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08 May 2017

When does a company or its directors “intend” to appoint an Administrator

Commercial Real Estate Property XV Ltd. v Davis Haulage Limited [2017] WLR(D) 265

This case raised the issue of when a company in financial distress (or the directors of that company) should issue a Notice of Intention to Appoint an Administrator (“NOITA”) which affords a moratorium under Schedule B1 of the Insolvency Act 1986 (“IA86”).

The Court of Appeal found that an NOITA should only be filed when the directors have reached a “settled intention” for the company to enter administration. Further it was clarified that where there is no Qualifying Floating Charge Holder (“QFCH”) a NOITA should not be used and the directors or company should proceed to a Notice of Appointment.

Case Facts

Davis Haulage Limited (“Davis”) was receiving creditor pressure on two fronts: JCAM Commercial Real Estate Property XV Limited (“JCAM”) was a threatening (and eventually issued) possession proceedings for outstanding rental payments and HMRC were threatening to present a winding-up petition for unpaid VAT, PAYE and National Insurance contributions. 

As a result, Davis’ director filed an NOITA on 22 January 2016 bringing into existence a moratorium, which frustrated the continuation of the possession proceedings. 

A further three NOITAs were presented whilst Davis’ management team and principal funder looked to secure the company’s financial survival.  This culminated in a Company Voluntary Arrangement (“CVA”) being filed and put to creditors on 3 March 2016.

The next day a fourth and final NOITA was filed by the director as a ‘plan B’ if the CVA was not approved by a sufficient number of the creditors.  It was this final NOITA that JCAM objected to.  JCAM sought an order that the fourth NOITA be vacated and removed from the court file on the grounds that it was an abuse of process.

First Instance

JCAM’s application was dismissed at first instance with His Honour Judge Bird finding that the nouns “intention” (found in the heading of paragraph 26 and content of paragraph 27 of IA86) and “proposes” (as stated in paragraph 26(1) of IA86) carried a different meaning.

HHJ Bird held that it was possible for a director to rely on administration as a possible rescue option but also to be open to other possible outcomes. He found no difficulty in a director issuing both a CVA proposal and an NOITA at the same time and indeed felt that this was aligned with the directors’ fiduciary duties to act in the best interests as creditors as a whole.

The Appeal

On appeal, Lord Justice David Richards (with Lord Justice Flaux and Lord Justice Jackson agreeing) overturned the decision at first instance holding that although HHJ Bird was correct in examining the phrasing in the paragraph 26(1) in a wider context, he did not do so widely enough.

Lord Justice David Richards considered the nouns “proposes” and “intends” to be synonyms. He considered that the director should have reached “a settled intention to appoint” an administrator before filing the NOITA.

His rationale was fourfold:

  1. That it was clear that ‘proposes’ and ‘intends’ “should be given a one single meaning” when paragraphs 26 and 27 are taken as a whole.
  2. As a matter of ordinary language there was no significant difference between a person proposing to do something and a person intending to do something.
  3. The purpose of the NOITA is both limited and specific; to give a QFCH an opportunity to exercise their prior right to appoint the administrator of their choice whilst the moratorium protected the assets of the company. It was not to afford the company breathing space to establish what insolvency regime to enter.
  4. In the context of CVA, a moratorium is available only to small companies (who satisfy specific criteria) under section 382 of the Companies Act 2006 (“CA06”). Lord Justice David Richards made it clear that Parliament had purposely limited the applicability of this moratorium to so-called “small companies” on policy grounds (and after much consultation). To allow larger companies to invoke a similar moratorium by filing a NOITA was an attempt to circumvent the limited scope of the moratorium for CVA’s.

Consequences

This case does not prevent directors from filing more than one NOITA (as per Cornercare Ltd) provided that they can show they had the requisite settled intention to appoint each time.

Historically NOITAs have been used by directors to afford time to take professional advice. The outcome of this case may hamper the administration process by not affording companies sufficient time to get to a position where they have a settled intention to appoint which will require due diligence to be undertaken by the insolvency practitioner.  Further, in the absence of a QFCH, no moratorium may be sought.  This therefore grants creditors a further window of opportunity to continue enforcement action which could be to the detriment of the body of creditors as a whole.

It is possible that, as a result of this authority that there will be an increased number of court-appointed administrators as creditors have additional time to issue winding up petitions, thereby preventing out of court appointments taking place. 

A creditor of a company using a NOITA to protect itself without the requisite ‘settled intention’ to appoint an administrator can apply to the Court for a declaration that the NOITA, and resulting moratorium, is invalid and request leave to continue with any enforcement action.


This article was written by James Roberts. For more information please contact James at james.roberts@crsblaw.com or on +44 (0)1483 252621 

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