Validity of administrators' appointment questioned over e-filing issue?

Overview

This case highlights the confusion that can arise when you apply procedural rules that were written for in-person filing of court documents to the more current standard of filing documents electronically. A company’s joint administrators brought an application confirming the validity of their appointment notwithstanding various procedural defects in the notice of appointment form. The Court applied a common-sense approach, finding that the defects were not fundamental and caused no substantial injustice. However, the Court was concerned that the joint administrators’ solicitors had seemingly been unable to file the documents electronically, and requested a detailed explanation for the steps taken and the reasons for the failure to e-file, not for potentially 'disciplinary' reasons, but out of genuine concern that others wishing to electronically file such documents might be being prevented from doing so in the future.

Background

The Joint Administrators of QM Systems brought an application confirming the validity of their appointment notwithstanding various procedural defects in the notice of appointment form (the “NOA”), namely that:

1. the heading of the NOA incorrectly suggested that QM Systems appointed the Joint Administrators rather than the directors of QM Systems;

2. only one as opposed to three copies of the NOA was filed at court; and

3. the NOA failed to exhibit the consent given by National Westminster Bank (“NWB”), the holder of the qualifying floating charge.

The reason behind these procedural defects was that the electronic filing process for filing the NOA did not permit the Joint Administrators’ solicitors to file three copies of the NOA or a separate consent by NWB. Accordingly, neither three copies of the NOA were filed nor was a separate consent by NWB filed, although the notice of intention to appoint the Joint Administrators (“NOI”) that was previously filed had included a consent from NWB.

The Court’s Decision

By paragraph 63 of Schedule B1 to the Insolvency Act 1986, a company’s administrator may apply to the court for directions in connection with his functions. This includes bringing an application to confirm the validity of an administrator’s appointment.

Under Rule 12.64 of the Insolvency (England and Wales) Rules 2016 (“IR”), an insolvency proceeding will not be invalidated by a defect unless the court considers that substantial injustice has been caused by the defect or irregularity and the injustice cannot be remedied by an order of the court.

Cases concerning defective out-of-court administration appointments can be divided into three categories:

1. Cases where the defect is fundamental. In such cases, the purported administration appointment is a nullity and there is nothing that the court can cure.

2. Cases where the defect is not fundamental and causes no substantial injustice. In such cases, the proceedings will not be invalidated by any formal defect or irregularity.

3. Cases where the defect is not fundamental, but substantial injustice is caused. In such cases, the court must ask itself whether that substantial injustice can be remedied by an order of the court and whether it is appropriate to make a remedial order. If so, then the defect is cured on the court making the order. If the court cannot make a remedial order or does not consider that it is appropriate to do so, then the defect remains uncured.

When it comes to notices of appointment of administrators more specifically, the failure to file a notice of appointment in the prescribed form appears to amount to a fundamental flaw which renders a purported out-of-court appointment a nullity. By contrast, the filing of a notice of appointment in the prescribed form but in the wrong manner appears to amount to a "defect" or "irregularity" that is not fundamental, and that can be dealt with in the manner described above.

Rule 3.24 IR: The Erroneous Heading

Rule 3.24 IR prescribes the form and contents of a notice of appointment, including its heading which varies depending on whether a company or its directors have appointed the administrators. The Court found that the statutory purpose of the heading provisions in r.3.24 IR is not to provide information about who made the appointment, but rather “for the plain and obvious reason to enable a reader to identify the relevant document: in this case the notice of appointment, no matter who made it”.

Considering the authorities and context in which the error was made, the Court concluded that the erroneous NOA heading — which incorrectly suggested that QM Systems appointed the Joint Administrators rather than the directors of QM Systems — was no more than a procedural defect which did not invalidate the Joint Administrators’ appointment pursuant to r.12.64 IR.

Among other things, the Court emphasised that the substance of the form was correct and no one reading it could be misled by the wrong heading. Paragraph 1 of the form commenced with the words “The directors of the Company (the appointer) have appointed the following named persons …” and then referred throughout to “the appointer”.

Interestingly, the Court noted that the use of the wrong heading may have been more problematic in former times, when the two different headings to the notices of appointment (reflecting the two methods of appointment) may have been in different statutory forms. However, the change in the rules has removed such draconian consequences for what might be regarded as an arbitrary failure if, in the event, the substance of the information has been provided. The approach adopted by the Court here reflected that relaxation in procedure. It was also consistent with previous cases where the Court regarded errors in a heading as being of a less serious nature (see, e.g., Re Kaupthing Capital Partners II Master LP Inc, Pillar Securitisation SARL v Spicer [2010] EWHC 836 (Ch)).

Rule 3.26 IR: Filing in Triplicate and Absence of Notice of Consent

Rule 3.26 (1) IR requires three copies of the notice of appointment to be filed with the court, accompanied by: (a) the administrator’s consent to act; and (b) the written consent of all those persons to whom notice was given in accordance with paragraph 26(1) of Schedule B1 unless the period of notice set out in paragraph 26(1) has expired.

The single NOA was filed electronically via CE-File on 15 July 2024 within normal court hours. There was no doubt that NWB had in fact consented to the appointment of the Administrators, since its written consent was endorsed on the NOI.

The Court stated that the reasons for the inability to file the NOA in triplicate and/or NWB's written consent were unclear, but accepted the Administrator’s word that her solicitors stated that they had been unable to file these documents. The Court was particularly concerned about this and stated that it intended to order that a detailed explanation of the steps taken and the reasons for the failure to file be provided to the court. This was not for potentially 'disciplinary' reasons, but out of genuine concern that others wishing to electronically file such documents might be being prevented from doing so in the future. The Court stated it would raise the issue at an appropriate level of HMCTS administration if necessary.

In any event, the Court found that the failure to file three copies of the NOA and to exhibit NWB’s consent were no more than procedural defects which did not have the effect of invalidating the Joint Administrators’ appointment.

The statutory purpose behind the requirement for filing a notice of appointment in triplicate and the requirement to exhibit the consent is to provide the appointer and the administrator with proof, for those that might be interested, that the requisite procedural steps have been taken following the appointment of the administrator and that the court is so satisfied.

Fundamentally, NWB gave its consent and it was inconceivable that any prejudice would be caused by either the failure to exhibit the consent or its cure. It would be a triumph of form over substance to allow these errors to cause the appointment to be invalidated. Accordingly, the Court was willing to cure them pursuant to r.12.64 IR.

Judge: HHJ Michael Berkley (sitting as a Judge of the High Court)

Counsel: Govinder Chambay (instructed by DAC Beachcroft) for the Joint Administrators