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Administrators' appointment upheld despite defective board resolution

Out-Law Legal Update | 27 Apr 2017 | 4:24 pm | 2 min. read

LEGAL UPDATE: The High Court has upheld an administrators' appointment even though the board meeting resolving to appoint the administrators was inquorate. The court ruled that the quorum provisions in the company's articles of association had been informally amended by the unanimous consent of the company's shareholders.

David Williams was the sole director of BW Estates Limited. His father, Robert Williams, was a disqualified director, but still conducted the day to day business of the company. Robert Williams "called the shots" and David was accustomed to acting in accordance with his instructions. His father was the beneficial owner of 75% of the shares in BW Estates, which were registered in David's name. Robert was also assumed to be the beneficial owner of the remaining 25% of the shares which were registered in the name of an Isle of Man company that had been dissolved.

At a board meeting in 2013 David, as the sole director of BW Estates, appointed administrators to BW Estates. Robert was not present at the board meeting but was fully aware that the company was being placed into administration and acquiesced to the process.

When the administration process had concluded the administrators handed BW Estates back to the control of its new directors, Gursharan Randhawa and Sukhinder Randhawa. The Randhawas challenged the validity of the appointment of the administrators, though not until there had been a number of hearings before the court, and the Randhawas appealed an order assessing the administrators' costs. The judge said that the challenge smacked of abuse of process.

The Randhawas' challenged the administrators' appointment on the basis that the articles of association for BW Estates required two directors to be present at board meetings and stated that a sole director could only act to appoint another director or convene a general meeting of the company. The Randhawas claimed that because he was a sole director of BW Estates David Williams did not have the power to appoint administrators.

The judge upheld the administrators' appointment by applying the Duomatic principle. The judge ruled that there had been a consistent course of conduct by which David and Robert in their capacity as members of BW Estates, whether as beneficial or legal owner of the shares, had informally varied the company's articles of association to either allow David as the sole director of BW Estates to excise all the powers of the company or alternatively to allow David as the sole director to put the company into administration.

The judge in this case was prepared to take a pragmatic approach to uphold the administrators' appointment, fuelled by an objection to the Randhawas failure to object to the administrators' appointment until they wanted to challenge their fees. The judge said that "It seems to me quite wrong that the applicants should have a second bite of the cherry in these proceedings".

The case is a reminder to carefully review the articles of association of a company and any shareholders' agreements, particularly if the company only has one director, before passing a board resolution to appoint administrators.

Caroline Castle is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com