April 24, 2017

April 24, 2017

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To Appoint, Or Not To Appoint- That Is The Question!

The recent Court of Appeal case of JCAM Commercial Real Estate Property XV Limited v. Davis Haulage Limited [2017] EWCA Civ 267 has set out the importance of there being a settled intention to enter administration and indicated that this is a pre-requisite to an out of court appointment being validly made.

The judge at first instance had held that it was not necessary for a company or its directors to have, at the point of filing a notice of intention (NOI), a settled intention to appoint an administrator. The Court of Appeal overturned this decision. In the judgment given by Lord Justice David Richards, there is a succinct overview of the out of court appointment process. It was held that conditional proposals to appoint administrators are not sufficient to trigger the entitlement and obligation to give and file an NOI to appoint administrators under paragraphs 26 and 27 respectively of Schedule B1 to the Insolvency Act 1986 (“the Act”).

Background

Davis Haulage Limited (Davis), the Respondent in the Court of Appeal case, was the tenant of a property let by JCAM Commercial Real Estate Property XV Limited (JCAM), the Appellant. In early 2016, Davis was struggling with rental payments and JCAM threatened Davis with possession proceedings if arrears were not settled.

On 22 January 2016, the sole director of Davis filed an NOI to appoint an administrator in the Manchester District Registry of the High Court (“the First Notice”). This NOI was not served on JCAM. On 28 January 2016, JCAM filed possession proceedings in the County Court at Crewe. The First Notice was served on Close Brothers Limited as the qualifying floating charge holder (the QFCH). The First Notice was in the correct form as prescribed by rule 2.20 of the Insolvency Rules 1986[1]. The filing of the First Notice gave rise to an interim statutory moratorium lasting 10 days and indicated an intention to appoint Steven Muncaster and Sarah Helen Bell of Duff & Phelps as joint administrators. D&P entered into correspondence with JCAM on 2 February 2016 indicating that they were working with Davis and the QFCH to find a turnaround solution to secure the business going forward including a sale of the business and assets as a going concern.

A further NOI was filed on 5 February 2016 (the Second Notice) which initiated a new interim moratorium.

A third NOI was filed on 19 February (the Third Notice), again starting another interim moratorium.

On 23 February 2016, D&P informed JCAM’s solicitors that a CVA proposal was being prepared. On 3 March 2016, a CVA proposal was filed at the Manchester District Registry and circulated to creditors on 4 March 2016. A meeting of creditors was convened for 23 March 2016 to consider the CVA proposal.

On 4 March 2016, the director of Davis filed a further NOI (the Fourth Notice) in substantially the same form as all the previous NOIs filed.

Davis then retained Leonard Curtis to provide contingency planning advice in the event the CVA proposal was not approved. Leonard Curtis advised that a pre-pack sale may be necessary in the event that the CVA was not approved.

The evidence showed that at the time of giving each of the first three and possibly even the Fourth Notice that appointment of an administrator was ‘at most within a range of possible outcomes for the company’.

On 11 March 2016, JCAM issued an application to have the Fourth Notice vacated and removed from the court file on the grounds that it constituted an abuse of process. JCAM asserted the initial proceedings that the director of Davis did not have a fixed or settled intention to appoint an administrator, and that he intended to do so only if the CVA proposal failed.

The judge at first instance stated that the word “proposes” could not be read as “intends” and held that a director of a company could propose to appoint without having a settled intention to do so.

The Court of Appeal took did not agree with the judge’s approach for a number of reasons:-

  1. In the context of Paragraph 26, “proposes” and “intends” are synonyms. The natural reading of the provisions of paragraphs 26-28 of Schedule B1 and associated Insolvency Rules 1986 is that a single meaning was intended.

  2. Either as a matter of ordinary language or in the context of paragraph 26, there is no significant difference in the meaning of a person proposing to do something and a person intending to do something.

  3. The judge wrongly dismissed or did not consider factors which are highly relevant and would have necessitated the issue to be decided in JCAM’s favour. These factors included (a) the purposes of the giving of notice is limited and specific, being to afford a QFCH or other relevant entitled person to decide whether to appoint and for an moratorium to protect a company’s assets whilst such decision is made in this regard. Otherwise there is little purpose of the interim moratorium; (b) paragraph 26(1) obliges the company or its directors to give notice. This sits neatly with a settled intention to appoint otherwise the QFCH is entitled and could appoint thereby frustrating any alternative rescue strategy a company and/or directors envisaged, such as a CVA; (c) there is already a procedure for obtaining a moratorium in order to consider a CVA proposal set out in schedule A1 and it is strictly limited

When looking at paragraphs 26 and 27 of Schedule B1 it is important to take into account the impact of other parts of the statutory insolvency regime, particularly rival constructions within the same Act. Accordingly, the Court of Appeal overturned the decision of the court at first instance.

Summary

Whilst it has been common practice for several NOIs to be filed in order to preserve a moratorium during a period when turnaround solutions are being explored, this judgment clearly shows that it will not be permitted ‘when there is not a settled and unconditional intention to appoint an administrator’.

There exists a statutory pre-requisite of a settled intention to appoint to be satisfied in order for a notice to be given pursuant to paragraph 26 of Schedule B1 and filed pursuant to paragraph 27 of Schedule B1. A conditional proposal to appoint an administrator will not entitle or oblige a company or its directors to give notice.


[1] This was the appropriate insolvency rule in force at the time. Practitioners should note that since the Insolvency Rules 2016 have come into force relating to out of court appointments.

© Copyright 2017 Squire Patton Boggs (US) LLP

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About this Author

James Rea-Palmer, Squire Patton Boggs, secured lenders attorney, distressed companies lawyer
Associate

James is an associate in the Restructuring & Insolvency Practice based in the London office. James primarily acts on behalf of Insolvency Practitioners, secured lenders, distressed companies and private individuals and routinely advises on a range of both contentious insolvency disputes and non-contentious insolvency related matters.

His experience involves conducting a variety of corporate recovery actions on behalf of clients including applications concerning delivery up, wrongful and fraudulent trading and antecedent transactions. James...

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