Appointing administrators: failure to obtain and file with the court FCA consent prior to the appointment of administrators leads to void appointments

In his judgment handed down on 7 May 2020 in the case of Gregory v ARG (Mansfield) Ltd [2020] EWHC 1133 (Ch), HH Judge Davis-White QC, sitting as a Judge of the High Court, commented (on an obiter basis) that where a company regulated by the Financial Conduct Authority (the “FCA”) seeks to enter administration, section 362A of the Financial Services and Markets Act 2000 (“FSMA 2000”) and paragraph 29 of Schedule B1 of the Insolvency Act 1986 (the “Insolvency Act”), require that written consent from the FCA must be obtained and subsequently filed with the court, at the latest, at the same time as the notice of appointment. Failure to do so will render the appointment void.

The factual background:

• A notice of intention to appoint administrators in respect of A.R.G (Mansfield) Limited (“the Company”) was filed on 7 January 2020 and on 9 January 2020 the qualifying floating charge holder consented to the appointment.
• On 10 January 2020, a notice of appointment was filed by the directors of the Company.
• On 3 March 2020, it was brought to the Administrators’ attention that the Company had been registered on the FCA Register under the name “A R G (Mansfield) Limited” omitting the full-stops after each of the capital letters “A”, “R” and “G”. Previous searches prior to the appointment had been carried out based upon the correct punctuation in the Company’s name and had apparently caused the directors to believe the company was not regulated by the FCA.
• FCA consent was subsequently sought in accordance with section 362A of the FSMA 2000 and granted on 5 March 2020.
• The directors thereafter made an application to the court to seek retrospective appointment of the administrators.

Options available to the court for defective appointments:

In the context of defects in the appointment of administrators, the court has adopted three possible routes to validation or regularisation:

1. the court may decide there is a simple irregularity or defect which does not invalidate the process and which the court will not itself invalidate under rule 12.64 of the Insolvency Rules 2016 (the “Insolvency Rules”). In such cases the court will declare what the position is under the law rather than itself regularise the position;
2. the court may decide there is an irregularity which does invalidate the appointment. However, the acts of the administrator are valid in spite of defects by virtue of paragraph 104 of schedule B1 of the Insolvency Act. In such cases the court will confirm the validity of the acts of the purported administrators, even if the appointment is not itself valid; or
3. the court may itself decide to appoint the administrators under its separate power to do so and purport to do so retrospectively.

Previous judgments:

In this case the judge discussed a number of previous judgments including:

• Re MTB Motors Ltd (In Administration) [2010] EWHC 3751 (Ch) - in which it was decided that making an appointment without first obtaining the FCA's consent was a fatal flaw which rendered the appointment void and not capable of being cured under what is now rule 12.64 of the Insolvency Rules or under paragraph 104 of schedule B1 of the Insolvency Act. The court was therefore required to make a retrospective appointment.
• Re Ceart Risk Services Ltd [2012] EWHC 1178 (Ch) - which was decided without the benefit of the above case and in which it was held that the defect in the appointment process did not invalidate the appointment. However, the appointment only took effect from the date on which the FCA ultimately gave its consent.
• Pettit v Bradford Bulls (Northern) Ltd (In Administration) [2016] EWHC 3557 (Ch) – in which the judge made an order for retrospective appointment without deciding whether the original purported appointment was ineffective or not in order to save time.
• Re Spaces London Bridge Ltd [2018] EWHC 3099 (Ch) – in which the judge drew a distinction between matters which merely cause irregularity and matters affecting the fundamental validity of an appointment. The judge also held that where it cannot be envisaged that Parliament intended non-compliance with a provision to lead to total invalidity of an appointment, the judge would hold that any failure to comply was nothing other than a formal defect or irregularity capable of being waived under rule 12.64 of the Insolvency Rules.

The Decision:

Using the same approach as in Pettit v Bradford Bulls (Northern) Ltd, the judge granted an order retrospectively appointing the administrators and made a series of useful obiter comments set out below.

Disregarding Re Ceart Risk Services Ltd, and following the principles set out in MTB Motors Ltd and Re Spaces London Bridge Ltd, the judge stated that the Insolvency Act and FSMA 2000 clearly require the FCA’s consent before an appointment of administrators can become effective over a company carrying out regulated activities. This is because the requirement for FCA consent defines the circumstances in which the power to appoint arises rather than simply being a prescribed procedural requirement that must be fulfilled. As a consequence, merely obtaining retrospective consent from the FCA will not satisfy the requirement. In fact public interest is potentially prejudiced if the regulator’s consent (and indeed notice to the regulator) is only sought after the purported appointment.

Therefore, consent must be obtained and filed with the court before or at the same time as the notice of the appointment itself is filed. A purported appointment without such consent is void and the court will need to make a retrospective appointment. The jurisdiction to make a retrospective appointment has been relied upon (and exercised) consistently for many years and if there is to be a challenge to the existence of that jurisdiction, such challenge should now be raised in the Court of Appeal

David Steinberg, co-head of restructuring and insolvency at Stevens & Bolton LLP, comments that:

Although the judge in this case makes it clear that his view is obiter, it would seem that where such circumstances involving the lack of FCA consent arise in future, any application seeking a declaration under paragraph 104 of schedule B1 of the Insolvency Act (a declaration that the actions of the administrator are valid), should also be accompanied by an application for retrospective appointment.

Generally, it is also worth noting that company searches on the FCA register should be made, not only against the correct name of the company, but also against variants of that name to mitigate the risk of missing a company’s registration details where the company’s name has been incorrectly recorded.  

Finally, solicitors acting for a company which is intending to seek the appointment of administrators should always check with the directors whether they consider that the company has been carrying out regulated activities – even if the company has not formally been registered as such with the responsible regulator. The requirement for prior consent from the responsible regulator under s. 362A FSMA applies whenever the company is, or has been, carrying out regulated activities – regardless of whether the company appears on the register of the responsible regulator.