Bezier Acquisitions Ltd, Re

This is one of two applications that came before me on successive days in the Applications Court. (The other was Re Virtualpurple Professional Services Ltd argued by Mr Collings QC). Each was argued within the constraints imposed by that list and raised related points of some controversy. I decided not to deliver an extempore judgment in either case but to reflect upon the thorough arguments of Mr Collings QC and Mr Trower QC respectively. Although the points have been argued on one side only the presentation was in each case fair to the weight of the argument on either side. I am grateful for the help I was given.

Bezier Acquisitions Limited (“Bezier”) was the holding company for six trading and three non-trading subsidiaries operating in the field of advertising, marketing and promotions. During the course of 2011 Bezier was involved in negotiations for refinancing and restructuring. It retained Linklaters LLP as its solicitor in relation to all aspects of the refinancing and the restructuring.

Bezier was in jeopardy because an Event of Default had occurred under its Senior Term Loan Agreement and its Senior Revolving Facilities Agreement. This senior debt was secured by a fixed and floating charge over all of the Bezier Group assets. The lender under these agreements was therefore the holder of “a qualifying floating charge” for the purposes of paragraph 14(3) of Schedule B1 to the Insolvency Act 1986 (“Schedule B1”). Bezier was at risk of an immediate demand for payment being made. In consultation with its senior lender Bezier negotiated the sale of its undertaking and assets, the intended mechanism being by way of a “pre-pack administration”. It was forecast to run out of funds by the end of August. On the 18 August 2011 the directors of Bezier were warned that a Notice of Demand would be served the following day. So that evening they resolved, subject to the service of the Notice of Demand, that the appointment of administrators would be in the best interests and to the advantage and benefit of Bezier and its creditors. To that end the directors approved a Notice of Intention to appoint an administrator in Form 2.8B. At that same meeting they also approved a Notice of Appointment in Form 2.9B recording the appointment of Mr Smith and Mr Edwards of Deloitte LLP as joint administrators.

The Notice of Demand was duly received on 19 August 2011. Mr Barfield, a director and the company secretary of Bezier, states that (as authorised by the directors)

“I swore the Notice of Intention in the presence of a solicitor…I then handed the completed document to a trainee solicitor from Linklaters who was present at the time. He took the original signed document back to Linklaters office with him. I understand that on the same day a scanned copy of the original Notice of Intention was sent by Linklaters LLP by e-mail to the Security Trustee……..

I also executed the Notice of Appointment in Form 2.9B. The appointment of the Administrators was effected by Linklaters filing at Court on [Bezier’s] behalf, the Notice of Intention, the Notice of Appointment and the requisite notices from the Administrators…”

The Notice of Appointment indicates that it was filed at Court at 4:30pm on the 19 August 2011. Immediately upon their appointment taking effect the Administrators sold Bezier’s business and assets to the purchaser who had emerged in the pre-administration negotiations. Since the consideration for the sale consisted principally of the assumption of responsibility for debt the key events in the administration occurred immediately after the appointment of the administrators. The entire process was consensual; indeed all of the ordinary share holders in Bezier were aware in advance of the director’s intentions and consented to the adoption of the intended course (either because they were themselves directors or because their consent had been specifically sought and received). But notwithstanding the knowledge and the consent of all directors and all shareholders, an issue has arisen about the validity of the appointment of administrators.

In appointing Mr Smith and Mr Edwards to be administrators of Bezier the directors were exercising the power conferred upon them by paragraph 22(2) of Schedule B1. Paragraph 26(1) of Schedule B1 required them to give notice to the holder of any qualifying floating charge. Paragraph 26 (2) of Schedule B1 states that they “shall also give such notice as may be prescribed to such other persons as may be prescribed”. Insolvency Rule 2.20(2) says that

“A copy of the notice of intention to appoint must, in addition to the persons specified in paragraph 26, be given to...(d) the company, if the company is not intending to make the appointment”.

So where Notice of Intention to appoint is given to a qualifying chargeholder (and an interim moratorium comes into effect for at least five business days under paragraph 44(4) of Schedule B1 to enable the qualifying chargeholder consider whether to make its own appointment (if entitled)) a copy of the Notice of Intention must in such case be given to the company.

As to the giving of notice to the company, IR2.20(3) declares that the provisions of IR2.8(2) ff. apply to the giving of Notice of Intention in the same way as they apply to service of an administration application. IR2.8(2) (which deals with service of an administration application) provides that

“Service shall be effected… on the company… by delivering the documents to its registered office”.

IR2.8(3) then provides that if delivery to a company’s registered office is not practicable then service may be effected by delivery to its last known principal place of business.

In the instant case the Notice of Intention was not delivered to Bezier at its registered office (although it could easily have been so served). Does this invalidate the appointment of Mr Smith and Mr Edwards as administrators of Bezier?

I would answer that question in the negative for two reasons.

First, in my judgment IR2.8(2) and (3) do not upon their true construction contain a complete and exhaustive code as to the mode of service upon a company. Thus:

In the instant case I am satisfied that this requirement is fulfilled. The copy of the Notice of Intention was delivered by Bezier’s company secretary to Linklaters who were the solicitors retained by Bezier. Paragraph 38 of Mr Barfield’s witness statement says

“ “For the avoidance of doubt [Bezier’s] retainer of Linklaters was intended by the directors to authorise the firm for all purposes to act on the company’s behalf in connection to the Sale, including in respect of the appointment of the administrators, such engagement to include taking receipt of, and dealing on the company’s behalf with, all relevant notices and formal documentation”.

This simply reflects the realities of life. The solicitors are undoubtedly acting for the company as a legal person about to enter into transactions; and those transactions are brought about by the legal person’s human agents, who are the directors.

So I hold that, reading the Insolvency Rules as a whole, the receipt of the Notice of Intention by Linklaters and its retention by them constitute sufficient service under IR2.8(2) and that Notice of Intention has been given to the company for the purposes of paragraph 26 of Schedule B1 and IR2.20(2).

Secondly, apart from the context of the Insolvency Rules themselves, the provisions of IR2.8(2) must be considered in a broader company law context.

The origins of the rules as to service of court process upon companies lie in section 10 of the Joint Stock Companies Act 1848. This required every petition for the dissolution and winding up of the affairs of a company to be served “at the Head or Only Office of the Company, upon any Member, Officer, or Servant of the Company there…”. It was thought by Knight Bruce V-C in Re The Trent Valley etc Continuation Railway Co (1848) 3 de G & SM that service on the solicitor for the company was not sufficient, since he was not “officer or servant of the company” within the section.

This provision was not repeated in the Companies Act 1862. But the issue of service was addressed in the General Order in Chancery of the 11 November 1862, Rule 3 providing

“Every such petition shall, unless presented by the Company be served at the Registered Office… upon any member, officer, or servant of the Company there… or by being left at such Registered Office…”

In Re Regent United Service Stores (1878) LR 8 ChD 75 the company was in a “miserable state of insolvency”. A creditor presented a petition. The directors met together at the place where the company generally transacted its business (which was not its registered office). The directors resolved that an interim liquidator should be appointed. A solicitor was in attendance at the meeting. The directors gave him instructions to take such steps as might be necessary in reference to the resolution they had just passed. That solicitor accepted service of the petition (so that it was never left at the registered office of the company). The Court of Appeal unanimously held that service was good.

First, Bagallay LJ held (at p 80)

“There is no doubt that the 3rd rule of the General Order… provides for a service being made at the registered office of the company… but that is not an imperative rule, which is never to be deviated from. I think that the general tendency of all the authorities is to show that if there is such a service as gives full and complete information to every body to whom information ought to be given, it is sufficient, although provisions and rules of this kind, which are not part of the Act of Parliament, but are merely made for the purpose of carrying it into effect, may not have been literally complied with”.

Second, at p82 Thesiger LJ held;

“Now there have been a great number of cases decided … in which the distinction has been recognised between provisions contained in Acts of Parliament (and the same observations would apply to rules made part of Acts of Parliament) which are merely directory, and those which are made by the legislature an absolute condition precedent necessary to the validity of any proceedings to which those provisions refer. And I may say from my own recollection… that the tendency of the Court has been to hold provisions such as those contained in the rule to which I have referred to be merely directory, except in cases where it is further provided that in the event of their not being complied with subsequent proceedings shall be invalid…Now, in the rule upon which the question turns, we find no words expressly invalidating the proceedings on the petition in the event of this particular provision not being complied with, and I am clearly of opinion that compliance with this rule is not an absolute condition precedent to the validity of the winding up proceedings”.

He noted that the directors had notice of the existence of the petition, they had convened a valid meeting to consider what should have been done on behalf of the company, the whole body of directors had resolved to give instructions of behalf of the company to the solicitor and that it was “clear…that under the resolutions so appointing him [the solicitor] had full authority to represent the company in the winding up proceedings”.

The distinction between “imperative” and “directory” provisions is as well recognised today as it was in 1878, although the language in which it is expressed and the description of the nature of the distinction have both evolved. I consider the most authoritive recent treatment is to be found in the speech of Lord Steyn in R v Soneji [2005] UKHL 49, [2006] 1 AC 340. Having noted the distinction that had evolved between mandatory and directory requirements Lord Steyn then cited a dictum of Lord Hailsham part of which I will set out ( the complete citation is in paragraph [15] of the speech);

“When Parliament lays down a statutory requirement for the exercise of legal authority it expects its authority to be obeyed down to the minutest detail. But what the Courts have to decide in a particular case is the legal consequence of non-compliance on the rights of the subject viewed in the light of a concrete state of facts and the continuing chain of events. It may be that what the Courts are faced with is not so much a stark choice of alternatives but a spectrum of possibilities in which one compartment or description fades gradually into another… though language like “mandatory”, “directory”, “void”, “voidable”, “nullity” and so forth may be helpful in argument, it may be misleading in effect if relied on to show that the Courts, in deciding the consequences of a defect in the exercise of power, are necessarily bound to fit the facts of a particular case and a developing chain of events into rigid legal categories or to stretch or cramp them on a bed of Procrustes invented by lawyers for the purposes of convenient exposition..”

Although the context in which that view was expressed was the supervisory jurisdiction of the court over the decisions of subordinate authorities, Lord Steyn said it that it had…

“..led to the adoption of a more flexible approach focusing intensely on the consequences of non-compliance, and posing the question, taking into account those consequences, whether Parliament intended the outcome to be total invalidity ”.

Lord Steyn concluded (at paragraph [23] of his speech)

“… The rigid mandatory and directory distinction, and its many artificial refinements, have outlived their usefulness. Instead… the emphasis ought to be on the consequences of non compliance, and posing the question whether Parliament can fairly be taken to have intended total invalidity. That is how I would approach what is ultimately a question of statutory construction.”

I have held that focusing upon the Insolvency Rules themselves IR 2.8 does not provide a complete and exhaustive code as to service of the Notice of Intention; and that service upon the company’s solicitor is also permitted. As a separate and independent ground I hold that IR2.8 is to be construed in the sense that Parliament did not intend that a failure strictly to comply with the rule as to service of the Notice of Intention at the registered office should invalidate the giving of notice where at a valid meeting of the directors of the company (a) it was resolved that the company enter administration and that Notice of Intention to Appoint be given and (b) an agent was appointed to act on behalf of the company in respect of the appointment of the administrators (that engagement to include the taking receipt of, and dealing on the company’s behalf with, all relevant notices and formal documentation). I would follow and apply the decision in Re Regent United Service Stores, the principle underlying which I consider remains good law. There has in the present case been “such a service as gives full and complete information to every body to whom information ought to be given”.

I would therefore declare that Mr Smith and Mr Edwards were validly appointed administrators because the delivery by the directors of the Notice of Intention to the company’s solicitors prior to the appointment of the administrators was sufficient to satisfy the requirements of paragraph 26(2) of Schedule B1. I approve the terms of the draft order lodged as “Option 1”.

I should record that Mr Trower QC also argued that there was no mandatory requirement to serve the company because under paragraph 22 of Schedule B1 the appointment of the administrators took effect when the requirements of paragraph 29 were satisfied (paragraph 29 requiring only the filing of a Notice of Appointment in the prescribed form (including a statutory declaration made during the prescribed period) together with the prescribed accompanying materials). He submitted that the requirements of paragraph 29 so read were fulfilled at 4.30pm on 19 August 2011. If this argument failed he and Mr Robins sought (in their comprehensive skeleton argument) an immediate order for the appointment of administrators but with retrospective effect (following G-Tech Construction [2007] BPIR 1275); alternatively relief under para. 104 of Schedule B1; and as an ultimate “fall-back” a declaration that the administrators had been validly appointed agents for the purpose of effecting a sale of Bezier’s assets. I do not have to decide these points because the first of the arguments succeeds.

The directors and their advisers have not made any mistake that requires correcting. The issue before me arises because of the state of the law and to quell any concerns about the validity of the sale by the administrators. This is a proper case for the costs of the application to be treated as an expense of the administration.