December 7, 2022

Volume XII, Number 341

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Is Your Appointor Entitled to Appoint? The Importance of Checking Whether There is Power to Appoint UK Administrators

The power to appoint an administrator is an important power for debenture holders when seeking to enforce their security. In order to exercise that power, the debenture has to be a qualifying floating charge (“QFC”) and it has to be enforceable.

The case of Borg-Olivier v Knowles & Ors [2022] EWHC 2579 (Ch) (“Borg-Olivier”), highlights the importance of the QFC being enforceable and the impact on the validity of the appointment of administrators if it is not.

In this case, the appointed administrators found themselves in the unfortunate position of not being validly appointed following the Court finding that the qualifying floating charge was not enforceable at the date of appointment.

Facts

In Borg-Olivier, the key facts are as follows:

  • Administrators were appointed using the out-of-court procedure by a qualifying floating charge holder (“QFCH”).

  • Prior to the appointment, the QFCH sent formal notice to the company requiring it to repay £378,464.84.  That notice was sent on 6 August 2021[1].  On the same day, the QFCH received two payments totalling £58,464.84 from the company.  A third payment of £320,000.00 was paid to the QFCH by a third party on the company’s behalf.

  • The payment of £320,000.00 was immediately rejected because the QFCH did not know the identity of the payer. The money, however, was not returned until 12 April 2022.  

  • On the date of payment (in fact 5 minutes after sending the money) the company sent an email to the QFCH to explain the money as being paid and that one payment was being made by a third party.

Following the appointment of administrators, Mr Borg-Olivier (the director of the company) applied to court seeking a declaration that the appointment of administrators was a nullity, on the basis that the sums secured by the floating charge had been repaid in full and the charge had been redeemed, or should have been treated as redeemed on 6 August 2021. 

On that basis he claimed that the QFCH did not have power to appoint because the charge was not enforceable at the time of appointment.

Decision

Having concluded that the balance owed to the QFCH could be validly discharged by a third party (who had paid as agent for and on behalf of the company, and whose monies not been returned by the date of appointment), the court found that the floating charge was not enforceable when the administrators were appointed. As such, the court held that the appointment of the administrators was not valid.

Outcome for the QFCH, the Administrators and the Company

What the judgment does not touch on is what (if anything) the administrators or the QFCH were ordered to do following the Court finding that the appointment was invalid. Perhaps nothing, given the judgment is silent.

The director did seek an order that the administrators refund any monies they had received. Although there is no mention as to whether the Court made this order, it might fairly be presumed that to the extent that the administrators had received monies due to the company, that they were paid over.

As to the administrators’ costs, again there is no mention about how those were dealt with.

A court does have power to order that a QFCH should indemnify administrators if their appointment is invalid (under paragraph 21 of Schedule B1) for any liabilities they incurred, but this is not something addressed in the judgment.  The director did seek an order that the QFCH indemnify the company under that provision, but as counsel pointed out, the court did not have power under paragraph 21 to make that type of order.

It does seem (as far as the judgment goes at least) that no order was made to compensate the company as a consequence of the fact that it was placed into administration when it ought not to have been.

Concluding Thoughts

The facts in this case are unlikely to be commonplace, but for those acting on behalf of a QFCH that is contemplating appointing administrators, it is important to check that the charge is enforceable and in doing that to also check the circumstances leading up to the appointment.

Failure to do so, could result in a null appointment. 

Megan Hoey contributed to this article.


FOOTNOTES

[1] The court transcript in Borg-Olivier provides this as 6 August 2022, but in light of timing of other events this appears to be an error and it should be 6 August 2021.

© Copyright 2022 Squire Patton Boggs (US) LLPNational Law Review, Volume XII, Number 328
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