UK: When is a Defective Appointment Too Defective to be Cured?

Last Updated: 17 May 2012
Article by David Allen, Jessica Walker and Alexandra Wood

Originally published May 11, 2012

Keywords: insolvency act, appointment of administrators, FSA, FSMA

The Court has heard another case dealing with a defective appointment of administrators under paragraph 22 of Schedule B1 Insolvency Act 1986 ("Schedule B1")1. Following hot on the tail of a recent series of conflicting cases relating to defective appointments, the Court has held that:

  1. the appointment of administrators of a company authorised by the Financial Services Authority ("FSA") was valid despite having obtained and filed the FSA's consent (which was required to be filed along with the appointment under s362A Financial Services and Markets Act 2000 ("FSMA")) only after the time of appointment, albeit that the appointment was effective only from the date on which the consent was filed at Court; and
  2. the sale of the company's assets, which completed before the defect in the appointment was cured by filing the FSA's consent, was valid in spite of the defect in the administrators' appointment, because the defect was capable of being cured.

Background

The administrators were appointed in respect of Ceart Risk Services Limited ("Ceart") by notice of appointment of the company (as there was no qualifying floating charge holder no notice of intention to appoint was given). Following the administrators' appointment, the FSA informed the administrators that, pursuant to s362A FSMA, the FSA's consent was required, which consent was to be filed at Court "along with" the notice of intention to appoint or should "accompany" the notice of appointment. Following a subsequent request, the FSA provided such consent and that consent was later filed at Court. After the FSA consented to the appointment but before that consent was filed in Court, the administrators sold the assets of the company to a third party.

Was the appointment valid?

In respect of the first question, whether the appointment was valid despite the fact that consent was not given by the FSA in advance of it, the Court considered the construction of s362A FSMA to determine whether or not the lack of consent at the date of the notice of appointment was a defect that was cured by the subsequent consent. Although there was no authority on that provision, the Court considered the various conflicting cases of Hill v Stokes2 and Virtualpurple3 on the one hand and Minmar4 and Msaada5 on the other.

In the former pair of cases, the Court held that where there was no qualifying floating charge holder on which to service notice, this obviated the need for any notice to be given to any others who may be prescribed under Rule 2.20(2) Insolvency Rules 1986. Conversely, in both Minmar and Msaada, the Court held that notice was to be given to all those prescribed under Insolvency Rules 1986, Rule 2.20(2) irrespective of whether notice was also to be given to a qualifying floating charge holder. The Court in Ceart did not consider which approach was correct, but relevantly, the Court in Hill v Stokes and Virtualpurple held, as an alternative reason to support its approach, that failure to give notice to those prescribed by Rule 2.20(2) was a curable defect.

Having examined the wording of s362A FSMA, the Court held that, although it was essential to obtain the FSA's consent to the appointment of administrators, that consent did not have to be given prior to the appointment nor did it have to be filed at the same time as the notice of intention or appointment (neither the meaning of "along with" nor "accompany" required the consent to be filed contemporaneously with the appointment). In addition, the Court held that no provision of FSMA specifies that failure to obtain the FSA's consent renders an appointment incurably invalid. Consequently, such a failure was indeed curable and, in Ceart's case, was cured by the subsequent consent given by the FSA.

When were the administrators appointed?

As for the timing of the cure, and therefore of the appointment, the Court looked to paragraph 31 of Schedule B1 which states that an appointment under paragraph 22 is effective when the requirements of paragraph 29 are satisfied, i.e. when all necessary documents have been filed with the Court. Until the FSA's consent was filed with the Court, which was required by s362A FSMA, paragraph 29 was not satisfied. Therefore, the appointment was effective only from the date on which the consent was filed at Court.

The last point to be addressed by the Court was whether the sale of Ceart's assets was valid, as it was completed before the consent was filed and therefore before the appointment was effective. However, the Court was content to allow the parties to rely on paragraph 104 Schedule B1 (which provides that the acts of administrators are valid in spite of a defect in their appointment) because the defect was curable. Had the defect not been curable, the Court held that paragraph 104 would not have provided any assistance as its intention was not to provide relief where there was no appointment at all.

Comment

Unfortunately this case does nothing to help find a way through the confusing melee of case law in respect of the requirement to give notice on an appointment of an administrator. However, it does serve as a useful reminder to ensure that all notice and consent requirements (whether specified in insolvency legislation or elsewhere) have been satisfied before making an appointment, as it is apparent from the decision in Ceart that only where it is clear that Parliament did not intend for the consequences of non-compliance with a legislative provision to result in total invalidity will the Court permit a defect to be cured.

Footnotes

1 Re Ceart Risk Services Limited (2012) EWHC 1178 (Ch)

2 Hill v Stokes Plc (2010) EWHC 3726 (Ch)

3 Re Virtualpurple Professional Services Limited (2011) EWHC 3847 (Ch)

4 Minmar (929) Ltd v Khalatschi (2011) EWHC 1159 (Ch)

5 National Westminster Bank Plc v Msaada Group (2011) EWHC 3423 (Ch)

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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