Judge warns administrators that having creditors' consent "in their back pocket" might not be compliant with the Insolvency Act 1986

There is a sense of "judgment fatigue" when it comes to decisions about the validity of an administrator's appointment or the extension of the administrator's time in office. However, the decision of Deputy ICC Judge Curl QC, in the case of Re E Realisations 2020 Limited, is worth paying attention to.

The issue was whether the extension of the administration, that had been obtained by creditors' consent, was valid. In many ways, the decision is unremarkable as it mirrors decision from earlier this year of Mr Justice Michael Green in the case of Re Caversham Finance Limited who was prepared to remedy the defect in notices sent by the administrators to the creditors seeking consent. The error in both cases was considered to be a procedural defect capable of being remedied under Rule 12.64 of the Insolvency (England and Wales) (Rules) 2016 ("the Rules").

The reason for highlighting the case is the judge's comments as to when in the administration the administrators ought to be asking the creditors for consent.

Facts

The administrators were appointed on 7 June 2020 and completed a pre-pack sale of the company's business the next day. In the statement of proposals, dated 15 June 2020, the administrators made a statement under paragraph 52(1)(b) of Schedule B1 of the Insolvency Act 1986, which meant that "consent" for the purposes extending the administration would be the consent of each of the secured creditors and the preferential creditors.

On 4 August 2020, the administrators sent a voting form to the secured and preferential creditors in which they were asked, among other things, to give their consent "[t]hat the period of Administration be extended by up to twelve months, if required." What the notice to the creditors lacked, in the judge's opinion, was reasons for the extension. Rule 3.54 of the Rules is clear that the notice must state the reasons why the administrator is seeking an extension.

The creditors all provided their consent, within a couple of weeks of 4 August 2020. However, the administrators did not complete and file a notice of the extension with Companies House until April 2021, presumably on the basis that it wasn't until then that they ultimately concluded that an extension was going to be necessary.

Procedural Defect or Nullity?

In light of the earlier case of Caversham, it seemed a straight forward point. In Caversham, the notice to creditors also failed to give reasons but the court was prepared to accept that this was only a procedural defect and therefore could be remedied without the need for a retrospective appointment.

However, the judge needed to be persuaded that the case was "on all fours" with Caversham. This was because it wasn't just that no reasons were provided but, as at August 2020, no reasons were capable of being provided as the decision as to whether to extend the administration had still to be made. The question for the judge was whether this took the case out of the category of procedural defect and into the category of fundamental validity.

Thankfully for the administrators, the judge accepted that the possibly contingent nature of any reasons that might have been given by the administrators did not convert the failure to comply with Rule 3.54 from a procedural irregularity into a matter going to fundamental validity. Therefore, the defect was capable of being remedied and the judge went on to grant a further extension of 12 months to allow the administrators to complete the administration.

A shot across the bows?

With large and complex administrations, it is almost always going to be necessary to request an extension to the initial 12-month period and administrators might be able to confidently predict this from a very early stage in the administration. There are also savings if the request for an extension can be combined with other communications that need to be sent to the creditors. The practice of seeking "advance consent" is understood to be fairly common. Indeed in Scotland, the practice of the Court of Session has meant that many administrators provide all creditors with notice in the first progress report that an extension may be necessary and asks any objections to be notified to the administrators within a specified period of time.

What is certain is that judges faced with a court application seeking an extension to the administration are now more likely than ever to examine the prior extension by way of creditors' consent. For that reason, these words of Deputy ICC Judge Curl are worth setting out in full:-

"…it is right to record, as I did at the hearing, that unambiguous compliance with the requirement in r.3.54(2) of the Rules to give reasons for seeking an extension is always likely to be difficult where contingent consents are obtained as a matter of routine at a relatively early stage of an administration and before real thought has been given to whether or not an extension of the administrator's appointment beyond the initial one year period will be required. Further, the practice of obtaining contingent consent may introduce uncertainty in relation to compliance with para.78(5) of Schedule B1, which requires that "where an administrator's term of office is extended by consent he shall as soon as reasonably practicable…(a) file notice of the extension with the court, and (b) notify the registrar of companies." Accordingly, the practice of obtaining consent to an extension prior to the decision in question being taken would seem to make clear compliance with the Act and the Rules difficult."

The message to administrators appears to be clear – you have been warned.