The High Court in England has recently confirmed in the case of Re Frontsouth (Witham) Ltd and Another (2011) that it cannot remedy a defective administration appointment using its powers under Rule 7.55 of the Insolvency Rules 1986.
Rule 7.55 provides for the following;
"No insolvency proceedings shall be invalidated by any formal defect or by any irregularity, unless the court before which objection is made considers that substantial injustice has been caused by the defect or irregularity, and that the injustice cannot be remedied by any order of the court."
The facts of the case are as follows:-
The administrators of the company were appointed in January 2009 with no issue arising regarding the validity of the appointments. However, by virtue of paragraph 76(1) of Schedule B1of the Insolvency Act 1986, their appointments would cease to have effect after one year unless validly extended. The administrators sought a six month extension under paragraph 76(2)(b) of Schedule B1 of the 1986 Act which requires the consent of all relevant creditors. However, it was realised that not all relevant creditors had consented to the extension with no consent provided by one of the company's secured creditors.
The administrators accepted that the lack of sufficient creditor consent meant that the administration had expired on the first anniversary of their appointment. However, they and the company applied to court for an order:
- That the administrator's appointment remained in effect despite the failure to obtain the requisite creditor consent, as the failure to obtain proper consent was a remediable defect in insolvency proceedings, within the meaning of rule 7.55 of IR 1986; and
- That the acts of the administrators in the period of the defective extension were valid despite the defect in their appointment, under paragraph 104 of Schedule B1.
The court considered that waiving the defect would probably be the simplest solution to the problem and it was noted that the same approach had been adopted by the Registrars of the Companies Court in a number of recent cases. However, it was also brought to the court's attention that the same point of law had been considered by the court on at least three separate occasions and all cases concluded that rule 7.55 could not be used to waive such a defect.
Mr Justice Henderson considered the previous cases and noted that:
- Where an administrator was not in office, either because he was invalidly appointed or because his term of office had expired, there were no "insolvency proceedings" within the meaning of Rule 7.55. Accordingly, the court could not make an order under that provision.
- Similarly, an invalidly appointed administrator, or one whose term of office has expired, is not the subject of a defective appointment, but rather his appointment is a nullity. Consequently, acts undertaken while purportedly in office cannot be validated under paragraph 104 of Schedule B1.
The administrators had been acting without authority since January 2010 and if they were to be re-appointed as administrators then a fresh application for that purpose would need to be made.
Mr Justice Henderson also considered that a solution may be to make a fresh appointment with retrospective effect. This would be considered by the court and such appointment may be back-dated. However, the issue still remained as to who could make such a new application. It was clear that the administrators could not make such an application themselves because they had no standing to do so. The court referred to the company's articles of association in respect of this point and held that an application order cannot be made on the application of a company, unless the making of that application was authorised in accordance with the provisions of its articles of association. In the present case, a shareholder resolution was insufficient authorisation, as the articles of association provided that the company's powers were only exercisable by its directors.
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