Care Matters Partnership Ltd, Re

This is an application by the directors of Care Matters Partnership Ltd (“the company”) for the appointment of Mr Solomons and Mr Defty as administrators of the company. In the case of Mr Solomons the appointment is sought with retrospective effect from the 12 October 2010 and in the case of Mr Defty with retrospective effect from 15 April 2011.

In G-Tech Construction Limited [2007] BPIR 1275 Hart J made an administration order to take effect on a date earlier than that of the order itself. He said (at paragraph [20]) that such a jurisdiction should be exercised “with extreme caution”.

There has of late been a spate of such applications in the Applications List, the case being presented on one side only and with the application increasingly treated as a matter of routine (the skeleton argument being delivered only shortly before the hearing). The reason for that is the doubt thrown upon the validity of many appointments by the decision of the Chancellor in Re Minmar (929) Ltd [2011] EWHC 1159 (Ch). The application before me proceeds on the footing that that decision correctly states the law, and I have not been invited to consider the earlier decision of HHJ McCahill QC in Hill v Stokes plc [2010] EWHC 3726 (not cited to the Chancellor and apparently to the contrary effect).

Some unease has been expressed at the course matters are taking. In Re Derfshaw [2011] EWHC 1565 (Ch) Morgan J said that he could see scope for argument as to the correctness of G-Tech Construction Limited, but that the desirability of making retrospective orders was considerable, and that since the authority for making such orders existed he felt he ought to follow the lead of Hart J. In Re Frontsouth (Witham) Limited [[2011] EWHC 1668 (Ch) Henderson J (in a reserved judgement) said that he shared Morgan J's misgivings, but like him regarded the jurisdiction as a useful one and was prepared to follow the practice.

When the present application came before me in the Vacation Applications Court I decided that, rather than add to the list of extempore judgments I would reflect upon the issues over the weekend. This case raises two points not specifically addressed in other cases.

Where there is a defect in the appointment of an administrator the judges at first instance are agreed that IR 7.55 cannot be used to waive the defect.

In G-Tech Construction Limited Hart J took the view that the only course open was to make a fresh administration order with retrospective effect. In Re Blights Builders Ltd [2008] 1 BCLC 245, unaware of the decision in G-Tech Construction Ltd, I took a different course, making a fresh administration order with prospective effect and validating the acts of the administrator who had been defectively appointed under paragraph 104 of Schedule B1 to the Insolvency Act 1986. Hart J had also been invited to take this course but had held

“ It is certainly the case that that provision plainly may [assist] in assessing the validity of acts done by a person purporting to be at the administrator, but it does [not] seem to me to provide in itself a cure for the fact that ... there has been no administration ... if the requirements of paragraph 29 have not been complied with ”.

For my own part (and with considerable diffidence in differing from Hart J) I adhere to my view that paragraph 104 may supply the answer in many cases. As Lord Simonds said (of similar provisions in s.143 of the Companies Act 1929 and Article 88 of the then-current Table A) in Morris v Kassen [1946] AC 459 and 471:-

“ There is ... a vital distinction between (a) an appointment in which there is a defect or, in other words a defective appointment, and (b) no appointment at all. In the first case it is implied that some act is done which purports to be an appointment but is by reason of some defect inadequate to the purpose: in the second case there is not a defect, there is no act at all ….. [T]he section and article alike deal with slips or irregularities in appointment, not with a total absence of appointment ”

It may well be that paragraph 104 is of no assistance where there is no power to make an appointment (for example because there is no valid charge in respect of which the power under paragraph 14 of Schedule B1 could be exercised, or the persons purporting to appoint an administrator under paragraph 22 are not themselves directors). But it may well be that paragraph 104 is of assistance where there is a power to make an appointment but that power has been defectively exercised through some irregularity in procedure.

Mr Solomons and Mr Defty made (but did not pursue) an application for validation under paragraph 104. Thus the point was not argued before me: and I am conscious (a) that both Proudman J in Kaupthing Capital Partners [2010] EWHC 386 (Ch) and Henderson J in Frontsouth accepted Hart J’s view on paragraph 104 without comment; and (b) that a wider debate ranges around section 232 Insolvency Act 1986. Having reflected on the matter I have decided that the only proper course for me to take in the circumstances is to accept (with the same misgivings voiced by Morgan J and Henderson J) that the jurisdiction identified in G-Tech Construction Ltd provides the only answer in the instant case, and to consider whether I may properly exercise it.

By paragraph 11 of Schedule B1 the court may make an administration order only if satisfied that the company is (or is likely to become) unable to pay its debts and that the administration order is reasonably likely to achieve the purpose of administration: I have supplied the emphasis. Mr Warents of Counsel (who appeared for the company) submitted that where an application is made for an administration order having retrospective effect those conditions are to be satisfied as at the date by reference to which the order is to take effect (not as at the date when the order is made). This is the first new point. He submitted that were this not so G-Tech Construction itself would appear to have been wrongly decided (because there the administration had been all but completed, and the administrator was proposing to put the company into voluntary liquidation: see para [8] of the judgment).

I disagree. In my judgment there are two separate questions. The first question is whether an administration order should be made at all. This requires both the satisfaction of the two conditions set out in paragraph 11 (which alone enable the court to make an order) and a decision by the court that it is appropriate to make an order - as at the date when the order is made. The second question is (under paragraph 13(2)(a)) as to the time at which the administration order “takes effect”. These questions should not be confused. Suppose that in January the directors (defectively) appointed an administrator with the objective of rescuing the company as a going concern, and that the administrator successfully promoted a CVA or refinanced the company although it remained in administration for the time being. When the defect in his appointment was discovered in June it would not in my judgment be possible to make an administration order to take effect in the preceding January since the threshold conditions would not be satisfied at the date the order was made: the court cannot in June make an administration order in relation to a solvent company even if the company was insolvent in the preceding January.

In the instant case the evidence established that the company was insolvent on 12 October 2010 when the directors appointed Mr Solomons as administrator. It established that as at 12 October 2010 Mr Solomons was satisfied that the purpose of the administration was reasonably likely to be achieved (though the statement of his opinion did not identify the purpose). The administrator's progress report showed that within days of his appointment Mr Solomons sold the business of the company for £15,000 and set about realising the book debts (estimated to realise £30,000). In fact the book debts realised only £5,856. Since the administrator’s time costs as at the 31 March 2011 totalled £68,436 the realisations in the administration were substantially below the cost of the administration itself. There is no evidence that the situation has improved: and with further time costs incurred it is likely to have worsened.

Whilst it may be taken to be the case that the company remains insolvent and unable to pay its debts I am not satisfied on this evidence (a) what the objective of an administration would now be (beyond enabling the purported administrator to collect something on account of his fees, which is not one or of the statutory objectives); or (b) that the purpose of the administration is reasonably likely to be achieved. As far as the evidence goes, all that can now be done is to dissolve the company by filing a notice under paragraph 84 of schedule B1.

Mr Warents submitted that although the acts of Mr Solomons that “achieved the purposes of the administration” occurred in the past, if his appointment was invalid, then so were the acts that achieved those purposes. By making a retrospective administration order now the court would validate the acts that were thought to have achieved the purposes of the administration and would thereby now achieve the purposes of the administration. In his report to the creditors the administrator has said that the first objective (“rescuing the company as a going concern”) had been achieved. But this does not seem to me to be so. The suggestion confuses the company and its business. A much slimmed-down version of the business of the company has been sold as a going concern: but the company cannot be rescued as a going concern because it has creditors of some £400,000, fees and expenses of administration of some £68,000 and virtually no assets. I do not think that this administration achieved anything. Nor do I think that it can be taken as read that the sale of the business was “invalid”.

The threshold conditions for the making of an administration order are therefore not satisfied. I cannot properly make an administration order today appointing either Mr Solomons or Mr Defty.

In addition, as a matter of discretion I would not make an administration order. Mr Solomons acted as administrator until 15 April 2011 on which date he was removed by order of the court and replaced by Mr Defty. Since 15 April 2011 Mr Defty has acted as sole administrator appointed by the court. Mr Warents argued that if Mr Solomons had not been validly appointed in the first place then a court order appointing Mr Defty as replacement administrator was a nullity and could be ignored. He submitted that I should therefore now appoint Mr Defty but with effect from 15 April 2011. When I suggested that the effect of my doing so would mean that from 15 April 2011 both Mr Solomons and Mr Defty would be in office as administrators under my retrospective orders Mr Warents submitted that that would not be so, because the effect of my today appointing Mr Solomons (but with effect from the 12 October 2010) would be that as at 15 April 2011 Mr Solomons would have been retrospectively in office and so retrospectively would be removed as at 15 April 2011 under the court order of that date. The logic of that argument would suggest that it is now unnecessary for me to appoint Mr Defty, whose title would now derive from the retrospectively validated order of 15 April 2011.

This approach seems to be well outside anything that was contemplated by Hart J in G-Tech Construction. I do not consider that I can today appoint Mr Solomons to be administrator from the 12 October 2010 until 15 April 2010: paragraph 13(2)(a) confers no such jurisdiction. I do not consider that if I today appoint Mr Solomons to be administrator with the order to take effect as at 12 October 2011 he would already have been removed as administrator as from 15 April 2010 under the order of that date. I do not consider that I should today appoint Mr Defty to be administrator when there is an unrevoked court order dated 15 April 2010 appointing him administrator (and under which in my view he continues in office). I am particularly reluctant to take such novel steps when creditors, who face a deficiency of about £400,000, have not had any voice.

If I had decided that it was proper to make an administration order today I would then have had to consider whether to direct that the order should take effect as at 12 October 2010. It would only be proper to do so if the conditions for making an administration order were also satisfied as at that date. I would then have had to address the issue of the relevance of hindsight. Would it be proper to accept Mr Solomon’s view (current in October 2010) that the purposes of the administration were reasonably likely to be achieved (based, presumably on estimated book debts of £30,000 and an anticipated value for the business) when it is now known that the business was only worth £15,000, the book debts worth less than £6000 and the only effect of the administration has been to generate funds to pay part of Mr Solomon’s fees? I can leave that question unanswered.

Without hesitation I give permission to appeal. My respectful view is that both the issues surrounding the validity of appointments arising from Minmar and the apparent solution afforded by G-Tech Construction are in need of definitive determination in a case fully argued on both sides. (That is not in any way a criticism of Mr Warents, for whose help I am grateful).