Scottish Court persuaded, albeit only just, on the competency of retrospective administration orders

The question of whether it is competent for the court to order a retrospective administration order has been the subject of much debate before the English courts. However, until now, there have been no reported Scottish decisions dealing with the point. Lord Braid's opinion in the petition of Methodist Homes for an administration order in respect of MHA Auchlochan Limited confirms that the Scottish courts are prepared to follow the interpretation of the legislation adopted by the English courts.

Background

A retrospective order was necessary because the purported extension of the administration of MHA Auchlochan Limited (the "Company") was invalid, resulting in the first administration coming to an end on 1 May 2024. The administrators failed to seek consent from four secured creditors of the Company due to an oversight resulting from the unusual combination of circumstances in which the securities had been granted and that these had not been registered a Companies House. The invalidity of the extension was not discovered until some months later, and therefore the administrators had, in the bona fide belief that the administration had been extended, continued to act as though they were appointed.

On becoming aware of the defect, Methodist Homes as the principal creditor of the Company applied for an administration order and asked the Court to "back-date" the date on which the appointment of the administrators should take effect to 2 May 2024.

Retrospective order

The court had no difficulty in finding that the statutory criteria for making an administration order was met. There was no major change of circumstances since the company first entered administration and so it was appropriate to make a second administration order.

The more difficult question for the court was whether the legislation allowed it to back date the date on which the administration was to take effect. The provision at the centre of the debate is paragraph 13(2) of Schedule B1 to the Insolvency Act 1986 which provides that:

"An appointment of an administrator by administration order takes effect – (a) at a time appointed by the order, or (b) where no time is appointed by the order, when the order is made."

The court was referred to a line of English High Court cases in which the English courts had been prepared to interpret paragraph 13(2) as giving the court the power to make a retrospective order. This was despite many of the English judges being of the view that a more natural reading of the provision is that it only has prospective effect.

Lord Braid shared these concerns but recognised that "the practice of making a retrospective administration order to rectify a defect in the widest sense is long-established, and that for good pragmatic reasons." Having satisfied himself that the jurisdiction existed, Lord Braid went on to find that it would be appropriate in all the circumstances of the case to make the order back dating the administrators' appointment.

Service and ancillary order

Lord Braid was also prepared to dispense with service and advertisement of the petition, notwithstanding the list of people who the applicant requires to "give notice" to of the administration application under the Scottish Insolvency Rules. He was prepared to do this as all the relevant parties had been given notice of the intention to lodge the application and indicated that they did not oppose it. Interestingly, the court dispensed with service by the power to do so under the Court Rules and not the dispensing power under the Scottish Insolvency Rules.

Extension of administration by consent

The decision will no doubt provide comfort to administrators who might find themselves in a similar position in the future. While there can be no guarantee that a retrospective order will be made, the fact that the court has confirmed it has the jurisdiction to make a retrospective order is good news. However, the decision is also a good reminder of the hidden dangers of seeking the extension of an administration by consent of creditors. In many cases, the creditors who the administrators need to obtain consent from in order to validly extend the administration will be clear and obvious. But care will always need to be taken to ensure that the correct parties have been identified as failure to do so has serious and expensive consequences.