Administration order - Administrator - Restrictions on power to appoint - Sole director of company appointing administrator

Re Virtualpurple Professional Services Ltd: ChD (Mr Justice Norris): 21 December 2011

The company traded as a software development company. W was its sole director and there were three shareholders. W held a formal meeting as sole director which noted that the company had significant financial difficulties and had received advice that it was in the best interests of the creditors of the company that it enter into administration.

The minutes of the meeting recorded that, because there were no qualified floating chargeholders, W was able to appoint an administrator pursuant to paragraph 22 of schedule B1 to the Insolvency Act 1986. W resolved to file form 2.10B at court to appoint L and W as administrators. In Hill v Stokes Plc [2010] EWHC 3726 the judge had declared that the appointment of administrators was not rendered invalid or ineffective by the 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. However, in Minmar Limited v Khalastchi [2011] EWHC 1159 (Ch), in which Hill was not cited, the chancellor of the High Court had held, in an obiter passage, that administrators had not been validly appointed where notice of intention had not been given to the company, even though there was no floating chargeholder to whom notice under paragraph 26(1) of schedule B1 was required. As a result of the doubt created, in the instant case, by the inconsistency between the two decisions, the administrators and W (the applicants) applied for a declaration that the appointment of L and W was valid.

The issues that fell to be determined were: (i) whether directors who were appointing administrators with immediate effect were obliged to give a separate prior notice to the company (of which they were directors) of their intention to do so and; (ii) if so, the result of a failure to give that notice. Consideration was given to paragraphs 26 to 28 of schedule B1 and rule 2.20 of the Insolvency Rules, SI 1986/1925.

The court ruled: (1) Reading paragraphs 26 and 28 of schedule B1 consistently with other provisions and with an eye on the purpose for which they had been enacted, directors could proceed to make an immediate appointment without giving ‘notice of intention’ to the company. Paragraph 28 of schedule B1 provided that an appointment might not be made by a director ‘unless the person who makes the appointment has complied with any requirement of paragraphs 26 and 27’. The reference to ‘paragraph 26’ was a reference to paragraph 26(1) alone (see [21],[22] of the judgment).

As a matter of strict construction, there was a strong indication that the draftsman had contemplated two scenarios, one in which notice of intention had to be given to a qualifying chargeholder and another in which no such notice had to be given. Paragraph 30 of schedule B1 dealt with the contents of the statutory declaration that had to be contained in the prescribed form ‘in a case in which no person is entitled to notice of intention to appoint under paragraph 26(1) and paragraph 28 therefore does not apply’.

That indicated that paragraph 28 was intended only to apply where there was someone who was entitled to appoint an administrative receiver of the company or there was a qualifying chargeholder. If that was so then the reference in paragraph 28 to ‘paragraph 26’ had to be read as a reference to ‘paragraph 26(1)’. Further, that reading was reinforced by the requirement of rule 20.2(1) of the Insolvency Rules and the nature of the prescribed forms such as form 2.8B, 2.9B and 2.10B. Reading the rules in that way made functional sense. Furthermore, notice of intention to appoint, with no prescribed minimum period, was without function if the appointment was immediate and the notice of the appointment immediate (see [22] of the judgment). In the instant case, W had not had to notify the company of the appointment she had been about to make (see [23] of the judgment).

(2) Even if it was a requirement that the directors had to give notice of intention to appoint an administrator to the company, notwithstanding that there was no qualifying chargeholder to whom such notice was otherwise being given, a failure to give such a notice did not necessarily render the administration process a nullity and the appointment of the administrator automatically void (see [24] of the judgment).

Although the language of rule 20(2) was expressed in the imperative, the consequences of failing to comply with the imperative were not expressed. The mere use of the imperative did not mean that the requirement was an absolute condition precedent necessary to validity. It by no means followed from the use of such language that any failure to comply with the requirement meant that the entire process was a nullity. The correct approach to the construction of a provision such as paragraph 26(2) of schedule B1 and rule 20.2(2) was to focus intensely on the ­consequences of non-compliance, and to pose the question, taking into account those consequences, whether parliament had intended the outcome to be total invalidity (see [25] of the judgment).

On the basis that paragraphs 26 and 28 of schedule B1 required W to give notice of intention to appoint to the company, W’s failure to notify the company of her intention immediately to appoint L and W did not automatically invalidate their appointment (see [26] of the judgment). The appointment of L and W was valid (see [28] of the judgment).

Matthew Collings QC (instructed by Howard Kennedy) for the applicants.