Let’s be clear – intention means intention!
Since 2003, placing a company into administration has been a lot easier than it used to be. Formerly, an administration could only be initiated with an application to court which was expensive, could be slow and with no certain outcome guaranteed. The out of court administration option, introduced in that year, is a far cheaper and more streamlined means of having a company placed into administration and is the option now used in the vast majority of cases.
The out of court option is commonly started with the filing in court of a notice of intention to appoint an administrator (“Nol”)(pursuant to paragraphs 26 and 27 of Schedule B1 to the Insolvency Act 1986). This is used where the appointment is sought by either the company itself or its directors. The key benefit accruing from the filing of a Nol is that the company in question is immediately protected from potential creditor action by an interim 10 business day moratorium.
If the company has one (or more) secured creditors holding a “qualifying floating charge” (“QFCH”), a copy of the Nol must be served on each QFCH which then has the right to select an insolvency practitioner (“IP”) to be the administrator in priority to the choice of IP proposed by the company or its directors. If each QFCH does not object within the set time (five business days), the company’s / directors’ choice of IP will be set to become the administrator.
The original intention of the Parliamentary draftsman was for there to be a single Nol before the actual appointment of the proposed administrator takes effect within the 10 business day moratorium period triggered by the NoI. However, a somewhat controversial practice has developed whereby it is not uncommon for a company to be subject to two (or more) NoIs before it finally goes into administration. This has culminated in JCAM Commercial Real Estate Property XV Ltd v David Haulage Ltd, a recent case in which the practice of issuing multiple NoIs was assessed by the Court of Appeal.
The facts in the case were clear. The subject company (Davis Haulage) had filed four successive NoIs giving it a moratorium aggregating to 40 days. At some point around the filing of the second and third NoIs, the company indicated that it was preparing a company voluntary arrangement (“CVA”), a contractual mechanism whereby a company seeks to compromise its debts with its creditors typically with a view to avoiding going into administration (or any other formal insolvency process). The CVA proposal was not popular with its creditors. A modified CVA was later approved, but then failed culminating in the company going into administration. One of the company’s creditors challenged the company’s repeated use of NoIs (which suggested that it was planning to go into administration) arguing that its intention had been to pursue a CVA instead.
The Court of Appeal criticised the approach of the judge in the first instance on a number of points. These include one of the narrow interpretation of certain wording in Schedule B1. More broadly however, the Court of Appeal wanted to provide some clarity to the market about what it considered to be Parliament’s intentions concerning the use of a Nol. It laid down some key principles to be observed when contemplating issuing and filing a Nol:
- A Nol should only be filed in court where there is a QFCH, that is a person with a prior right to appoint an administrator. The purpose of filing a copy of the Nol, and the purpose of the interim moratorium triggered by the filing, is to protect the company and its assets while the QFCH decides whether to appoint an administrator (prevailing over the company’s / its directors’ choice of administrator). If the company does not have a QFCH, there can be no interim moratorium.
- A NoI can only be given where the company or its directors have a “settled intention” to appoint an administrator to the company.
- Furthermore, it follows from the above that, where there is such a settled intention, the company / its directors are obligated to file a NoI and serve a copy on each QFCH.
The Court of Appeal ordered the fourth and last Nol to be removed from the court file (and with it the moratorium conferred) as the company did not have the settled intention at the point to appoint an administrator (because the focus then was to propose a CVA to its creditors instead). This Nol was therefore invalidly given and its issue an abuse of the court’s process.
The clear message this case gives is that it is no longer safe for a company and its directors to blithely assume that they can issue any NoI (or any successive NoI) . They can only do so where each Nol is justified by them having (or continuing to have), at the point of issue, a settled intention to appoint an administrator.