If these conditions are not satisfied, the administrators’ appointment will be invalid.
The judge decided that the commentary in the latest edition of Sealy & Milman about the need for a formal resolution of directors is incorrect.
Serving the notice of intention to appoint
Rule 2.20(2)(d) IR 1986 states that where the directors file a notice of intention to appoint, a copy of the notice must be given to the company. The notice must be served on the company at its registered office (Rule 2.8(2)).
Paragraph 26 of Schedule B1 IA 1986 contains two separate provisions relating to service of the notice of intention to appoint. Under sub-paragraph (1), the holder of a qualifying floating charge must be given five business days’ written notice. Under sub-paragraph (2), notice also has to be given to “such other persons as may be prescribed”.
The Chancellor concluded that these provisions together mean that the company itself, along with the other people listed in Rule 2.20(2) such as enforcement officers and persons distraining on the company’s assets, must be given notice:
“I can see no reason why all those enumerated in Insolvency Rule 2.20(2), namely bailiffs, process servers, distrainers, supervisors or the company itself, should receive notice of an intention to appoint administrators if there is a floating charge over the assets of the company in respect of which there is someone entitled to appoint an administrative receiver or an administrator, but not otherwise. Prima facie each of them is concerned, whether or not there is a floating charge over the property of the company.”
Rule 2.20(2) does not require five business days’ notice to be given to the company and the other parties listed before the appointment is made. If any holder of the qualifying floating charge consents to short notice, the appointment can be made earlier. It is certainly arguable that the purpose of Paragraph 2.20(2) was to notify the people listed in it of the moratorium rather than for any wider purpose.
The outcome of the Chancellor’s decision is that in all cases where the appointment is made by a resolution of the directors rather than the shareholders, and in all cases where there is any enforcement or distress, a notice of intention to appoint must be filed and served before the appointment is made.
The directors’ resolution
Paragraph 22 of Schedule B1 states that, “The directors of a company may appoint an administrator.” Paragraph 105 states, “A reference … to something done by the directors of a company includes a reference to the same thing done by a majority of the directors of the company.”
The commentary on these provisions in Sealy & Milman states that a formal meeting is not required. It is enough that there is an informal decision of a majority of directors.
The Chancellor decided that this view is incorrect:
“The terms of paragraph 105 give to an act of the majority the same validity as would be accorded to an act of the directors as a whole but if the act in question must still be an act of the majority of such directors, I see no reason why the reduction in the requisite number of directors should also dispense with the usual rules of internal management.”
This means that in all cases the decision to appoint administrators must either be a unanimous decision of the directors, or be taken strictly in accordance with the company’s articles. The articles may, for example, specify particular notice periods, restrict the business which can be conducted in the absence of particular directors, and so on.
Practical points
- If there is any uncertainty as to the status of directors or the validity of a resolution to appoint administrators, consider whether it is feasible to obtain a shareholders’ resolution.
- If a shareholders’ resolution is impractical, it may be necessary to apply to the court.
- In all cases, practitioners need to take great care to identify people such as bailiffs and enforcement officers who must be served with a notice of intention to appoint. Failure to do so could invalidate the appointment.
- Where the appointment is made following a directors’ resolution, there would appear to be nothing to stop the company formally waiving the requirement of service of the notice of intention to appoint, but a prudent approach would be to ensure that it is served at the registered office before the appointment is made.