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In The Matter Of Frontsouth (Witham) Ltd (In Administration) (2011)

Summary

The Insolvency Rules 1986 r.7.55 could not be used to cure a fundamental defect in the appointment of administrators such as a failure to obtain the consents required by statute for the extension of the appointment.

Facts

The court determined applications concerning the administration of a company (F) and its wholly-owned subsidiary (B). B had been incorporated to develop a site into residential accommodation. The development was not successful and the companies' directors placed both F and B into administration. Administrators (X) were appointed pursuant to theInsolvency Act 1986 Sch.B1 Pt 4 para.22(2). Under Sch.B1 para.76(1) the appointments ceased to have effect after a year unless validly extended, so X sought an extension to their appointment by consent. The consents required under Sch.B1 para.78 were obtained in relation to F, but not in relation to B, although the administration continued on the assumption that it had been validly extended. In the instant proceedings, X sought a court order granting another extension in relation to both companies. The court granted the extension in relation to F as the prior extensions had been validly made and the instant application had been brought in good time. However, because of the failure to obtain consents for the first extension, X's original appointments in relation to B had expired, and under Sch.B1 para.77(1)(b) a court order granting an extension could not be made after expiry. X sought an extension in relation to B, arguing that (1) the defect in their appointment caused by the failure to obtain consents for the first extension could be waived under the Insolvency Rules 1986 r.7.55; (2) alternatively, a fresh appointment could be made with retrospective effect.

Held

(1) Rule 7.55 could not be used to cure the defect in the purported extension. Where a statutory prerequisite for appointment had not been observed, there were no "insolvency proceedings" within r.7.55: no valid administration had come into existence. A regularisation provision such as r.7.55 could not be used to remedy such a fundamental flaw. Such a defect was not purely formal or a mere irregularity; it went to the very essence of the appointment, and its circumvention by r.7.55 would effectively replace a mandatory requirement with an optional one. Further, the language of r.7.55 showed that it had never been intended to apply to such defects: it made little sense to talk of an invalid appointment causing "injustice" or of such injustice being "remedied" by a retrospective validation of the appointment, G-Tech Construction Ltd, Re (2007) BPIR 1275 Ch D andKaupthing Capital Partners II Master LP Inc, Re (2010) EWHC 836 (Ch), (2011) BCC 338 applied and Blights Builders Ltd, Re (2006) EWHC 3549 (Ch), (2007) Bus LR 629 considered. Accordingly, X had acted without authority since the expiry and would need a fresh application to be re-appointed as administrators. Any practice that might have developed in the Companies Court of purporting to waive defects of such a nature in reliance on r.7.55 had no foundation in law and had to cease (see paras 17-26 of judgment). (2) The court had jurisdiction under Sch.B1 para 13(2)to re-appoint administrators and then backdate the appointment up to 364 days before the date of the order. It could then immediately make a further order under Sch.B1 para.76(2) extending the appointment for a specified future period, G-Tech and Derfshaw Ltd, Re (2011) EWHC 1565 (Ch) applied. (3) (Obiter) There had been a question of who should make the fresh application. It would be impracticable to trace B's directors. X sought to rely on an ordinary resolution made by F, as B's sole shareholder, to make an application. B's articles included the relevant provisions of Table A, meaning that the decision as to whether to place it into administration was for the directors and could not be taken by ordinary resolution of the shareholders. X suggested that as it was open to the shareholders to procure the necessary action by the board by passing a special resolution, it had to be open to them to make the necessary decision themselves. Alternatively, X suggested that since they had acted as de facto directors, X could make the application themselves. Both suggestions had considerable difficulties. In the event the application was made by a creditor under Sch.B1 para.12(1)(c) (paras 30-33).

Applications granted in part

Chancery Division
Henderson J
Judgment date
30 June 2011
References

LTL 30/6/2011 : [2011] EWHC (Ch)

Practice areas