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No Notice of Intention Unless Definitely Intend to Appoint Administrator

10 Apr 2017

It is a familiar scenario – a company is facing a cataclysmic event, perhaps a winding-up petition presented by an unpaid creditor or its landlord is seeking recovery of premises due to unpaid rent.

At the proverbial “five minutes to midnight”, the directors decide to seek professional advice as to their options.

To “steady the ship” and give its advisors a breathing space to formulate a rescue plan the directors file a Notice of Intention to Appoint an Administrator. In doing so, this gives the company up to ten business days to appoint an administrator and, in the meantime, creates an interim moratorium to protect the company against certain creditor actions.

If no appointment of an administrator is made within that period then the interim moratorium lapses. However, the filing of a fresh Notice of Intention will trigger a fresh interim moratorium. In some cases, there have been up to four Notices of Intention filed, without resulting in the actual appointment of an administrator.

Right? After all, it takes time to formulate a viable rescue plan and determine how it is to be financed, consult with key stakeholders whose consent is essential to make the plan work and decide whether it should be operated via an administration, company voluntary arrangement (CVA), scheme of arrangement or some other informal arrangement.

To achieve the optimum outcome for the company, its creditors, employees and other stakeholders, the imposition of an interim moratorium via the filing of a Notice of Intention to Appoint an Administrator is seen by many as an acceptable short-term fetter on the rights of creditors whilst the way forward is worked out.

Wrong – according to the recent judgment of the Court of Appeal in JCAM Commercial Real Estate Property XV Limited –v- Davis Haulage Limited [2017] EWCA Civ 267.

For a company to be entitled to file a Notice of Intention to Appoint an Administrator, it (or its directors) must have a settled and unconditional intention to actually make the appointment, the Court making it clear “that a conditional proposal to appoint an administrator [e.g. – whilst the company and its advisors investigate other potential options, such as a proposal for a CVA] does not entitle or oblige a company or its directors to give a notice under paragraph 26 of schedule B1 [to the Insolvency Act 1986]”.

As the Court observed, “the circumstances in which a company may obtain the benefit of a moratorium in aid of a proposed CVA are…strictly limited to an eligible company that takes the steps required by schedule A1 [to the Insolvency Act 1986]”. Yet schedule A1 is barely used in even the small number of proposals for a CVA (in 2016, CVAs accounted for 2% of all new company insolvencies).

The Insolvency Service is currently evaluating the responses to its recent Review of the Corporate Insolvency Framework, with the key proposal being that there should be a restructuring moratorium that will act “as a single gateway to different forms of restructuring including a compromise with creditors, a contractual/consensual workout, a CVA, administration or a scheme of arrangement”.

Such a reform is, in principle, welcome, especially now that the Court of Appeal in JCAM –v- Davis has laid bare the shortcomings of the existing interim moratoria provisions as being siloed to either a settled and unconditional intention to appoint an administrator in accordance with paragraph 26 of schedule B1 or a proposal by an eligible company for a CVA in accordance of schedule A1 (but an interim moratorium may not cover both procedures).

Yet the responses to the Insolvency Service’s proposals also lay bare the controversies that have bedeviled previous proposals in this area made in past decades, including:-

  • What should the entrance criteria to a moratorium be?
  • How long should the moratorium initially be in force for / potentially be extended to (and who should have the power to approve/veto an extension)?
  • Who should run/monitor/supervise the company’s affairs during the moratorium, how are powers and responsibilities to be demarcated and how and to whom are they to be held accountable for any acts and omissions?
  • How is the moratorium to be financed and how should funds introduced / credit incurred whilst it is in force rank in comparison to existing creditors?
  • How are the property rights of existing secured, lessor and retention of title creditors to be treated during the moratorium?
  • Will the moratorium override any other statutory provisions? (one factor in JCAM –v- Davis that precluded the appointment of an administrator was that the company had the benefit of haulage operating licences which an administrator would not be able to hold so that the business would not be able to continue to trade in an administration).

Devising an effective moratorium to facilitate the restructuring of distressed companies that is workable (avoiding the same fate as the barely used schedule A1) whilst still being acceptable to society at large will require the Wisdom of Solomon.

Perhaps the greatest impediment to achieving a genuine rescue culture is human nature itself – if companies and their directors could be persuaded to seek professional assistance at “the onset of twilight” rather than “five minutes to midnight”, then the options to restructure its debts and return to profitability while protecting its employees and creditors would be that much greater.

For further information, please contact Neil Harrold on 0191 232 8345 or email: Neil.Harrold@hay-kilner.co.uk