Abigal Boura v Lyhfl Limited

This is an application by Ms Abigal Boura, a director of LYHFL Limited (the “Company”), seeking the appointment of an administrator in respect of the Company. She seeks the application as “the director of the company under paragraph 12(1)(b) of Schedule B1”. The Company is not represented, but the application is opposed by Mr Leigh Harmer, the other director of the Company. He does so on two principal grounds, firstly that one of two directors has no standing to apply for an administrator and secondly that the Company is able to pay its debts and it not likely to become unable. I heard argument on the first issue alone because, if Mr Harmer is correct, then that would dispose of the application.

For the reasons set out below, I have concluded that one of two directors has no standing to apply to court for the appointment of an administrator in circumstances where there is no majority of the board and no valid resolution of the board in favour of the application.

As this is a decision on a point of law, I am able to state the relevant facts very briefly. Ms Boura and Mr Harmer are the sole directors and shareholders of the Company. They were also in a personal relationship which ended acrimoniously in around November 2021. Perhaps unsurprisingly, the relationship as directors has also become acrimonious. Each side says that the other has acted in breach of their fiduciary duties as a director. Ms Boura says that the Company is or is likely to become unable to pay its debts. Mr Harmer denies this and says that Ms Boura is attempting to use the application to engineer a quasi pre-pack without board approval.

It is unnecessary for me to make any findings of fact on any of these issues. I merely note that, in a case such as this, if one director has standing to apply to court for an administration order and the other director opposes the application, I can see the potential for each side to use this as a further weapon in their dispute.

The following paragraphs of Schedule B1 to the Insolvency Act 1986 are relevant:

Mr James Knott, who appeared for Mr Harmer, submitted that “the directors” in para.12(1)(b) means all or a majority of the directors acting pursuant to a valid board resolution, and that the word “only” means that the court has no power to hear the application unless it is made by a person or persons who fall within one of the categories in para.12(1).

Mr Geoffrey Zelin, who appeared for Ms Boura, invited me to follow the decisions of Marcus Smith J in Re Brickvest Ltd [2019] EWHC 3084 (Ch) (“Brickvest”), which was itself followed by Fancourt J in Re Nationwide Accident Repair Services Ltd [2020] EWHC 2042 (Ch) (“Nationwide”). In both cases the court appointed administrators on the application of the sole director.

Mr Zelin submitted as follows:

Mr Knott met these detailed points as follows:

S.9 of the Insolvency Act 1986 as originally enacted (the predecessor to para.12) permitted “the company, or the directors” to petition the court for the appointment of an administrator. In Equiticorp a resolution to petition the court was passed by the board, but two of the seven directors were not present at the meeting. Millett J explained that in Re Emmadart Ltd [1979] Ch 540 Brightman J had held, contrary to what was previously thought, that the board of directors of a company had no power to authorise the presentation of a winding-up petition. In order to bring the law into line with the previous practice, s.124 of the 1986 Act empowered “the company, or the directors” (among others) to present a winding-up petition, and the same wording was used in s.9. (In my judgment this provides the historical explanation for the inclusion of “the directors” as well as the company in para.12(1) and provides no support for Mr Zelin’s submission that the wording must have been intended to include a single director where the board is deadlocked.)

Millett J concluded as follows:

“I am perfectly prepared to read the words "the directors" in section 9 as meaning all the directors. Once a proper resolution of the board has been passed, however, it becomes the duty of all the directors, including those who took no part in the deliberations of the board and those who voted against the resolution, to implement it; and even in the absence of the specific authorisation to any and every director to take such steps as are necessary to implement it, which is contained in this particular resolution, that remains the legal position.

In my judgment, therefore, once a resolution of properly convened board of directors to present an application under section 9 for the making of an administration order has been passed, any director has authority to make the application on behalf of all of them. Accordingly, in my judgment, this is a properly presented application, made on behalf of the directors, and the court has jurisdiction to entertain it.”

Thus Equiticorp decided in relation to s.9 that the phrase “the directors” does not require unanimity among the directors; nevertheless it is necessary to have a resolution passed by a majority at a properly constituted board meeting. Although para.12 is a new provision, it is modelled on s.9.

In Minmar the issue was whether an appointment out of court was valid in accordance with para.22 when there had not been a proper board meeting. At [43] Morritt V-C considered para.105 and noted that it applied to various paras in the Schedule, including para.12(1)(b) and para. 22(2). He continued at [44]:

“Plainly, in each of those cases the relevant operation may be performed if authorised by a majority of the board at a duly constituted directors’ meeting. The question is whether they may be performed by a group of individuals who are in fact directors and together constitute a majority of the board but who have not complied with the provisions of the company’s articles so as to have the authority of the company.”

He then referred to para.105 and considered a submission that this went further than Equiticorp by allowing a majority of directors to authorise an administration out of court without having had a formal board meeting. He rejected that submission on three grounds, including the following:

“50.

Secondly, the terms of para.105 give to an act of the majority the same validity as would be accorded to an act of the directors as a whole but if the act in question must still be an act of the majority of such directors, I see no reason why the reduction in the requisite number of directors should also dispense with the usual rules of internal management. To do so appears to me to be giving greater effect to a provision of general application than is to be derived from either the words used or the context in Sch.B1 in which they are used or in the previous case law to which I have referred.

51.

Thirdly, in Re Equiticorp International Plc, Millett J. was at pains to point out that the observations of Mervyn Davies J. in Re Instrumentation Electrical Services Ltd were confined to a case in which the majority had failed to observe any of the usual formalities. Accordingly, his own decision is to be read in the context of a proper resolution of a majority of the board. Clearly, para.105 gives statutory force to that decision but I do not accept that it goes further. Had it been intended to do so, I would have expected some clear statement to that effect in the White Paper which preceded the Enterprise Act of which para.105 was originally enacted as para.103 or in the Explanatory Notes to that Act. There is none.”

I agree with Mr Knott that Morritt V-C’s decision makes it clear, not only that a decision of the directors must be a decision of all or a majority or the board, but also that it must be at a properly convened board meeting. It is also clear that he regarded the position as being the same under para.12(1)(b) in this respect as it is under para.22(2).

The third decision on which Mr Knott relies is BW Estates. In this case the company’s articles provided that a quorum of two directors was required for a board meeting, but there was only one director, who purported to appoint administrators under para.22(2). Vos C (with whom Underhill and Henderson LJJ agreed) said at [78]:

“In my judgment, the Joint Administrators are wrong to suggest that the provisions of paragraph 22(2) of Schedule B1 are sufficient to override these provisions of the Articles. … Secondly, it is beyond doubt that either the company itself or the directors may appoint an administrator under paragraph 22 of Schedule B1, but there is nothing in Schedule B1 to suggest that either the company or the directors can act except in the manner set out in the articles of association under which the company was incorporated and by which the corporators agreed to be bound. … . I respectfully find myself in agreement with the reasoning of Sir Andrew Morritt C in Minmar (1929) Ltd v Khalastchi [2012] 1 BCLC 798, paras 49-52 to the effect that there is no notion of informality in the provision allowing the directors of a company to appoint an administrator. This approach seems to me to be consistent with the decision of Millett J in In re Equiticorp International plc [1989] 1 WLR 1010, and also with the general requirement of company law that the provisions of the articles of association cannot be ignored.”

Although BW Estates is a decision on para.22(2), it expressly approves the reasoning in Minmar which makes it clear that the same approach applied in the case of para.12(1)(b), and it also applies the reasoning in Equiticorp.

I now turn to Brickvest. This was an urgent unopposed application for an administrator. The company’s articles required there to be at least three directors, but there was in fact only one. Marcus Smith J said at [10]:

“The point of difficulty which I must refer to is this. Mr Lumineau is presently the only director of BrickVest Limited, which, as I have said, is the ultimate parent of the group. By Rule 12(1)(b) of Schedule B1 to the Insolvency Act 1986, an application to the court for an administration order in respect of a company may only be made by one of five designated classes of person, one of which is the directors of the company in question. It is clear law that in the case of the appointment of administrators out of court, such an appointment is only regular if the internal rules regarding the company’s internal management are properly followed. That, one might think, is self-evidently the case: there must be some form of binary control where the court is not involved in the making of an appointment. Either the resolution appointing the administrator is valid or it is not. If it is valid, then the appointment can take effect. If it is not, then there is an irregularity that must be cured. The authority that stands for this proposition is Re BW Estate Limited (No.2), [2017] EWCA Civ 1201.”

This was the only reference to BW Estates and there was no reference to Equiticorp or Minmar. With respect, it is not clear to me what the judge meant when he referred to BW Estates as authority for the proposition that the invalidity of a board resolution was an “irregularity” that could be cured. Nor can I see anything in BW Estates that will enable any irregularity to be cured in the case of an application to the court which could not be cured in the case of an appointment out of court. The judge continued as follows:

“17.

... My view is that it is hard to read Article 11.2 as entitling Mr Lumineau properly to act on his own, when the Articles require (as they do, in the present circumstances) a minimum of three directors.

18.

The question goes to the standing of Mr Lumineau under Rule 12(1)(b) of Schedule B1 to the Insolvency Act 1986 to make the application for BrickVest Limited. Given that administration orders are made – as here – in circumstances of urgency – it seems to me inapt to engage in detailed analysis of the internal operations of a company or to delay an order that otherwise ought to be made whilst an irregular position is being rectified. Delay might cause a company to be at risk of trading insolvently; and the purpose of an administration order being thwarted. As I have already found, it seems there is real benefit in the making of an administration order in the case of BrickVest Limited.

19.

In a case such as this, where there is a question – indeed, a serious question over a director’s standing to make an application for an administration order, the court should approach the matter as essentially a discretionary one, taking full account of the question as to standing, but not allowing the point to be automatically determinative against the application. I note that the question of standing in Rule 12(1)(b) of Schedule B1 to the Insolvency Act 1986 is not framed as a jurisdictional questions as to which the court must be satisfied. That is the manner in which I intend to proceed in this instance.

20.

Here there is a situation where, through no fault of his own and, more importantly, through no fault of BrickVest Limited, Mr Lumineau is left on his own, the two other directors having recently resigned. In these circumstances, it seems to me that it would be conduct capable of grave injustice were I to refuse to make the orders that are being sought. Accordingly, notwithstanding the issues regarding the BrickVest Limited resolution being by only one director, the jurisdictional requirements in paragraph 11 to Schedule B1 to the Insolvency Act 1986 being met, I should make the administration orders sought.

21.

I conclude with one further thought as to how potential irregularities, like that described in paragraphs 9ff above, can be dealt with. Having reached the view that an application for an administration order without notice to all interested parties is an inappropriate forum to deal conclusively with such matters, it seems to me that the proper course in terms of dealing with potential irregularities in appointment is under Rule 12.64 of the 2016 Rules which provides:

“No insolvency proceedings will be invalidated by any formal defect or any irregularity unless the court before which objection is made considers that substantial injustice has been caused by the defect or irregularity and the injustice cannot be varied by any order of the court.”

22.

It seems to me that that is a matter for the future, if it arises at all, and I should simply make clear that nothing that I have said in this ruling is intended to confine the discretion of any Judge dealing with any application that may or may not be made in future under Rule 12.64.”

I make the following observations on this judgment:

As I have said, this was a decision on an urgent and unopposed application. The judge was referred to BW Estates but it does not appear that his attention was drawn to the passages which I have quoted above, nor to Equiticorp or Minmar. It may be that Brickinvest can be distinguished on the basis that it is dealing with a different issue, the issue being whether “the directors” includes the sole director where there is only one director, in breach of the quorum provision in the articles. However, if it cannot be distinguished, then I am satisfied that this is one of those rare cases in which I should depart from that decision (see Colchester Estates (Cardiff) Ltd v Carlton Industries plc [1986] Ch 80 at 84-85, Nourse J). I do so for the following reasons:

Nationwide was another case in the sole director of the company applied to court for the appointment of administrators. Once again, it was arguable that the articles required there to be at least two directors. Fancourt J said:

“15.

I am however persuaded that, on the strength of the decision in Re Brickvest Limited [2019] EWHC 3084 (Ch), in particular at paras 13-21, and as a matter of principle, that is not an impediment to a single director making an application to the court as “the directors of the company”, under para 12(1)(b) of Schedule B1 to the Insolvency Act 1986, where he is the sole director, or an impediment to the court making an order where it is otherwise appropriate to do so. The plural form in para 12(1)(b) will include the singular, by virtue of section 6 of the Interpretation Act 1978. Each director of a company, including a single director, has a duty owed to the company and its creditors to cause a company to cease trading where it is clearly insolvent and to instigate an appropriate insolvency process. Where a better result for a company’s creditors will be achieved by an administration, a director must be entitled – if not bound – to apply to the court for that relief, if an administrator cannot be appointed out of court or for some other reason it is necessary or appropriate to apply to the court. If the application is made in circumstances in which the board of the company could not resolve to appoint an administrator, that is a matter that the court can take into account in the exercise of its discretion, though it is likely to be outweighed by other relevant considerations in many cases, particularly where, as here, an administration order will result in a better return for creditors and there is no other realistic alternative to a winding up.

16.

It seems to me that is a case in which a director is the sole appointed director of a company, and that director has standing to apply to the court for an administration order by virtue of para 12(1)(b) of Schedule B1, even if under the internal governance of the company he could not alone pass a resolution of the company to make such an application. The Court will then exercise its discretion, taking into account all relevant circumstances, which may include the reasons why there is a sole director and the effect of the company’s articles as to the relevant powers of its board.”

I make the following observations on Nationwide:

For these reasons, I have concluded that one of two directors has no power to apply to court under para.12(1)(b) for an administration order without the approval of the majority of the directors and without a valid board resolution.

I therefore dismiss the application with costs, which I summarily assess at £45,000 (including VAT).