So when is an administrator appointed?

So when is an administrator appointed?

This question has been left in doubt following the recent High Court case, Re NJM Clothing Ltd [2018] EWHC 2388 (Ch).

The legal framework

Paragraph 31 of Schedule B1 to the Insolvency Act 1986 (“Sch B1”) provides that the appointment of an administrator by a company or its directors using the out-of-court route is effective when the relevant requirements under paragraph 29 of Sch B1 are satisfied. Paragraph 29 provides, amongst other things, that the person who appoints an administrator shall file the notice of appointment at Court. Accordingly, it has long been understood that an administrators’ appointment will not be effective until the time the notice is filed at court.

However, when the Insolvency Rules 1986 were replaced with the Insolvency Rules 2016 (“IR16”), the prescribed form of notice of appointment was abolished and, in its place, IR16 provided prescribed content for the notice of appointment.

Rule 3.24 IR16 requires that the notice of appointment of administrators must contain: (a) a statement that the company or directors have appointed the person named as administrator; and (b) the date and time of appointment. There was no such requirement for the date and time of appointment to be specified under the previous prescribed notice of appointment form, but the time of appointment was completed by the court upon filing the notice.

The new requirements under Rule 3.24 IR16 imply that the appointment of administrators must take place at some time prior to the notice of appointment being filed at court – but when?

Re NJM Clothing Ltd (2018)

This case concerned the appointment of administrators by the directors of a company under paragraph 22 of Sch B1.

As noted above, there is a requirement to complete the date and time of the administrators’ appointment on the notice of appointment which is filed at court. Due to the inconsistency between the requirements of Sch B1 and Rule 3.24 IR16, the notice of appointment included a statement that "The administrators' appointment was made on the date and time this notice is filed with the court”.

HHJ Klein (sitting in the High Court) had difficulty accepting this statement, on the basis that Rule 3.24 IR16 suggests that the directors must first have appointed administrators before they subsequently file the notice of appointment at court.  Consequently, the judge proceeded on the assumption that the notice of appointment must be defective (and without making any determination on the appropriate time) because:

  • the notice of appointment did not specify the date and time of the administrators’ appointment - it only referred to the time of filing the notice; and/or
  • the notice did not record the precise moment when the appointment was made and confirm that the appointment had been made before the notice was filed.

However, as HHJ Klein concluded that the above defects were not substantial and capable of remedy, he made a declaration under rule 12.64 IR16 that, notwithstanding the defect, the administrators’ appointment was valid.

Implications

The findings of HHJ Klein in this case are worrying for a number of reasons:

  • The judge appeared to consider that he was bound to conclude that the appointment of administrators must take place prior to the time of filing the notice of appointment at court, given the wording which must be included on the notice of appointment by virtue of Rule 3.24 IR16 (i.e. that the company has/directors have appointed an administrator). However, such an analysis ignores the wording and requirements of paragraphs 29 and 31 of Sch B1.
  • The Court did not provide any guidance to clarify what the appropriate date and time of appointment should ordinarily be in the case of a company or directors’ appointment of administrators under paragraph 22 Sch B1, only that the appointment must take place before the notice of appointment is filed at court. However, as noted above, paragraph 31 of Sch B1 provides that the appointment can only become effective when the requirements of paragraph 29 of Sch B1 (which includes the notice of appointment being filed at court) have been satisfied. The appointment cannot therefore be effective before the time of filing.  
  • It is now unclear how to complete a notice of appointment in a manner which is compliant with both Sch B1 and Rule 3.24 IR16 in order to guarantee the validity of the administrators’ appointment. Perhaps there is a distinction to be drawn between the appointment being ‘made’ by the directors/company, which could happen once the notice of appointment (together with the administrators’ consent to act) is sworn, and the effective time of the appointment, which can only be once the notice of appointment is filed at court.

Unfortunately, until this issue comes back before the courts for further clarification, administrators are vulnerable to potential defects with their appointment when made via the out-of-court route. However, administrators can take some comfort that:

  1. This is only likely to be a contentious issue if, as in this case, there is a disgruntled creditor or qualifying floating charge-holder seeking to challenge the validity of the administrators’ appointment; and
  2. HHJ Klein gave clear guidance that any defect around the requirement to state the time of appointment would be insufficient to render the appointment of administrators invalid; hence, if required, administrators should be able to obtain a declaration of validity under Rule 12.64 IR16.

Contact our experts for further advice

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