Bootes & Ors v Ceart Risk Services Ltd

This is an application by Peter Bootes, the sole owner and director of Ceart Risk Services Ltd (“the Company”), and by Jeremy Frost and Stephen Wadstead (“the Administrators”) for a declaration that the Administrators were validly appointed as administrators of the Company under paragraph 22 of Schedule B1 to the Insolvency Act 1986 (“Schedule B1”) notwithstanding a failure to obtain the prior consent of the Financial Services Authority (“the FSA”) to the appointment, or for alternative relief. The FSA was served with the application, but has not appeared to resist it. While that is understandable, it is regrettable from the Court’s point of view, since I have not had the benefit of adversarial argument.

As at 19 January 2012 the Company was authorised by the FSA to carry on non-investment insurance intermediation for retail and commercial customers.

On 19 January 2012 the Company resolved at a general meeting that it should be placed into administration and that the Administrators should be appointed as joint administrators. There was no qualifying floating charge holder, and therefore no consent to the appointment of the Administrators was required from such a person. On the same day the Company filed a notice of appointment of the Administrators pursuant to paragraph 22 of Schedule B1 on Form 2.10B at Croydon County Court together with supporting documents. No consent from the FSA was sought, obtained or filed on 19 January 2012.

On 2 February 2012 the FSA wrote to the Administrators drawing attention to section 362A of the Financial Services and Markets Act 2000 (“FSMA 2000”) and inviting the Administrators to write to the FSA as a matter of urgency to provide certain information and to seek the FSA’s consent to their appointment as administrators of the Company.

On 6 February 2012 the Administrators sent two letters to the FSA providing the information which it had requested and seeking the FSA’s consent to their appointment.

On 8 February 2012 the FSA wrote to the Administrators giving its consent to their appointment as administrators of the Company.

On 9 February 2012 the Administrators entered into an agreement with HFIS plc to sell the assets of the Company to HFIS Plc for £65,000. This sum has since been duly paid and is being held by the Administrators for distribution to the Company’s creditors.

I was informed by counsel for the Applicants that the FSA’s letter of consent was subsequently filed at Croydon County Court, although the evidence before me does not establish when this was done.

Section 362A provides as follows:

“Administrator appointed by company or directors

(1)

This section applies in relation to a company of a kind described in section 362(1)(a) to (c).

(2)

An administrator of the company may not be appointed under paragraph 22 of Schedule B1 to the 1986 Act or paragraph 23 of Schedule B1 to the 1989 Order without the consent of the Authority.

(3)

Consent under subsection (2)—

(a)

must be in writing, and

(b)

must be filed with the court along with the notice of intention to appoint under paragraph 27 of Schedule B1 to the 1986 Act or paragraph 28 of Schedule B1 to the 1989 Order.

(4)

In a case where no notice of intention to appoint is required—

(a)

subsection (3)(b) shall not apply, but

(b)

consent under subsection (2) must accompany the notice of appointment filed under paragraph 29 of Schedule B1 to the 1986 Act or paragraph 30 of Schedule B1 to the 1989 Order.”

The Applicants do not dispute that section 362A applies in relation to the Company. Nor do they dispute that the Company purported to appoint the Administrators under paragraph 22 of Schedule B1 without at that time having the consent of the FSA. The Applicants’ first contention is that the Administrators were nevertheless validly appointed with effect from 19 January 2012, alternatively 8 February 2012, once the FSA gave its consent.

This contention raises a question of construction of section 362A(2). When this says that an administrator “may not be appointed … without the consent of the Authority” does that mean that a purported appointment prior to such consent being obtained is incurably invalid or is it merely defective such that the defect can be cured by subsequent consent? If the latter is the case, a further question arises: does the appointment take effect from (a) the date of the purported appointment or (b) the date when the FSA’s consent is obtained or (c) the date when the consent is filed with the court in accordance with section 362A(3)(b) or (4)(b)?

I was informed by counsel for the Applicants that there is no authority on this point, but he relied by way of analogy upon the decisions of HHJ McCahill QC sitting as a Judge of the High Court in Hill v Stokes plc [2010] EWHC 3726 (Ch), [2011] BCC 473 and of Norris J in Re Virtualpurple Professional Services Ltd [2011] EWHC 3847 (Ch), [2012] BCC 254.

The issue in those cases was whether directors had validly appointed administrators in circumstances where they had failed to give a copy of a notice of intention to appoint to one of the categories of person prescribed in rule 2.20(2) of the Insolvency Rules 1986 (in Hill v Stokes, to landlords who were distraining (rule 2.20(2)(a)) and in Virtualpurple, to the company (rule 2.20(2)(d)) as required by paragraph 26(2) of Schedule B1. This depends on whether paragraph 28 of Schedule B1, which provides that an appointment “may not be made under paragraph 22 unless the person who makes the appointment has complied with any requirement of paragraphs 26 and 27”, should be interpreted as meaning “any requirement of paragraphs 26(1) and 27”. That is a question upon which there has been an unfortunate difference of judicial opinion. HHJ McCahill QC in Hill v Stokes and Norris J in Virtualpurple answered it in the affirmative, whereas Sir Andrew Morritt C in Minmar (929) Ltd v Khalatschi [2011] EWHC 1159 (Ch), [2011] BCC 485 (to whom Hill v Stokes was not cited) and Warren J in National Westminster Bank plc v Msaada Group [2011] EWHC 3423 (Ch), [2012] BCC 226 (a judgment handed down on the same day as Virtualpurple) decided it in the negative. In Re MG Global Overseas Finance Ltd [2012] EWHC 1091 (Ch) Mann J indicated a preference for the former pair of decisions over the latter, but did not have to decide which was correct.

Even if the Chancellor in Minmar and Warren J in Msaada were correct on that point, as to which I express no view, HHJ McCahill QC in Hill v Stokes at [61]-[68] and [70] and Norris J in Virtualpurple at [24]-[26] also held, as an alternative ground for their respective decisions, that the failure to give a copy of the notice of intention to appoint to the required person did not mean that the appointment was incurably invalid, but rather constituted a curable defect. As Norris J pointed out in Virtualpurple at [24], this issue was not addressed by the Chancellor in Minmar. It was briefly addressed by Warren J in Msaada at [42]-[43], but it appears that Warren J did not have cited to him the decision of the House of Lords which Norris J applied in Virtualpurple by reference to Norris J’s own earlier judgment in In re Bezier Acquisitions Ltd [2011] EWHC 3299 (Ch), [2012] Bus LR 636 (which was handed down after the argument in Msaada, albeit prior to the judgment in the latter case).

As Norris J pointed out in Bezier at [19], the most authoritative approach to issues of this kind is to be found in the speech of Lord Steyn (with whom Lord Carswell and Lord Brown of Eaton-under-Heywood agreed) in R v Soneji [2005] UKHL 49, [2006] 1 AC 340. Lord Steyn outlined the problem, and an earlier approach to it which had been adopted by the courts, at [14]:

“A recurrent theme in the drafting of statutes is that Parliament casts its commands in imperative form without expressly spelling out the consequences of a failure to comply. It has been the source of a great deal of litigation. In the course of the last 130 years a distinction evolved between mandatory and directory requirements. The view was taken that where the requirement is mandatory, a failure to comply with it invalidates the act in question. Where it is merely directory, a failure to comply does not invalidate what follows. There were refinements. For example, a distinction was made between two types of directory requirements, namely (1) requirements of a purely regulatory character where a failure to comply would never invalidate the act, and (2) requirements where a failure to comply would not invalidate an act provided that there was substantial compliance. ...”

As Lord Steyn explained in [15], however, the speech of Lord Hailsham of St Marylebone LC in London & Clydeside Estates Ltd v Aberdeen District Council [1980] 1 WLR 182 at 189–190 led to “the adoption of a more flexible approach of 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.” Having reviewed subsequent case law in this country, New Zealand, Australia and Canada, Lord Steyn concluded at [23]:

“… I am in respectful agreement with the Australian High Court [in Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355] that the rigid mandatory and directory distinction, and its many artificial refinements, have outlived their usefulness. Instead, as held in Attorney General's Reference (No 3 of 1999) [2001] 2 AC 91, 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. …”

Applying this approach to section 372A(2), the starting point is to identify the purpose of the requirement to obtain the FSA’s consent. In my view it is clear that section 372A(2) constitutes an aspect of the FSA’s regulatory role with respect to financial services companies. It enables the FSA to vet persons who are proposed to be appointed as administrators of such companies to ensure that they are suitable persons to undertake that role. It also enables the FSA to check whether the appointment of an administrator is likely to achieve a better outcome for the company’s creditors than an alternative course of action. Finally, it gives the FSA an opportunity to draw to the attention of the administrator other obligations imposed on insolvency practitioners dealing with authorised companies by Part XXIV of FSMA 2000.

The next step is to consider the consequences of non-compliance with section 372A(2). In my view it is clear that the requirement to obtain the FSA’s consent is an important one. It does not follow, however, that it is essential to obtain such consent prior to the appointment of the administrator. As the facts of the present case demonstrate, if the need to obtain the FSA’s consent is overlooked prior to the appointment, it remains possible to seek and obtain such consent after the event. It is difficult to see how the interests of creditors are prejudiced if the FSA approves the appointment after the event rather than before. By contrast, if the appointment is incurably invalid if prior consent is not obtained, then problems may arise which do cause detriment to the interests of creditors.

Against this background, I must consider the wording of section 362A(2). The words “may not be appointed … without the consent of the Authority” clearly indicate that it is essential to obtain the FSA’s consent. They do not clearly indicate that it is essential to do so prior to the appointment. Thus subsection (2) does not say “without the prior consent of the Authority”. Although subsections (3)(b) and (4)(b) provide that the consent “must be filed … along with the notice of intention to appoint” or “must accompany the notice of appointment”, that wording does not compel the conclusion that the consent must be filed at the same time as the notice of intention to appoint or notice of appointment, as the case may be. A consent filed the following day could still be said to have been filed “along with” a notice to intention to appoint or to “accompany” the notice of appointment. Even if one interprets subsections (3)(b) and (4)(b) as requiring the consent to be filed simultaneously with the notice of intention to appoint or the notice of appointment, that does not compel the conclusion that the consent must be obtained prior to the appointment. The appointment could be made on day 1, consent obtained on day 2 and the notice of appointment and the consent filed simultaneously on day 3. Finally, nothing in section 362A explicitly states, or necessarily implies, that a failure to obtain the FSA’s consent prior to the appointment means that the appointment is incurably invalid.

Having regard to the purposes of section 362A(2), the consequences of non-compliance, the wording of section 362A(2) and the other provisions in section 362A, can Parliament fairly be taken to have intended that failure to obtain the FSA’s prior consent should incurably invalidate a purported appointment under paragraph 22 of Schedule B1? In my judgment, the answer to that question is no. Rather, I consider that Parliament should be taken to have intended that failure to obtain the FSA’s prior consent constitutes a defect in the appointment which is capable in appropriate circumstances of being cured subsequently.

I turn then to consider the second question identified in paragraph 11 above. Although the Applicants seek a declaration to the effect that, the FSA’s consent having been obtained, the appointment took effect on 19 January 2012 (the date of the purported appointment), counsel for the Applicants advanced no argument in support of that date. Rather, he submitted that the defect was cured, and hence the appointment took effect, on 8 February 2012 (the date of the FSA’s letter of consent).

As counsel for the Applicants rightly acknowledged, however, paragraph 31 of Schedule B1 provides:

“The appointment of an administrator under paragraph 22 takes effect when the requirements of paragraph 29 are satisfied.”

Paragraph 29(1) of Schedule B1 provides:

“A person who appoints an administrator under paragraph 22 shall file with the court-

(a)

a notice of appointment, and

(b)

such other documents as may be prescribed.”

No rule in the Insolvency Rules prescribes the filing with the court of the FSA’s consent where section 362A of FSMA 2000 applies, but section 362A(4)(b) does require this. I note that paragraph 29(5) of Schedule B1 provides that “any document accompanying” the notice of appointment “must be in the prescribed form”. There is no prescribed form for the FSA’s consent other than the requirement imposed by section 362A(3)(a) that it be in writing, however. In my judgment it follows that the combined effect of section 362A(4)(b), paragraph 29(1)(b) and paragraph 31 is that, where section 362A applies, the appointment of an administrator takes effect when the FSA’s written consent is filed with the court (assuming that, as here, the notice of appointment has already been filed).

Accordingly, I conclude that the appointment of the Administrators did not take effect on 8 February 2012, but took effect on the date when the FSA’s consent was filed with Croydon County Court.

The Applicants’ second contention is that, if the Court comes to the conclusion that the Administrators were not properly appointed until a date later than 19 January or 8 February 2012, then the Court should make a declaration pursuant to paragraph 104 of Schedule B1 that the Administrators’ acts prior to the date when they were properly appointed were valid.

Paragraph 104 provides:

“An act of the administrator of a company is valid in spite of a defect in his appointment or qualification.”

The applicability of paragraph 104 in circumstances such as these is again a question upon which there has been an unfortunate difference of judicial opinion amongst the judges of this Division. I cannot improve upon Norris J’s exposition in Re Care Matters Partnership Ltd [2011] EWHC 2543 (Ch), [2011] BCC 97:

“6.

Where there is a defect in the appointment of an administrator the judges at first instance are agreed that the Insolvency Rules 1986 (SI 1986/1925) r.7.55 cannot be used to waive the defect.

7.

In G-Tech Construction Ltd [2007] BPIR 1275 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 [2006] EWHC 3549 (Ch); [2007] B.C.C. 712, 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 para.104 of Sch.B1 to the Insolvency Act 1986. Hart J. had also been invited to take this course but had held ([16]):

‘It is certainly the case that that provision plainly may [assist] in assessing the validity of acts done by a person purporting to be an 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 para 29 have not been complied with.’

8.

For my own part (and with considerable diffidence in differing from Hart J.) I adhere to my view that para.104 may supply the answer in many cases. As Lord Simonds said (of similar provisions in s.143 of the Companies Act 1929 and art.88 of the then-current Table A) in Morris v Kanssen [1946] A.C. 459 at 471, 472:

‘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 para.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 para.14 of Sch.B1 could be exercised, or the persons purporting to appoint an administrator under para.22 are not themselves directors). But it may well be that para.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.

9.

Mr Solomons and Mr Defty made (but did not pursue) an application for validation under para.104. Thus the point was not argued before me: and I am conscious (a) that both Proudman J. in Re Kaupthing Capital Partners II Master LP Inc; Pillar Securitisation SARL v Spicer [2010] EWHC 836 (Ch); [2011] B.C.C. 338 and Henderson J. in Re Frontsouth (Witham) Ltd [2011] EWHC 1668 (Ch); [2011] B.C.C. 635 accepted Hart J.’s view on para.104 without comment; and (b) that a wider debate ranges around s.232 of the 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.”

In the present case, counsel for the Applicants did pursue an application under paragraph 104, and he submitted that the obiter view of Norris J in Care Matters was to be preferred to the decision of Hart J in G-Tech Construction. I accept that submission. It does not appear that Morris v Kassen was cited to Hart J, and I find Norris J’s reasoning applying it persuasive. Paragraph 104 says that, even though an administrator has been defectively appointed, his acts shall be valid. This seems to me to be apt to address situations where the defect in the appointment is curable, as opposed to situations where the appointment is incurably invalid. If paragraph 104 does not apply where an appointment has been made subject to a curable defect, then it is difficult to see in what circumstances it would ever apply. I therefore respectfully disagree with Hart J.

In the present case, there was a defect in the appointment of the Administrators on 19 January 2012 which was cured when the FSA’s consent was filed with Croydon County Court. In those circumstances, I conclude that the effect of paragraph 104 is to validate the Administrators’ acts during the intervening period.

The Applicants’ third contention is that, if necessary, the Court should make a retrospective appointment of the Administrators under the jurisdiction recognised in G-Tech Construction. In the light of my conclusions in respect of the first and second contentions, it is not necessary for me to consider this contention.

For the reasons given above, I shall declare that: