Re Tokenhouse VB Limited

Failure to give chargeholder notice of intention to appoint did not invalidate administrator appointment - but replacement administrators appointed by the court.

Background

The directors of Tokenhouse VB Limited (formerly VAT Bridge 7 Limited) appointed joint administrators without providing the company’s qualifying floating charge holder (the QFCH) with notice of their intention to do so.

The QFCH made an application to court to challenge the appointment of the joint administrators on the basis that:

the appointment was void for failure to provide notice; or
(in the event that the appointment was held to be valid) the QFCH had been deprived of the opportunity to appoint its own administrators and as such the court should appoint the QFCH’s proposed administrators in place of those appointed by the directors.

On hearing the application on 4 September 2020, Insolvency and Companies Court Judge Jones noted that the QFCH should have been given 5 business days’ notice of the directors’ intention to appoint administrators in accordance with paragraph 26(1)(b) of Schedule B1 to the Insolvency Act 1986. ICC Judge Jones reserved judgment but ordered that, in the interim, the first period of administration would cease and a new administration would begin with one of the original director-appointed administrators and one of the QFCH’s proposed administrators to act jointly pursuant to paragraph 81(1) and 81(3)(d) of Schedule B1 and the court's inherent jurisdiction.

Decision

ICC Judge Jones handed down his judgment on 14 October[1], finding as follows:

Valid appointment

The failure to provide the QFCH with notice was not a fundamental breach, but rather was an ‘irregularity’ which could be cured, if appropriate, by the replacement of administrators by the court pursuant to paragraph 91 of Schedule B1. Deciding by reference to Parliament’s intention in connection with the administration regime, the “overriding purpose” of administration was to achieve the rescue of the company, which took priority over any potential prejudice to the QFCH by the breach of notice requirements. The appointment was not invalidated by the failure to provide notice.

2. Replacement administrators

Although satisfied the first appointment of administrators was valid, it should not have occurred. The breach of compliance with notice requirements was “an important factor with considerable weight” when considering whether the administrators should be replaced.

The court needed however to consider all relevant circumstances, in particular whether appointing replacement administrators would assist in the operation of the administration and ‘achieve justice’ for all parties. This would need to be decided on the facts of each case.

In this instance, ICC Judge Jones appointed the second of the QFCH’s proposed administrators to act jointly alongside the first, and removed the remaining director-appointed administrator. Persuasive factors included:

the QFCH had made the application promptly;
the administration was at an early stage;
the QFCH was the main creditor; and
the interim appointment of the QFCH-proposed administrator meant that the replacement of the final director-appointed administrator with the QFCH proposed administrator would be seamless.

ICC Judge Jones noted that this decision was only binding upon judges sitting below High Court level and that it did not resolve the conflict of High Court Judge level authority on the validity of administration appointments. In the Appendix to the judgment, ICC Judge Jones included a useful summary of the existing authorities at High Court level, including (amongst others):

Re G-Tech Construction Ltd [2007] the incorrect prescribed form had been filed at court, where the appointment was held to be invalid and that paragraph 104 of Schedule B1 could not apply as there was no appointment. The judge made a retrospective administration appointment which allowed the case to progress as if there had been a valid appointment;
Re Ceart Risk Services Ltd [2012] where the consent of the Financial Services Authority was not obtained at the appointment date. This defect was held to be curable if a notice of consent was subsequently obtained (albeit in this case the administration appointment date was in fact ordered to be the date that the subsequent FSA consent was filed);
Re Euromaster Ltd [2012] where administrators were appointed made eleven days after directors filed a notice of intention to appoint administrators (after the expiry of the 10 day prescribed period), which was held to be an irregularity that did not invalidate the appointment; and
Re Skeggs Beef Ltd [2019] made by QFCHs outside of court office hours using the incorrect procedure (CE-file rather than email or fax), where the defect was found not to be fundamental and was capable of being cured.

ICC Judge Jones recommended any future cases addressing conflict over the validity of administration appointments with similar issues should be listed at High Court Judge level.

Our comment

The case serves as an important reminder to comply with the notice requirements for out of court administration appointments.

Although it may be somewhat reassuring to insolvency practitioners that failure to comply with the chargeholder notice requirements will not invalidate an administration appointment (if this decision is followed), such a breach leaves administrators at risk of being displaced if the court considers it is appropriate for the chargeholder’s choice to prevail.

If seeking that replacement administrators are appointed, the onus is on the qualifying floating charge holder to make the application promptly and to demonstrate any prejudice suffered.

For further information relating to this article, please contact a member of our Restructuring & Insolvency Team.

[1] [2020] EWHC 3171 (Ch)