Can Directors File an Out of Hours Administration Appointment?
With the introduction of electronic filing which allows parties to file documents at court 24/7 we consider the recent case of Wright v HMV Ecommerce Limited (2019) in which the court was asked to confirm whether administrators were validly appointed following the directors filing a notice of appointment after the court office was closed.
The Electronic Working Pilot Scheme (“EWP“) Practice Direction came into effect in 2015, initially in the London region. It now applies in all Business and Property Courts in England and Wales from 30 April 2019.
Electronic filing enables parties to issue proceedings and file documents online 24 hours a day, every day, all year round, including out of normal court office opening hours, and on weekends and Bank Holidays. The question considered in the HMV case was whether the appointment of administrators by directors out of hours using electronic filing was valid.
Why is there confusion?
Under the Insolvency Rules 2016 (“Rules”) only a qualifying floating charge holder has power to appoint an administrator out of hours. Electronic filing is however 24/7 and can be used to issue insolvency proceedings. The EWP practice direction sets out some exceptions to this. In particular, paragraph 2.1(c) states that where a filing is of a notice of appointment of an administrator by a qualifying floating charge holder, and the court is closed, the filing must be in accordance with Rule 3.20 which requires the appointment to made by fax or email.
Paragraph 8.1 of the Practice Direction – Insolvency Proceedings (“PDIP”) also deals with electronic filing.
The PDIP says, notwithstanding the restriction in the EWP to notices of appointment made by qualifying floating charge holders, paragraph 2.1 of the EWP shall not apply to any filing of a notice of appointment of an administrator outside court opening hours, and Rules 3.20 to 3.22 of the Rules shall continue to apply. Rules 3.20 to 3.22 of the Rules set out the process for out of hours appointments by qualifying floating charge holders only.
Some have interpreted paragraph 8.1 of the PDIP to mean that electronic filing cannot be used to make any out of hours appointments full stop, others read it to mean that the restriction only applies to qualifying floating charge holders and, as such, directors can file a notice of appointment outside of court hours.
What did the court say?
The clear ambiguity between the EWP practice direction and the PDIP was brought into sharp focus in the case of Wright v HMV Ecommerce Limited in January of this year. In this case, the court considered whether an electronic filing of a notice of appointment of administrators by directors outside the court opening hours was valid.
Mr Justice Barling was already familiar with the matter having made an order a few weeks previously in which he declared the administrators were validly appointed. However, at the initial hearing he had not been directed to the PDIP and he was now asked to consider whether the out of hours electronic appointment was in breach of paragraph 8.1 of the PDIP.
He referred to the wording of that paragraph as “byzantine” and “curious” and agreed with the administrators that because of the ambiguity in the legislation the application by them to remedy any problems was properly made.
There has been a long line of cases considering whether procedural defects in the appointment process make an appointment invalid. Mr Justice Barling analysed the four principles he says emerge from cases:
What is the purpose of the legislation?
The Judge concluded that the purpose of paragraph 8.1 of the PDIP was not immediately apparent, save that, in removing what would otherwise be the power of directors and the company to file a notice of appointment of an administrator out of court hours, it would bring their options into line with those of a qualifying floating charge holder and remove any apparent differences of treatment. However, he concluded there was no evidence this was what was intended, and further concluded that the two situations are not in all respects comparable.
Did the particular requirement (filing within court hours) go to the root of the appointment?
He described that as a “non-starter” saying the provision did not go to the power to appoint, but was in fact concerned with the time from which an appointment would take effect, concluding it was difficult to envisage any circumstances in which failure to comply would give rise to nullity or invalidity, so far as the appointment was concerned.
Was the failure to comply inadvertent or deliberate?
If inadvertent, again the question was whether it could have been intended by the legislature that it would result in total invalidity.
The nature of the legislation
The Judge said consideration should be given to the distinction between a provision which restricts the power to appoint and a requirement of the kind in the PDIP which he described as “obviously procedural in nature”, a breach of which would render an appointment irregular rather than a nullity. He went on to say that the consequences of such a failure are, as in this case, “wholly trivial”, and it was inconceivable that the affect could be to render any act subsequently taken on the strength of the filing as a nullity.
He concluded, having considered various authorities, that there was no question here of the administration appointment or any act of the administrators being nullified or automatically rendered a nullity or invalid.
Finally and importantly, he concluded there was no conceivable injustice caused by any breach of the legislation in this case.
The judge himself recognised that paragraph 8.1 of the PDIP was open to more than one interpretation. Acknowledging that the restriction may only apply to qualifying floating charge holders (in which case directors can appoint out of hours) or if the wording of paragraph 8.1 prevents all out of hours appointments using electronic filing then he would address the breach by either extending time for filing the notice, or by making an appropriate declaration or by waiving any non-compliance with the Rule or granting all of the alternative remedies.
What the Judge did not do was confirm definitively that directors can make an out of hours appointment, but neither did he say that they can’t. The meaning of paragraph 8.1, therefore, remains ambiguous.
Until the ambiguity is remedied by amendments to the PDIP, changes to the legislation or there is further judicial comment; directors who find themselves having to appoint an administrator outside of court hours should make an urgent application to have the appointment and any steps taken the administrator ratified by the court at the earliest opportunity.
Likewise, any purchaser from an administrator appointed in these circumstances should ring fence any consideration until the court confirms the position.
Providing directors have no realistic option but to make an appointment out of hours, there is no fundamental defect in the appointment process and it is in the best interests of creditors then we would expect the court to confirm that a notice of appointment filed out of hours is valid.
Please read our note about the practical impact of electronic filing an administration appointment.