Out-Law Legal Update 6 min. read

Administration extension pitfalls and recent UK court decisions

The administration of a company automatically comes to an end on the first anniversary of its commencement. However, the period can be extended beyond the first anniversary with the consent of the creditors or the court.

If the extension is not validly carried out, the appointment of the administrator ends and administrators’ acts may be invalid and may constitute trespass on the company’s assets.

We therefore consider the main issues that arise on administration extensions and recent court decisions.

  • An administration can be extended beyond its first anniversary with the consent of the creditors but there are various pitfalls with the procedure;
  • There is also a conflict between government guidance and recent court decisions on the meaning of “secured creditor”;
  • Re Pindar Scarborough Ltd (in administration) [2024] EWHC 908 (Ch)

The process

Who can extend the administration?

An administrator can extend the administration of a company beyond its first anniversary by getting the consent of the creditors or the court. Creditors can only extend the term for one year whereas there is no such limit on the court’s powers to extend.

Which creditors need to consent to the extension?

The creditors whose consent is required depends on whether the administrator stated in their proposals that no distribution to unsecured creditors outside of the prescribed part was anticipated – this is commonly known as a paragraph 52 statement.

If the administrator did make a paragraph 52 statement, the administration can be extended with the consent of:

  • each secured creditor of the company; and
  • if a distribution to preferential creditors is anticipated, the preferential creditors.

If the administrator did not make a paragraph 52 statement in the proposals, the administration can be extended with the consent of:

  • each secured creditor of the company; and
  • if there are unsecured creditors, the unsecured creditors.
How does a creditor consent to the extension?

If the consent of the unsecured creditors or preferential creditors is sought, their consent can either be obtained by a decision procedure or the deemed consent procedure under the Insolvency (England and Wales) Rules 2016 (the Rules). The deemed consent procedure is more commonly used as it doesn’t require these creditors to take any active steps.

There is no prescribed format in which a secured creditor can consent, but it must be ‘actual’ consent. The deemed consent procedure cannot be used to obtain the consent of a secured creditor. Most commonly the secured creditor is requested to send an email confirming they consent or to sign a document confirming their consent – either mechanism is acceptable.

The pitfalls

The consequences of an invalid extension by creditors are serious. The administration will automatically come to an end on its first anniversary, and the administrator will therefore no longer have any power to carry out acts on behalf of the company.

The problem is compounded as the invalid extension often only comes to light around one year after the administration has ended when an application to court is made for a further extension, as it is at this stage that the court will review the previous creditor consents to see if the extension by creditors was valid or not.  During the intervening period, the ‘administrator’ could have invalidly carried out all manner of acts on behalf of the company, such as selling assets or advancing claims while actually being out of office.

Here we look at some of the most commonly-encountered pitfalls and recent court decisions.

The creditor paid in full after the commencement of the administration

If the debt of a secured creditor is paid in full after the administration has commenced, many administrators understandably do not seek its consent to the extension on the assumption that a creditor who has been paid is no longer a creditor.

However, in its first review of the Rules, published in April 2022, the government made the following statement: “Several respondents asked for clarification on the position of secured and preferential creditors that had received payment in full. It has been the government’s position for some time that the classification of a creditor is set at the point of entry to the procedure and that this remains, even if payment in full is subsequently made. We believe that to legislate away from this position could cause more problems than it would seek to solve. Accordingly, the government has no plan to change its long-standing view on this matter. We will amend rule 15.11(1) to be clearer that where the Insolvency Act 1986 or the Rules require a decision from creditors who have been paid in full, notices of decision procedures must still be delivered to those creditors.”

The government therefore set out its position that a secured creditor for the purposes of the Rules remains a secured creditor even if it has been paid in full after commencement of the administration, because the relevant date of classification is the date on which the administration commenced.

Many commentators considered the government’s position to be illogical as it did not seem right that the administrator should need the consent of a creditor who no longer had any economic interest in the administration. The government’s position also appeared to conflict with the definition of “secured creditor” in section 248(a) of the Insolvency Act 1986, which states that a secured creditor is “a creditor of the company who holds in respect of his debt a security over property of the company”. The wording clearly refers to creditor in the present tense.

It was primarily for this reason that the High Court in the recent case of Re Pindar Scarborough Ltd (in administration) [2024] decided that the consent of a secured creditor that had been paid in full post-administration was not needed. The court also emphasised that it was the position of the creditors with a “real economic interest” in the administration whose views were relevant, and that a creditor who had been paid had no such interest.

Pinsent Masons represented administrators with a very similar situation on a currently unreported case heard in May 2024 where the court also agreed with the administrators’ position that the consent of a paid secured creditor was not required. 

Despite these helpful decisions from the court, we would still recommend that the administrator seek the consent of a secured creditor that has been paid after the commencement of the administration. The reason for this is the conflicting position of the government and the risk that another judge may see the position differently. Getting this consent, as well as any other required consents, will limit any risk of an invalid extension.

The company that has granted security to multiple companies within the same group

It is not unusual for a company to grant security to multiple companies within the same corporate group. By way of an example, a borrower that has been lent money by a clearing bank may have granted separate security to the bank’s security trustee company and to the bank’s lending company.

The issue that we have encountered here is that the administrator will sometimes only obtain the consent of one of these entities, while sometimes it is just not clear on whose behalf the consent has been given.

We have in the past successfully argued to the court that the security trustee company did not constitute a secured creditor because it did not have any debt owed to it. However, the prudent step for an administrator to take when faced with this situation is to obtain the consent of each company that has security, regardless of whether that means multiple company within the same group giving security. It is important that the consent expressly states the company on whose behalf consent is being given to avoid the risk of an invalid extension.

The wrong form of consent

Another issue that we have seen arise is where the administrator does not follow the correct procedure for obtaining the consent of the secured creditors. As stated above, the consent of unsecured creditors and preferential creditors can be obtained by the deemed consent process. However, the consent of secured creditors needs to be actual consent.

The question of the type of consent required arose in the case of Biomethane (Castle Easton) Ltd [2019] EWHC 3298 (Ch). The court in that case decided that the use of the deemed consent procedure by the appointed administrators was deficient and that actual consent of the secured creditors was required. However, the issue was remedied by the Court making a retrospective administration order which it backdated to the expiry date of the administration.

Actual consent requires active, rather than deemed, consent, which most commonly takes the form of an email confirming consent or a signed document confirming consent.

Learning points

The recent court decisions referred to above adopt a sensible approach and will be welcomed by administrators. However, there remain serious consequences that can arise on seemingly innocuous procedural points. It is therefore essential that an administrator that is seeking the consent of creditors to an extension act carefully and follow the recommendations we have outlined. If a defect is discovered, it is important to promptly address the issue as the court will be more sympathetic to an administrator that acts quickly and openly.

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