Whose consent is required to extend an administration?

Overview

In this case, the Court considered whose consent is required to extend an administration under paragraph 76 of schedule B1 to the Insolvency Act 1986. The administrators of a company had sought consent to the extension from the only secured creditor with an economic interest in the case, who agreed to the extension. An issue later arose as to whether the administrators should have also sought the consent of other parties who were secured creditors at the time the administrators were appointed, but had since been paid off.

In a strongly-worded and clear decision, the Court rejected the position of the Insolvency Service that creditors are classified “at the point of entry to the procedure”, and that this classification remains even if the creditor is subsequently paid in full. The Court cited the definition of “secured creditor” in section 248 of the Act as a creditor who holds (present tense) a security, finding that any creditor whose debt has been paid off is no longer a creditor. The Court concluded that nothing in the legislature suggests, let alone compels, that parties with no economic interest in the outcome of the administration should have to spend their time and money making administration decisions that do not affect them.

Background

The administrators of Toogood International Transport and Agricultural Services Ltd made an application seeking an order, if necessary, declaring that a previous extension to the administration by creditor consent was valid.

The company was incorporated in 2006 and carried on business as an independent express transport and haulage company based near Bristol. After facing financial difficulties following Brexit and the Covid-19 pandemic, administrators were appointed on 21 June 2022.

At the time, Companies House records showed HSBC Bank plc, HSBC UK Bank plc, and HSBC Invoice Finance (UK) Ltd as having unsatisfied security interests against the company. However, the HSBC Bank plc debt had been transferred to HSBC UK Bank plc, so only HSBC UK Bank plc and HSBC Invoice Finance (UK) Ltd actually held unsatisfied security interests. The company’s liability to HSBC Invoice Finance (UK) Ltd was also discharged in full by the end of 2022, such that HSBC UK Bank plc remained the only secured creditor with an economic interest in the administration.

Under paragraph 76 of schedule B1 to the Insolvency Act 1986, the original appointment of the administrators would have come to an end after one year (in June 2023) unless the term was extended by consent for not more than one year, or by order of the court for a specified period. "Consent" for this purpose means the consent of "(a) each secured creditor of the company" and of "(b) the unsecured creditors of the company", under paragraph 78(1) of the schedule.

The administrators sought such consent on the basis that there was further work to be done before the company could exit administration. Unsecured creditor consent was deemed to have been given under section 246ZF of the Act, because appropriate notice was given and no objections were received. They were not relevant to this application.

With respect to secured creditors, the administrators took the view that only the consent of HSBC UK Bank plc was necessary, since it was the sole creditor with an economic interest in the administration. The administrators obtained such consent and continued with the administration on the basis that the extension was valid and effective.

The consent procedure in paragraph 76 can only be used once. The administrators, considering that they required more time to complete the administration, issued an application for a further extension by order. They also sought an order, if necessary, declaring that the previous extension was valid.

The Court’s Decision

The issue before the Court was whether the consent of HSBC Bank plc and/or HSBC Invoice Finance (UK) Ltd was required in addition to that of HSBC UK Bank plc. The Court’s attention was drawn to a passage in the First Review of the Insolvency (England and Wales) Rules 2016, published by the Insolvency Service on 5 April 2022, in a section headed "Creditor approval of proposals and fees". That passage reads as follows:

"Several respondents asked for clarification on the position of secured and preferential creditors that had received payment in full. It has been the Government's position for some time that the classification of a creditor is set at the point of entry to the procedure and that this remains, even if payment in full is subsequently made. We believe that to legislate away from this position could cause more problems than it would seek to solve. Accordingly, the government has no plan to change its long-standing view on this matter. We will amend rule 15.11(1) [of the Insolvency (England and Wales) Rules 2016] to be clearer that where the Insolvency Act 1986 or the Rules require a decision from creditors who have been paid in full, notices of decision procedures must still be delivered to those creditors."

However, rule 15.11(1) (which deals with the procedures for giving notice of decisions) has not so far been amended. It relevantly provides that, in administration proceedings where decisions are to be made by creditors, notice must be given to “creditors who have claims against the company at the date when the company entered administration (except for those who have subsequently been paid in full)”.

The Court reviewed a number of authorities relied on by the administrators to support the position that only those creditors with an economic interest were required to give consent to the extension. It found the Court’s recent decision in in Re Pindar Scarborough Ltd (In Administration) [2024] EWHC 908 (Ch) to be most analogous and instructive. In that case, at the time that the company appointed administrators, Barclays Bank was a secured creditor with a charge registered at Companies House. Barclays Bank was paid off during the administration, and the administrators later sought an extension of their appointment. The extension was consented to by the main secured creditor, but not Barclays Bank, which was not asked.

The Court referred to the definition of “secured creditor” in section 248 of the Act and said:

"The definition of secured creditor is framed in the present tense: 'a creditor of the company who holds… a security'. To state the obvious, a secured creditor is a creditor, therefore one owed a debt by the company or other obligation sounding in money; and he is a creditor who holds a security as defined. A creditor who had once held security would not be within the definition. Neither does the definition purport to apply any time period other than the present. It does not, for example, treat a secured creditor as being one who was owed at a particular point a debt which was then secured. On that straightforward reading, by the time paragraph 78 was engaged in respect of the company, Barclays was no longer within the section 248 definition."

The judge then specifically rejected the Insolvency Service’s approach set out in the First Review of the Insolvency (England and Wales) Rules 2016, stating:

"It is not therefore apparent how the rule can be made 'clearer' in order to reflect the Government's long-standing view that notice ought to be given to creditors who have been paid in full. Instead, if that were what this rule was meant to do, the wording would have to be reversed. … rule 15.11(1) does not itself create any ambiguity. Insofar as there is ambiguity it is in this Insolvency Service response.”

The Court in Re Pindar Scarborough Ltd (In Administration) concluded that the issue was governed by section 248, and that the consensual extension of the administration was effective and no retrospective order was required.

The Court in this case agreed, finding that section 248 is clear, and contained in primary legislation. A secured creditor is defined as "a creditor … who holds … a security". A creditor who has been repaid is no longer "a creditor". Rule 15.11, contained in secondary legislation, does not contain a definition of secured creditor for the purposes of Schedule B1. Even if it did, it would not lead to a different conclusion from section 248.

A secured creditor is one who is owed a debt that is secured. Any creditor whose debt has been paid off is ex hypothesi no longer a creditor, and therefore no longer a secured creditor. Nothing in the legislation suggests, let alone compels, the conclusion that the position is to be governed only at the point of entry into the administration process. And, according to the Court, that is as it should be. Only those who have an economic interest in the outcome should be concerned to make decisions about the continuance of the administration. There is no reason why a commercial organisation such as a bank that has been repaid in full should have to spend its time and money making administration decisions that do not affect it.

The Court concluded its decision by challenging the Government to legislate more clearly if it wishes there to be a different result, and moreover to explain why those with no economic interest in the outcome of an administration should nevertheless determine what happens. In the meantime, the Court held that a secured creditor whose debt is paid off ceases to be a secured creditor for the purposes of Schedule B1 of the 1986 Act, and its consent is no longer needed for any decision requiring the consent of such a creditor. No prejudice can be or is caused to such a person by not obtaining its consent.

Conclusion

Accordingly, the Court ruled that the extension of the administration by consent was valid.

Judge: HHJ Paul Matthews

Counsel: Osborne Clarke for the applicants