Article by Thomas Wheeler
This is a case note on the recent case of Matthew Robert Haw, Diana Frangou (As joint administrators of QM Systems Limited (in administration) v QM Systems Limited (In Administration) [2024] EWHC 1944 (Ch).
It concerned an application by the joint administrators to confirm the validity of their appointment as joint administrators, pursuant to paragraph 63 of Schedule B1 to the Insolvency Act 1986 and Insolvency Rule 12.64.
The issue the joint administrators had in this case, was that the Notice of Appointment, pursuant to Insolvency Rule 3.24, had the following errors:
- the heading of the notice of appointment form incorrectly suggested that the Company appointed the Applicants rather than the directors of the Company;
- only one, as opposed to three copies of the NOA were filed at court; and
- the Notice of Appointment failed to exhibit the consent given by National Westminster Bank Public Limited Company, being the holder of a qualifying floating charge over the Company’s property.
Legal Background
Paragraph 63 of Schedule B1 to the Insolvency Act 1986 provides that “the administrator of a company may apply to the Court for directions in connection with his functions.”
It has long been established that an administrator of a company can apply to the Court pursuant to this paragraph seeking an order confirming the validity of their appointment – see the decision of Marcus Smith J in Eason & Anor v Skeggs Beef Ltd [2019] EWHC 2607 (Ch).
Pursuant to Insolvency Rule 12.64:
”No insolvency proceedings will be invalidated by any formal defect or any irregularity unless the court before which objection is made considers that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by any order of the court.”
The above provisions formed the basis of the joint administrators’ application to the Court. As stated above, there were issues with the Notice of Appointment which had been filed. Therefore, the Court had to look at the rules in relation to those particular issues.
First, the Notice of Appointment had incorrectly stated that the company had appointed the administrators and not “the directors of the company”. Pursuant to rule 3.24(1):
“Notice of an appointment under paragraph 22 of Schedule B1 (when notice of intention to appoint has been given under paragraph 26) must be headed “Notice of appointment of an administrator by a company (where a notice of intention to appoint has been given)” or “Notice of appointment of an administrator by the directors of a company (where a notice of intention to appoint has been given)” and must contain …” [Emphasis added].
There is then a list of requirements from (a) to (j) which prescribe the required information. (b) is of note:
“A statement that the company has, or the directors have, as the case may be, appointed the person names as administrator of the company.”
Second, pursuant to Insolvency Rule 3.26(1) there must be three copies of the Notice of Appointment filed with the Court (in this case there was only one), and that must be accompanied by the written consent of all those persons to whom notice was given (National Westminster Bank PLC’s consent was not attached).
As such, the Court needed to determine whether the Notice was defective such that it was a nullity, or could be cured.
Decision
HHJ Michael Berkley (sitting as a Judge of the High Court), hearing the application, came to the following decision.
The Judge set out the three categories concerning defective out-of-court administration appointments, as set out by Marcus J in Eason at [21]:
“(1) Cases where the defect is fundamental. In such cases, the purported administration appointment is a nullity. There are no insolvency proceedings on foot, and so there is nothing that the court can cure.
(2) Cases where the defect is not fundamental and causes no substantial injustice. Rule 12.64 of the Insolvency (England and Wales) Rules 2016 provides […]
Thus, provided the defect is not fundamental (i.e. not falling within paragraph 21(1) above), so that there are indeed insolvency proceedings on foot, the court must first satisfy itself that the defect or irregularity has caused no “substantial injustice”. If so satisfied, then 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. If the defect – again, not being a fundamental defect within paragraph 21(1) above – is found to cause “substantial injustice”, then the court must ask itself whether that substantial injustice can be remedied by an order of the court. Of course, the court will consider, in light of all the circumstances, 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.”
Having considered the authorities, it was found that the erroneous heading was a procedural defect, it was therefore ordered that it did not have the effect of invalidating the appointment.
It was said that in so ordering, the Judge was satisfied that the error related to procedure and not connected with the defined circumstances where the power to appoint arises. Further, that the substance of the form is correct and so no-one could be mis-led by the incorrect heading.
It was said by HHJ Michael Berkley held: “The purpose behind the heading provisions is, I find, 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. In my judgment it is plain that it cannot have been intended that a breach of that specific provision would render an appointment a nullity.”
Finally, in relation to the further two errors, the Judge was satisfied that, despite the reasoning behind those errors, they were procedural defects and, as with the above defect, did not concern circumstances in which the power to appoint arose. As such, they were defects which could be cured pursuant to Insolvency Rule 12.64.
The Judge, therefore, granted the application.
This case is an example of where defects, or errors, pursuant to legislation, can be cured, so long as they are not fundamental, nor any substantial injustice is caused as a result of those defects or errors.
