Virtualpurple Professional Services Ltd, Re

This is the other of two cases which I heard on successive days in the Applications Court raising related questions about the commencement of an administration. I have already delivered judgment in the matter of Bezier Acquisitions Limited [2011] EWHC 3299 (Ch) (which was argued by Mr William Trower QC): I was able to decide that matter without addressing the subsidiary arguments which he advanced. But those subsidiary arguments addressed many of the same questions which Mr Collings QC addressed in presenting the application of the administrators and the application of the director in this case.

The issue in the present case is whether directors who are appointing administrators with immediate effect are obliged to give a separate prior notice to the company (of which they are directors) of their intention so to do: and, if so, what is the result of a failure to give that notice. I am grateful for the arguments advanced by Mr Collings QC and Mr Trower QC on this question in support of their respective applications. Although in the nature of things each case has been argued on one side only, Leading Counsel were helpful to me in not seeking to avoid the weight of the argument on the other side.

Virtualpurple Professional Services limited (“VPS”) traded as a software development company. Ms Williamson was its sole director. There are three shareholders. On 9 February 2011 Ms Williamson held a formal meeting as sole director which noted that VPS had significant financial difficulties and had received advice that it was in the best interests of the creditors of VPS that the company enter into administration. The minute of the meeting reports that, because there were no qualified floating charge holders, Ms Williamson was able to appoint an administrator pursuant to paragraph 22 of Schedule B1 to the Insolvency Act 1986 (“Schedule B1”). Ms Williamson resolved that, having regard to the financial position of VPS, the appropriate steps should be taken forthwith to file Form 2.10B at court to appoint Mr Linton and Mr Weber as administrators. Form 2.10B is a prescribed form bearing the heading “Notice of Appointment of an administrator by company or director(s) (where a notice of intention to appoint has not been issued)”. Its first operative provision makes a direct and immediate appointment of administrators. This was the correct form to use.

Paragraph 22(2) of Schedule B1 says that “The directors of a company may appoint an administrator”. That was the power that Ms Williamson exercised. Paragraph 26 of schedule B1 provides as follows: -

“26(1) A person who proposes to make an appointment under paragraph 22 should give at least 5 business days’ with notice to

(a)

any person who is or may be entitled to appoint an administrative receiver of the company, and

(b)

any person who is or may be entitled to appoint an administrator of the company under paragraph 14.

26(2) A person who proposes to make an appointment under paragraph 22 shall also give such notice as may be prescribed to such other persons as may be prescribed.

26(3) A notice under this paragraph must

(a)

identify the proposed administrator, and

(b)

be in the prescribed form”.

The “prescribed form” which is referred to in paragraph 26(3) of Schedule B1 is (by virtue of Insolvency Rule 2.20(1)) Form 2.8B. Paragraph 1 of Form 2.8B declares that

“Notice is given that… the directors of the company…intend to appoint [X] and [Y] as administrator (s) of the company”.

Paragraph 2 of Form 2.8B then says:-

“This notice is being given to the following person(s) being person(s) who is/are or may be entitled to appoint an administrative receiver of the company or an administrator of the company under paragraph 14 of Schedule B1 to the Insolvency Act 1986…”

That is the prescribed form. Paragraph 26(2) of Schedule B1 says that the appointor “shall also give such notice as may be prescribed”. There is no period of notice required (in contrast to the notice that has to be given to a qualifying charge holder). The appointor must also give notice “to such other persons as may be prescribed”. Those other persons are set out in IR 2.20(2) which is in these terms:-

“A copy of the notice of intention to appoint must, in addition to the persons specified in paragraph 26, be given to

(a)

any enforcement officer who, to the knowledge of the person giving notice, is charged with execution or other legal process against the company;

(b)

any person who, to the knowledge of the person giving the notice, has distrained against the company or its property;

(c)

any supervisor of a voluntary arrangement under Part I of the Act;

(d)

the company, if the company is not intending to make the appointment.”

Because VPS had no qualifying charge holders Ms Williamson and her advisers did not complete a Form 2.8B. They therefore did not give a “copy” to the company “in addition”. Form 2.10B took effect according to its terms and it was filed at court at 15:22 pm on 9 February 2011.

In adopting this course Ms Williamson and her advisors were following the guidance of the Insolvency Service. During October 2010, in issue No.47 of its newsletter “dear IP”, the Insolvency Service made the following statement:-

“The Insolvency Service has been asked to provide its view on the circumstances in which a copy of the Form 2.8B Notice of Intention to appoint an administrator is required to be given to the persons specified in rule 2.20(2) of the Insolvency Rules 1986 by either the directors or the company… It is our view that, when read together, paragraph 26 (2) of Schedule B1 of the Insolvency Act 1986, Rule 2.20 and Form 2.8B should be interpreted to mean that paragraph 26(2) does not give rise to a stand alone requirement to give notice of the intention to appoint an administrator. Form 2.8B is not a form that can be completed unless Notice of Intention to appoint is also being given under paragraph 26(1). Rule 2.20(2) requires that specified persons must be given a copy of the Form 2.8B notice (given under paragraph 26(1)) and a copy of the form cannot be made and given where no original form exists. To interpret paragraph 26(2) as requiring a stand alone notice independent of paragraph 26(1) would serve no useful purpose and would be contrary to the policy intention”.

It is, of course, for the Court (and not the Insolvency Service) to interpret the statutes and rules that Parliament has passed: but it is the daily experience of the Applications Court that many appointors and their advisers have followed this guidance.

In Hill v Stokes Plc [2010] EWHC 3726 HHJ McCahill QC declared that the appointment of administrators was not rendered invalid or ineffective by reason of the failure of directors to give a copy of the notice of intention to appoint in Form 2.8B to landlords who were distraining. But in Minmar (929) Limited v Khalatschi [2011] EWHC 1159 (Ch) (in which Hill v Stokes Plc) was not cited the Chancellor held (in an obiter passage) that administrators had not been validly appointed where notice of intention has not been given to the company (even though there was no floating charge holder to whom notice under paragraph 26(1) of Schedule B1 was required). Because of the doubt which the inconsistency between these two decisions creates in the instant case the administrators and Ms Williamson apply for a declaration that the appointment of Mr Linton and Mr Weber was valid (and Ms Williamson applies for further relief.

In my judgment this involves two questions:-

Before addressing those considerations I should note the context in which they arise. “Administration” was introduced in the 1986 Act to facilitate the rescue and restructure of businesses. It is of the nature of the commencement of an administration that the formalities will have to be observed under pressure of time and circumstance. Whilst under the 1986 Act the commencement and termination of that process took place in Court proceedings, the Enterprise Act 2002 streamlined that process and enabled administrators to be appointed out of Court. The true construction of Schedule B1 and of the relevant Insolvency Rules depends upon setting the particular paragraph or Rule in the context of this scheme as a whole.

I will first look briefly at administrations resulting from an order of the Court. Some of those who may make the application are identified in paragraph 12(1) of Schedule B1. Amongst those entitled to apply are “the company” and “the directors of the company”. IR 2.3(2) says that if the administration application is made by the directors it shall so state, “but from and after making it is to be treated for all purposes as the application of the company”. It seems clear that any defect in the service of the administration application would not automatically render it null and void. By IR12A.16(3) an administration application is to be treated as a “claim form” for the purposes of CPR Part 6; so CPR 6.16 would permit the court to dispense with service of an administration application where, for example, there had been a minor departure from the permitted method of service but the respondent knew precisely what the application was about; see also IR 7.55 and Re Anderson Owen Limited [2009] EWHC 2837 (Ch).

Paragraph 12(2) of Schedule B1 provides that as soon as reasonably practicable after the making of an administration application the applicant “shall notify” the persons identified in sub-paragraphs (a)-(c) and “such other persons as may be prescribed”. By IR 2.6(2) the “notification” is to be by way of service in accordance with IR2.8 i.e. in the same manner as the application notice itself. It would, I think, be difficult to resist the argument that any defect in the “notification” by way of “service” should be treated as in exactly the same way as a defect in the service of the administration application itself. A defect would not render the act null and void: the Court would have power in an appropriate case to waive the defect. The persons to be so notified are (i) those who have appointed or can appoint administrative receivers and (ii) qualifying charge holders. The point of notifying them is that they have rights capable of being exercised notwithstanding the existence of the administration application (and the interim moratorium which the making of the application creates under paragraph 44(1) of Schedule B1). For example paragraph 36 of Schedule B1 enables a holder of a qualifying floating charge to apply to the Court to have its own preferred candidate as administrator (and his own power to appoint outside the court process continues notwithstanding the administration application): and paragraph 39 confers on someone who has exercised or has the right to exercise the power to appoint an administrative receiver what is effectively a veto.

In addition to notifying those with superior rights paragraph 12(2)(d) of Schedule B1 requires the applicant to “notify … such other persons as may be prescribed”. These persons are “prescribed” by IR2.6(3). They include any administrative receiver in office, anyone who has presented a winding up petition (and any provisional liquidator appointed under it) and the supervisor of a voluntary arrangement. These are people whose current rights are immediately affected by the making of the administration application, being temporarily suspended whilst the outcome of the administration process is awaited. They have to be notified as soon as reasonably practicable after the making of the application. It would again be difficult to resist the argument that if there was delay in serving them or if there was a technical defect in the service itself, then the proceedings would not thereby be rendered a nullity, and the court would have jurisdiction to waive the defect. Amongst the prescribed persons are also the proposed administrator and “the company, if the application is made by anyone other than the company”. (The relationship between this last provision and IR2.3(2) has not been explored). There is no reason to think that a delay or a defect in serving these persons would have any consequences different from a delay or defect in service upon any other of the “prescribed persons”: it would not render the administration application a nullity but the court would have power to waive the defect.

The appointment of an administrator by an administration order takes effect at a time appointed by the order: see paragraph 13(2) of Schedule B1.

The second method by which a company may enter administration is when an administrator is appointed by a qualifying charge holder under paragraph 14 of Schedule B1. Where the appointor is the only or senior qualifying charge holder then the appointor can proceed immediately to make the appointment by filing a notice of appointment with the court under paragraph 18(1) of Schedule B1 together with the other “prescribed” documents. By IR 2.16 the prescribed form is Form 2.6B: and the prescribed documents are identified in IR 2.16(2). The key operative paragraph in Form 2.6B is the first which declares that the appointer gives notice that “[X]and [Y] are hereby appointed as an administrator(s) of [the company]”. The following five paragraphs of Form 2.6B then confirm the attachment of the other prescribed documents, identify the qualifying floating charge pursuant to which the appointment is made, confirm its enforceability, deal with any prior qualifying charges and confirm that the status of the company does not disable the qualifying charge holder from making an appointment. These statements are supported by a statutory declaration. There then follow two formal paragraphs dealing with the standing of the appointment for the purposes of EC Regulation (which are part of the prescribed form but which do not specifically reflect the requirements of paragraph 18 of Schedule B1). Paragraph 19 of Schedule B1 says that the appointment so made “takes effect when the requirements of paragraph 18 are satisfied”: and those requirements are satisfied when the relevant documents are filed with the court.

There are a number of matters to note about this procedure: -

It is within this context that paragraphs 22 to 34 of Schedule B1 fall to be construed and the questions posed in paragraph 10 above answered. The answers I would give are:-

The appointment of an administrator under paragraph 22 of Schedule B1 (that is, by the company or by its directors) takes effect “when the requirements of paragraph 29 are satisfied”. Paragraph 29 requires there to be filed at Court the notice of the appointment of the administrators (see paragraph 29(1) of Schedule B1) in the prescribed form (see paragraph 29(5) and IR2.23(1)) together with the prescribed documents (see paragraph 29(3) and IR2.23(2)). These provisions precisely mirror those of paragraph 18 of Schedule B1 and IR2.16 which relate to appointments by qualifying chargeholders. Paragraph 29 of Schedule B1 itself does not itself require any of the other paragraphs of Schedule B1 to have been complied with. It was therefore argued that it is to paragraph 29 alone that one looks to see whether the appointment of the administrator is valid.

It is tempting to accept this argument because it provides a simple “bright line test”; and that is a significant advantage when, under pressure of time and circumstance, the company, its creditors and the officeholder need to know where they respectively stand. But I cannot properly take this course. Paragraph 30 of Schedule B1 is directed to identifying the point in time at which the officeholder assumes office: it is not directed to the conditions for the validity of the appointment. Although paragraph 29 of Schedule B1 makes no express reference to compliance with the other paragraphs in this section of Schedule B1, there is an indirect reference in that the notice of appointment must include a statutory declaration by or on behalf of the appointor that “the appointment is in accordance with this Schedule”.

What then are the requirements with which directors must comply where there is no qualifying chargeholder? In Minmar (supra at para. [66]) the Chancellor decided that to answer this question the court must “follow the clear words of paras 26 and 28”: and he observed that the directors must give notice to the company of their intention to make an appointment even where there was no qualifying chargeholder. For my part, I have not found the provisions clear: but reading them consistently with other provisions and with an eye on the purpose for which I think they were enacted I have concluded that the directors may proceed to make an immediate appointment without giving “notice of intention” to the company.

Paragraph 28 of Schedule B1 says that an appointment may not be made by a director “unless the person who makes the appointment has complied with any requirement of paragraphs 26 and 27”. In my judgment the reference to “paragraph 26” is a reference to paragraph 26(1) alone. These are my reasons:-

It will be seen that I align myself with HHJ McCahill QC and his decision in Hill v Stokes plc. I respectfully disagree with the obiter observations of the Chancellor (who was not referred to Hill v Stokes plc). I hold that Ms Williamson did not have to notify VPS of the appointment she was about to make.

This brings me to the second question. Even if it is a requirement that the directors must give notice of intention to appoint an administrator to the company (notwithstanding that there is no qualifying chargeholder to whom such notice is otherwise being given) I would hold that a failure to give such notice does not necessarily render the administration process a nullity and the appointment of the administrator automatically void. This question was not separately addressed in Minmar (supra) where the argument before the Chancellor seems to have assumed that the failure to comply with any requirement of Schedule B1 would automatically result in the invalidity of the appointment. But it was considered by HHJ McCahill QC as part of his reasoning in Hill v Stokes plc (supra).

These are my reasons for that view:-

I would therefore hold (on the footing that paragraphs 26 and 28 of Schedule B1 required Ms Williamson to give notice of intention to appoint to VPS) that Ms Williamson's failure to notify the company of her intention immediately to appoint Mr Linton and Mr Weber does not automatically invalidate their appointment.

I would further hold (on that same footing) that where there is no evidence of any division between the directors and shareholders and no doubt about the authority of the directors to act on the half of the company, and where it may fairly be taken that the acts of the directors are the acts of the company and the knowledge of the directors the knowledge of the company, then the failure of directors to give notice of intention to appoint to the company does not invalidate the appointment of administrators by the directors. In the instant case there is no doubt that Ms Williamson's knowledge was the knowledge of the company and there is no doubt cast upon her authority as sole director to act for the company. Parliament did not intend that the failure to give notice (effectively) to herself of an act she was in the course of undertaking, and which would upon completion immediately be formally notified to the company by the appointee, should have the consequence that the administration of VPS is invalid and a nullity.

I will accordingly declare that the appointment of Mr Linton and Mr Weber was valid. It is unnecessary to consider the questions that would have arisen on paragraph 104 had I found the appointment to be invalid.

This is not a case in which anyone has made any mistake that requires corrective action. The need for the declaration arises from the state of the law. I will accordingly order that the costs of and occasioned the applications shall be paid as an expense of the administration (but without prejudice to the creditors’ right of challenge).