In this article we will cover the notice requirements for an out of court administration appointment by a company or its directors, and look at the recent case of Re Tokenhouse VB Ltd (Formerly VAT Bridge 7 Ltd)  EWHC 3171 (Ch).
The notice requirements
Where a company or its directors intend to appoint administrators using the out of court route, paragraph 26 of Schedule B1 of the Insolvency Act 1986 ( “Schedule B1”), found here, requires that five business days’ notice are given to:
- Any person who is or may be entitled to appoint an administrative receiver of the company
- Any person who is or may be entitled to appoint an administrator of the company under paragraph 14 of Schedule B1
And that such notice, referred to as a notice of intention to appoint administrators, must:
- Identify the proposed administrator
- Be in the prescribed form, which is set out in rule 3.23 of the Insolvency Rule 2016, found here
The recipient of the notice then has the opportunity to agree to the appointment of the proposed administrators or to make its own appointment under paragraph 14 of Schedule B1, found here, or (if appropriate) to seek direction from the court including to challenge the right to appoint administrators.
Where there are no persons entitled to appoint administrators or administrative receivers, or such persons have either consented to the appointment or failed to respond to being served with notice, the company or its directors can appoint an administrator by filing a notice of appointment with the court.
In Re Tokenhouse VB Ltd, the directors of Tokenhouse VB Ltd did not provide VAT 1 SP, a qualified floating charge holder of the company, with notice of their intention to appoint administrators. The charge holder subsequently made an application to the court challenging the validity of the administrators’ appointment.
At an initial hearing, pending the judgment summarised below, the court ended the administration and ordered a new administration appointing its own administrators (one of the original administrators, and one of the appointees proposed by the charge holder).
When deciding on the validity of the appointment, the judge considered that:
- Where there is an issue of compliance with the requirements of paragraphs 26-30 of Schedule B1, there is a consensus that whether non-compliance results in invalidity depends upon whether Parliament intended that outcome.
- The purpose of paragraph 26 (1) of Schedule B1 and the consequence of breach do not lead to the answer that Parliament intended automatic invalidity. They lead to the conclusion of irregularity, consistent with the existence and breach of a procedural requirement.
- The requirement to give notice of intention to appoint is therefore not linked to the issue of validity.
The judge held that the original appointment was valid although in breach of paragraph 26 (1) of Schedule B1 and that as the breach was procedural and had not caused any substantial injustice, it could be remedied by the court. The judge subsequently ordered that the original administrator be replaced with the second appointee proposed by the charge holder, leaving the two appointees proposed by the charge holder as the administrators going forward.
David Steinberg, Co-Head of Restructuring & Insolvency at Stevens & Bolton comments:
"The current economic climate has caused more and more companies and directors to turn towards insolvency processes, such as administration, in an attempt to rescue their businesses. To save time and costs, out of court routes are becoming increasingly popular. This case does not change the current position of the law in this area, but does clarify that failure to give notice of intention to appoint administrators will result in a breach of Schedule B1 that will require rectification by the court. That said, this case is a good example of the court adopting a pragmatic and purposive approach; appointing the administrator preferred by the charge holder but without holding that the original appointment was invalid. This would have resulted in unnecessary disruption and additional cost, to the detriment of those stakeholders who are the intended principal beneficiaries of the administration process, namely the creditors. This case is also a salutary reminder to debtors and their professional advisers of the importance of complying with the notice requirements for an out of court administration appointment."