Out-Law Legal Update | 08 Feb 2021 | 4:31 pm | 5 min. read
A secured creditor's appointment of an administrator was not void despite the fact it failed to notify its intention to make the appointment to another secured creditor whose security was in place first, the High Court has ruled.
The failure to notify arose because of an administrative error which meant that the prior security was marked at Companies House as having been satisfied. The court ruled that, while there was a procedural irregularity in the appointment of the administrators, it could be corrected by a court order and did not render the appointment void.
The court, however, provided guidance on what it considered would be best practice in fulfilling the administrator appointment notice requirements under UK insolvency law in the event a prior ranking secured creditor has been dissolved.
In the case before it, the High Court had to assess whether the appointment of an administrator by a 'qualifying floating chargeholder' – a secured creditor with a floating charge over all or most of a company’s property who can appoint an administrator to the company – was valid given their failure to notify a prior ranking qualifying chargeholder of the appointment.
The High Court determined that the failure to notify does not constitute a fundamental defect rendering the administrator appointment void. It found that such failure could be remedied by an order of the court made under rule 12.64 of the Insolvency (England and Wales) Rules 2016 (IR16) so long as no substantial injustice was caused.
The case arose following the incorrect filing of a notice of satisfaction of a qualifying floating charge by NMUL Realisations Limited (NMUL) at Companies House.
NMUL had granted a debenture to Tudor Capital Management Limited (Tudor), the trustee of the Moya pension scheme on 9 October 2008 which was validly registered at Companies House. Tudor was suspended from acting as a trustee on 4 October 2011 and subsequently two of its directors were convicted of conspiracy to cheat the public revenue on 5 March 2013. Tudor was dissolved on 6 December 2016. On 28 March 2018, the director of NMUL filed a notice of satisfaction after assuming that, because he had not heard from Tudor or anyone on behalf of the pension scheme for some time, the loan had been discharged and the debt owed to the scheme satisfied. In reality, NMUL still owed approximately £1.5 million to the pension scheme which was secured by the debenture.
Following the discharge, NMUL refinanced twice, first with Santander Bank UK plc (Santander) and then with Metro Bank Plc (Metro). Both Santander and Metro took debentures, with the Santander debenture being correctly marked as satisfied following the refinance with Metro. When Metro filed a notice of appointment of administrators for NMUL on 29 January 2020, the only charge showing on the company's register as being unsatisfied was the Metro debenture. This meant that Metro did not serve notice of its intention to appoint on any other party. As monies were still owed under the Tudor debenture, Metro should have served notice of its intention to appoint administrators on Tudor in accordance with paragraph 15 of Schedule B1 to the Insolvency Act 1986 (IA86).
After considering case law, the High Court confirmed that the certificate of satisfaction filed mistakenly by the director of NMUL did not affect the underlying charge and debt that it secured and the liability of NMUL to pay it. It further confirmed that it did not affect the obligation to give the holder of such a prior charge the appropriate notice under paragraph 15 of Schedule B1 IA86.
Following the appointment of the administrators, it was discovered that an enforcement receiver had been appointed over the realisable property of the directors of Tudor on 6 September 2019 and that the receivership order listed the benefit of the Tudor debenture and underlying loan as part of the realisable property over which the enforcement receiver was appointed to realise. Under normal circumstances, the unclaimed property of a dissolved company will sit with the state, however the government legal department confirmed that this did not happen in this case due to the wording of the receivership order.
The court said that, while it was unclear at the time of the administrator appointment who on behalf of Tudor notice of the appointment could have been given to, given Tudor had been dissolved, it refused to accept that there was no one to whom such notice could have been given following the dissolution. The court said that notice should have been given to either the enforcement receiver or to the government legal department, or even both if a pragmatic approach was being taken, though it made no criticism of the conduct of the administrators or their advisers, given the court had the benefit of hindsight.
In determining whether the failure to comply with the notice provisions of paragraph 15 of Schedule B1 IA86 was a procedural error rectifiable under rule 12.64 IR16, or a defect of such magnitude that rendered the appointment null and void, the court considered a number of previous cases, including the decision in the case of Re Tokenhouse last year.
The court, following the principles set out in that case, determined that paragraph 15 of Schedule B1 IA86 prescribes a procedural requirement with the result that a breach will "naturally fall to be treated as irregular" on the basis that:
The administrators and the enforcement receiver agreed that the administrators would sell the business and hold £1.7 million from the sale proceeds until an agreement was reached or a court order was made, determining the issue. The administration was successful and the enforcement receiver was paid an amount which satisfied the loan secured by the Tudor debenture. At no point did the enforcement receiver object to the relief sought by the administrators, nor were any representations received from the enforcement receiver following the issuing of the administrators progress report. The court therefore found that no substantial injustice had been suffered by the enforcement receiver.
The court therefore made a declaration that, while there had been an irregularity in the procedure of their appointment, the administrators were validly appointed notwithstanding that irregularity.
This judgment should reassure chargeholders and insolvency practitioners that the court is likely to exercise its discretion positively to cure procedural errors in the administration process where such have arisen due to genuine mistake. However, the court's comments that notice could and should have been given to the enforcement receiver and government legal department where a potential chargeholder had been dissolved, should be noted.
Samantha Poulton is a restructuring expert at Pinsent Masons, the law firm behind Out-Law