Insolvency

Company - Administrator - Restrictions on power to appoint

Minmar Ltd and another v Khalatschi and another: Chancery Division (Sir Andrew Morritt): 8 April 2011

The Insolvency Act 1986, so far as material, provides: '105: A reference in this schedule to something done by the directors of a company includes a reference to the same thing done by a majority of the directors of a company.'

The Insolvency Rules 1986, SI 1986/1925, provide, so far as material: '2.2(1): There may be prepared, with a view to its being exhibited to the affidavit in support of the petition, a report by an independent person to the effect that the appointment of an administrator for the company is expedient.

'(2) The report may be by the person proposed as administrator, or by any other person having adequate knowledge of the company's affairs, not being a director, secretary, manager, member, or employee of the company. (3) The report shall specify the purposes which, in the opinion of the person preparing it, may be achieved for the company by the making of an administration order, being purposes particularly specified in section 8(3).'

M Ltd (the company) was incorporated in January 2010 to carry on gambling businesses. RS Ltd (RS) was its only shareholder and, at that stage, M was its only director. Subsequently, H and C were made additional directors. In order lawfully to carry on a gambling business, it was necessary to have both an operating licence granted by the Gambling Commission and a premises licence granted by the local authority in respect of each place where the gambling activity was to be carried on.

Under sections 159 and 188 of the Gambling Act 2005, a premises licence might only be granted or transferred to a holder of an operating licence. In October 2010, the company obtained an operating licence and entered into negotiations with a number of companies then in administration (collectively called A Ltd), for the acquisition of their gambling businesses.

It expected to obtain finance from a third party. In the event, such finance was not forthcoming and the assets of A Ltd were acquired by B Ltd (B), which had been incorporated on 17 November 2010 and had been effectively controlled by an individual, T. On 30 November or 1 December, three agreements were concluded, namely: (i) an asset sale agreement made between A and B, whereby a sold to B its gambling businesses for £6m; (ii) an option agreement; and (iii) an operator agreement.

On 3 December, another agreement was made between RS and B (UK) Ltd (BUK) under which, in consideration of £199,999, RS granted to BUK an option to buy its shares in the company on written notice and payment of £1 (the RS option agreement). By effluxion of time, B and C, to whom an operating licence had been issued by the Gambling Commission, on 18 February 2011, entered into a new operator agreement in relation to the gambling business bought by B from A. B subsequently commenced proceedings for specific performance of a provision in the operator agreement obliging the company to transfer to B the benefit of the premises' licences.

On 16 March, BUK assigned to B its rights to acquire the shares in the company under the RS option agreement for £200,000, conditional on RS procuring the appointment of C Ltd, G Ltd and O Ltd as intervening directors of the company. A resolution to that effect was signed on behalf of RS as the company's sole shareholder. On that same date, the intervening directors purportedly appointed the respondents as administrators pursuant to paragraph 22, schedule B1 to the Insolvency Act 1986 (the 1986 act), as introduced by the Enterprise Act 2002 (the 2002 act).

On that same day, a board meeting was held, attended only by T on behalf of C Ltd. A record of that meeting indicated that T had taken the chair, declared the presence of a quorum and that the meeting was open. The record then went on to note that a written resolution had been passed by RS, and that C Ltd, G Ltd and O Ltd had been appointed as directors. It was proposed at that board meeting that, given the company's financial difficulties, appropriate action was required and that the respondents had agreed in principle to act as administrators to the company should the board decide to place the company into administration.

At that meeting, the board did so resolve. On 18 March, which was the return date of B's summary judgment application for an order on the company to transfer the licences, the proceedings were effectively stayed because of the effect of the appointment of the respondents. On that same day, the company and C obtained, without notice, an order staying the administration on the ground that the administrators had not been validly appointed. On 25 March, the company and C (the applicants) applied to set aside the appointment of the respondents.

The applicants submitted, inter alia, that the appointment of the respondents was invalid on the bases that: (i) the intervening directors had not themselves been validly appointed as directors of the company; (ii) even if the intervening directors had been validly appointed, they had not formed a majority of the board because C, M and H had already been duly appointed as directors of the company; (iii) no notice had been given to any of the existing directors as required by the articles of association; (iv) the meeting was inquorate; and (v) the decision of the intervening directors had not been made in the interests of the company but of B and should not be given effect.

Relying on paragraph 105 of schedule B1 to the 1986 act, the intervening directors and B contended, inter alia, that because they had constituted a majority, it did not matter that there had been no meeting of the directors duly convened and held in accordance with the articles.

The court ruled: Although the rules might be regarded on questions of construction of the terms of schedule B1 to the act, they themselves recognised that minutes should include a record of any resolution passed (see rule 2.44A(4)(c)). Accordingly, the distinction drawn in rule 2.2(2) of the rules between the resolution of the company and the decision of the directors did not appear to import any notion of informality to the decision of the directors.

Whether a minute or a record, it should still be of a decision of the directors as such. Further, the terms of paragraph 105 of schedule B1 to the act gave 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 should still be an act of the majority of such directors, there was no reason why the reduction in the requisite number of directors should also dispense with the usual rules of internal management.

Furthermore, paragraph 105 clearly gave statutory force to the decisions in previous authority that a relevant operation might be performed if authorised by a majority of the board at a duly constituted directors' meeting. However, it could not be accepted that it went further (see [49]-[51] of the judgment).

To state that the reduction in the requisite number of directors should also dispense with the usual rules of internal management would be giving greater effect to a provision of general application than was to be derived from either the words used or the context in schedule B1 to the act in which they were used or in the previous case law. Further, had paragraph 105 been intended to go further than giving statutory force to decisions in previous authority that a relevant operation might be performed if authorised by a majority of the board at a duly constituted directors' meeting, some clear statement to that effect would have been in the white paper which had preceded the 2002 act in which paragraph 105 was originally enacted as paragraph 103 or in the explanatory notes to that act. There was none (see [49]-[51] of the judgment).

In the instant case, the submissions of C were to be preferred. Rule 2(2) of the rules would not bear the weight put on it. Further, paragraph 105 did not validate the appointment of the administrators on 16 March. It was plain that the so-called meeting had not been not a valid meeting of the board. No notice had been given to the existing directors. Indeed, it was plain that they had deliberately been kept in the dark. There had only been one person present, so there had been no quorum or indeed any meeting (see [49], [52] of the judgment).

The appointment of the administrators had been invalid and ought to be set aside (see [52] of the judgment). Emmadart Ltd, Re [1979] 1 All ER 599 considered; Instrumentation Electrical Services Ltd, Re [1988] BCLC 550 considered; Equiticorp International plc, Re [1989] BCLC 597 considered.

Michael Green QC (instructed by Clyde & Co) for the applicants. Marcia Shekerdemian (instructed by Isadore Goldman) for the respondents. Alan Gourgey QC (instructed by Fladgate LLP) for the interveners.