Homebridge Manor. Meanwhile, they must also ensure that FWL continues to manage and maintain Homebridge Village. For these purposes the administrators now seek a further, and it is hoped final, 12 month extension of their appointments.

The FWL application presents no difficulties. I am satisfied on the evidence that it would be appropriate to extend the administration for a final period of 12 months. Both of the prior extensions were validly made, and the present application has been made in good time before the expiry of the current extension on 24 July 2011. I therefore indicated at an early stage of the hearing on 23 June that I would be willing to make the order sought.

Unfortunately the position in relation to BHWL is not so straightforward. Paragraph 77(1)(b) of Schedule B1 provides in mandatory terms that an order of the court under paragraph 76 extending an administrator’s term of office “may not be made after the expiry of the administrator’s term of office”. It follows that, if the initial extension of the administration by consent was invalid, due to the failure to obtain the written consent of WHHL in good time, the original term of office of the administrators must have expired by effluxion of time at midnight on 26 January 2010. It further follows that, unless the defect in their appointment after that date can somehow be waived, the court now lacks jurisdiction to make the extension sought, because the order would be made after the expiry of their term of office in contravention of paragraph 77(1)(b). It would also follow, for the same reason, that the extension purportedly granted by the court on 30 June 2010 was itself made without jurisdiction and was therefore a nullity.

In their application notice issued on 17 June 2011 the administrators ask the court to waive the relevant defect under rule 7.55 of the Insolvency Rules 1986, and to declare that their acts to date are valid pursuant to paragraph 104 of Schedule B1. Thus the first question that I have to consider is whether the defect can indeed be waived under rule 7.55. Mr Atkins, while very properly pointing out to me the difficulties in following such a course, nevertheless urged me to do so if I felt that I properly could, because it would undoubtedly provide the simplest solution to the problem, and it is hard to see how anybody could be prejudiced by it. He also informed me that this solution has been adopted by Registrars of the Companies Court in a number of recent cases where defects of a similar nature have come to light. By way of example, he showed me an order made by Registrar Derrett in November 2009 which contained a provision in the following terms:

Rule 7.55 is headed “Formal defects” and reads as follows:

The question whether rule 7.55 can be used to cure a defect in the appointment of an administrator has been considered by the court on at least three occasions. In each case, the court concluded that rule 7.55 could not be so used. I will take the three cases in chronological order.

The first case is a decision of Hart J on 29 September 2005, Re G-Tech Construction Limited reported at [2007] BPIR 1275 (“G-Tech”). On 13 September 2004 the company in general meeting had appointed an administrator out of court under paragraph 22 of Schedule B1, but the wrong form of notice of appointment was then filed with the court. By virtue of paragraph 31 of Schedule B1, the appointment of the administrator took effect only when the requirements of paragraph 29 were satisfied; and one of those requirements was that a notice of appointment in the prescribed form should be filed with the court. The failure to file the correct form was overlooked, with the result that one of the prerequisites of an appointment taking effect under paragraph 31 remained unsatisfied. However, the administration was carried on successfully for about a year, and the error only came to light when the administrator proposed to put the company into voluntary liquidation. He then sought directions as to whether he had been validly appointed, and whether there was any way that the failure to file the correct form could be waived.

Hart J held that the failure could not be waived under rule 7.55, because the result of the failure was that the administration had never started and accordingly there were no “insolvency proceedings” within the meaning of rule 7.55: see paragraphs 11 to 14 of the judgment. I should note at this point that, due to the untimely death of Hart J in 2007, he never had an opportunity to correct the transcript of the judgment, and this is recorded in an editor’s note on page 1275. For this reason some parts of the judgment, particularly in paragraph 11, are difficult to follow; but it is clear enough from paragraph 12 that the insuperable difficulty, in Hart J’s view, was that no insolvency process had ever started, with the result that there were no insolvency proceedings to which rule 7.55 could apply. Hart J also rejected a submission that the wrong form of notice which had been filed (a notice of intention to appoint an administrator) itself triggered an interim period of administration for at least five business days, and therefore gave rise to an insolvency proceeding upon which rule 7.55 could bite. As he said in paragraph 14, any such interim period would have expired after the five business days, so again there was no ongoing administration to which rule 7.55 could apply.

For similar reasons, Hart J also rejected a submission that the defect could be cured by reliance on paragraph 104 of Schedule B1, which provides that:

The second case is a decision of His Honour Judge Norris QC (as he then was) sitting as a High Court Judge in the Birmingham District Registry in October 2006, Re Blights Builders Limited[2006] EWHC 3549 (Ch), [2008] 1 BCLC 245. The defect in this case was that an out of court appointment of joint administrators of the company, a one-man building company, had been made by the principal shareholder’s executors at a time when, unknown to them, a creditor’s petition for the winding up of the company had already been presented. By virtue of paragraph 25 of Schedule B1, an administrator may not be appointed under paragraph 22 if a petition for the winding up of the company has been presented and not disposed of. Having held that the petition was “presented” when it was delivered to the court, and not when it was later sealed and issued, the judge then considered whether the position could be regularised by reliance on rule 7.55. He held that it could not, for the following reasons:

The decision in G-Tech was not cited to Judge Norris, no doubt because it had not yet been reported and counsel for the company was unaware of it. In any event, the reason given by the judge for holding that there were no insolvency proceedings within the meaning of rule 7.55 was not that no insolvency process had ever begun, but rather that an out of court appointment of administrators does not, of itself, initiate any legal proceedings. In reaching this conclusion he was influenced by the decision of Sir Donald Nicholls V.-C. in In re a Debtor (No.88 of 1991)[1993] Ch. 286 where the issue was whether service of a statutory demand by a solicitor for payment of his costs before the expiry of one month from the date of delivery of his bill of costs fell foul of section 69(1) of the Solicitors Act 1974, which provides that “no action shall be brought to recover any costs due to a solicitor before the expiration of one month from the date on which a bill of those costs is delivered …” The Vice-Chancellor held that, although “action” in section 69 should be liberally construed, it could extend only to forms of legal process and did not embrace a statutory demand. It was in that context that the Vice-Chancellor said at 291G:

It seems to me, with the greatest respect to Norris J (as he now is), that the parallel between service of a statutory demand in the context of section 69(1) of the Solicitors Act 1974 and an out of court appointment of administrators pursuant to Schedule B1 is not a close one, and speaking for myself I prefer the reason given by Hart J in G-Tech for holding that, in the case of an invalid appointment where a statutory prerequisite has not been observed, there are no “insolvency proceedings” within the meaning of rule 7.55. The problem is, quite simply, that no valid administration has ever come into existence.

That point apart, however, Judge Norris gave two further reasons for holding that rule 7.55 could not apply, with each of which I respectfully agree. The first reason is that a regularisation provision such as rule 7.55 cannot be used to remedy a fundamental flaw such as a failure to satisfy one of the statutory prerequisites for appointment. Such a defect cannot be characterised as purely “formal”, nor is it a mere “irregularity”. On the contrary, it goes to the very essence of the appointment, and if it could be circumvented by reliance on a rule such as rule 7.55 the effect would be tantamount to replacing a mandatory requirement with an optional one. The second reason is that the language of rule 7.55 itself shows that it was never intended to apply to fundamental defects of the type with which I am now concerned. It does not make much sense to talk of an invalid appointment causing “injustice”, or of any such injustice being “remedied” by an order retrospectively validating the appointment. I would add, in the present case, that no “objection” has been made to the court by any person prejudiced by the mistake. The application is made by the administrators themselves, who are not “objecting” to the invalidity of their appointment, but rather asking the court to waive it.

The third case is the recent decision of Proudman J in Re Kaupthing Capital Partners II Master LP Inc[2010] EWHC 836 (Ch), apparently unreported, in which judgment was delivered on 1 April 2010. One of the many issues before the judge was whether administrators of a Guernsey limited partnership (“Master”) had been validly appointed out of court by its general partner, in circumstances where (as Proudman J held) the wrong form of notice of appointment had been filed with the court. The form which had been used was the form appropriate for a company, but Master was not a company within the meaning of the relevant definition. The defect was thus very similar to that considered by Hart J in G-Tech. Proudman J decided that G-Tech could not be distinguished on the basis of differences between the relevant forms in the two cases, and said in paragraph 55 of her judgment that if a principle could be found to distinguish which forms are essential to validity and which are not, it was for a higher court to identify it. She then continued:

In the light of these authorities, it seems to me clear that rule 7.55 cannot be used in the present case in order to cure the defect in the purported extension by consent of the administration of BHWL. The result of the failure to obtain a written consent in good time from WHHL was that the initial period of administration expired on 26 January 2010, and thereafter the court has had no jurisdiction to extend it. A defect of this nature is fundamental, and quite apart from the absence of any existing insolvency proceedings, it falls outside the scope and intendment of rule 7.55. It follows that the administrators have acted without authority since 26 January 2010, and if they are to be re-appointed as administrators a fresh application for that purpose needs to be made.

It also follows that, if and to the extent that a practice has developed in the Companies Court of purporting to waive defects of this or a similar nature in reliance upon rule 7.55, such practice has no solid foundation in law and must therefore cease. It might well be convenient if the court had a power to waive defects of a relatively technical nature in the out of court appointment of administrators, but rule 7.55 cannot be pressed into service for that purpose, and in my view such a change could only be brought about by legislation.

With some ingenuity, the courts have devised a partial solution to the problem in cases of the present type by acceding to an application for the re-appointment of the same persons as administrators and then back-dating the appointment so that it takes effect 364 days before the date of the order. It has been held that the jurisdiction to back-date the appointment in this way is provided by paragraph 13(2) of Schedule B1, which provides that an appointment of an administrator by the court takes effect:

The first judge to make such an order, so far as I am aware, was Hart J in G-Tech: see paragraphs 17 to 23 of the judgment. The period of retrospection in that case was in fact about two weeks short of a year, because the initial purported appointment of the administrator had taken place a little less than 12 months before the hearing. Similar orders have subsequently been made by other judges in different cases, and most recently by Morgan J in Re Derfshaw Limited[2011] EWHC 1565 (Ch), on 2 June 2011. In the latter case Morgan J expressed some misgivings on the question whether the court does indeed have power to proceed in this way, but he decided to follow G-Tech because of the convenience and desirability of making such orders in appropriate cases, the fact that G-Tech had already been treated as authority for making such orders in a number of cases, and the fact that its authority had not been called into question (so far as Morgan J was aware) in any subsequent case or text book. I would only add that I share some of the misgivings expressed by Morgan J, but like him I regard the jurisdiction as a useful one and I am prepared to follow the practice which has by now become fairly well established.

One thing that clearly cannot be done, however, is to make successive retrospective appointments for more than one period of 364 days. This possibility was canvassed before Proudman J in Kaupthing, where she was invited to make two successive administration orders in order to validate the acts of the administrators since their original purported appointment in October 2008. Proudman J had no difficulty in rejecting this submission:

The question still remained, however, of who should make the fresh application. The administrators could not make it themselves, because they had no standing to do so. Mr Atkins sought to rely on paragraph 12(1)(a) of Schedule B1, which provides that an application to the court for an administration order may be made by “the company”, and upon an ordinary resolution to this effect of the shareholders of BHWL made on 16 June 2011. This resolution was signed by one of the joint administrators “for and on behalf of” FWL in administration, FWL being the sole shareholder of BHWL. In answer to enquiries from the Bench, counsel told me on instructions that the application could not in practice be made by the directors of BHWL, because they were four or five in number and it would not be practicable to trace them. However, the problem remains whether an ordinary resolution passed by the sole shareholder of a company is sufficient for the purposes of paragraph 12(1)(a) in circumstances where (as in the present case) the usual provisions of Table A apply, including in particular regulation 70 which provides so far as material that:

In my judgment there can be no doubt, where the articles of a company include a provision in this form, that as a matter of general company law the decision whether or not to place the company into administration is one to be taken by the directors. The decision cannot be taken by an ordinary resolution of the shareholders, although by a special resolution they may direct the board to take such a step. Mr Atkins tried to get round this difficulty in two different ways. First, he submitted that if it was open to the shareholders to procure the necessary action by the board, it must be open to them to make the necessary decision themselves when it was not practicable to convene a board meeting. He relied in this context on the proposition stated in Company Directors (Oxford, 2009), a recent textbook edited by Simon Mortimore QC, at para 4.18 to the effect that the shareholders, if they are unanimous, may informally take over the management of the company for themselves. The authority cited for that proposition is the well known case of Re Duomatic Limited[1969] 2 Ch 365. The paragraph also refers to the view expressed by the Company Law Review in Developing the Framework (March 2000) at paragraph 4.21, where the Duomatic principle was said to imply “that the members may even decide unanimously to dispense with the division of powers between themselves and the directors and run the company themselves”. Alternatively, if I felt unable to adopt this solution, counsel suggested that I might feel able to conclude that the administrators had themselves acted as de facto directors of the company since 2010, with the consequence that they could make the application themselves pursuant to paragraph 12(1)(b) which provides that the application may also be made by “the directors of the company”.

Without hearing detailed argument on the point, I made it clear that I saw considerable difficulties with both of counsel’s proposed solutions, and suggested that the appropriate course would instead be for the fresh application to be made by the Bank in its capacity as a creditor of the company pursuant to paragraph 12(1)(c). I agreed to adjourn the hearing until the next day so that this possibility could be explored. In the event, there was no difficulty in persuading the Bank to make the necessary application, and on 24 June I duly made an administration order back-dated to 25 June 2010 on the Bank’s application.

In these circumstances it is unnecessary for me to rule on the question whether I could, if necessary, have proceeded in either of the ways suggested by counsel, and I therefore prefer to leave the question open. I will merely record my provisional view that it would be a recipe for corporate chaos, and could be productive of much uncertainty in an area where it is desirable that there should be no room for doubt, if it were open to the shareholders of a company in general meeting to apply to the court for an administration order, or to appoint administrators themselves out of court, at a time when there is a functioning, or potentially functioning, board of directors.

The recent decision of Sir Andrew Morritt C in Minmar (929) Limited and another v Freddy Khalatschi and another[2011] EWHC 1159 (Ch), 8 April 2011, establishes that the rules of internal management of the company must be complied with where administrators are appointed out of court by the directors, and that it is not sufficient for the decision to be taken by a majority in number of the directors without any properly convened meeting of the board: see in particular paragraphs 33 to 52 of his judgment. My provisional view is that similar principles should apply to the division of functions between directors and shareholders, and that shareholders should not be able to procure the appointment of administrators by the company, or make an application to the court for that purpose, at a time when as a matter of internal corporate governance the decision in question is one to be taken exclusively by the directors.