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Invalid administration appointment - the s245 conundrum

When is an administrator not an administrator?

The facts:

An administrator appointed by a qualifying floating charge holder discovers that the purportedly qualifying floating charge is "invalid" under s245 Insolvency Act 1986, in that the consideration for the charge was given by the creditor before the charge was created, at which time the company was unable to pay its debts within the meaning of s123.

The questions:

(a) Is the administrator's appointment therefore invalid and (b) what should he do?

The issues:

(a) Since s245(2) is triggered retrospectively by the definitions of "relevant time" (s245(3)) and "onset of insolvency" (s245(5)), and the onset of insolvency in this case is the appointment of the administrator, there is a "scintalla of time" argument that the charge does not become invalid until the administrator is appointed, by which time he has been appointed under a (then) valid charge, his appointment was therefore valid and it remains unaffected by the charge's subsequent invalidity.

Alternatively, and on the face of it more pragmatically, there could never be a valid administration appointment within the 12 month (or two year) relevant time period because that was the clear intention of the legislation, an appointment by a floating charge holder that was not a "qualifying" floating charge holder by reason of the charge's invalidity is itself invalid, and an invalid appointment is sufficient to trigger the relevant time and to give the administrator the locus to apply for directions.

(b) Should the administrator plough on, seek directions or just walk away from the nullity?

Some answers:

  1. the administrator's appointment is invalid and he should seek directions, which might include a declaration from the court declaring the appointment to be invalid and an order that the administrator be indemnified by the appointor. This is arguably the safest route for the administrator and a proper course to bring the matter to the court's attention. Since the whole matter is uncertain, it must be right for the (purported) administrator as (or in case he is) an officer of the court to bring the matter to the court's attention in this way. A separate administration application can then be made, possibly retrospectively to the time of the original, invalid appointment; or  
  2. on the scintilla of time argument, the administrator's appointment was valid at the time he was appointed and he should just carry on. This might avoid a creditor or the directors having to make a fresh administration application, but there is a risk that someone might view the position differently and challenge the administrator's actions. If the court is not wholly persuaded by the scintilla of time argument, such a challenge might find favour with the court, with adverse cost and liability implications for the administrator; or
  3. the whole appointment was a nullity and the purported administrator is not in a position to do anything, even make an application to the court, as the company is not subject to any insolvency proceedings.

Observations:

I have recently followed answer (1) in an unreported case, but I am aware of other cases where different Counsel advised along the lines of each of answers (2) and (3).

What is your view? Is it useful to have a precedent of seeking directions or is it preferable to retain the flexibility of being able to plough on in cases where there is little prospect of challenge? Is there a real prospect of the court declining to entertain a directions application from an administrator in these circumstances?

 

 

Date: 12th April, 2009
Author: Chris Laughton

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