When is an administrator not an administrator?

The facts:

An administrator appointed by a qualifying floating charge holder discovers that the purportedly qualifying floating charge is "invalid" under s245 Insolvency Act 1986, in that the consideration for the charge was given by the creditor before the charge was created, at which time the company was unable to pay its debts within the meaning of s123.

The questions:

(a) Is the administrator's appointment therefore invalid and (b) what should he do?

The issues:

(a) Since s245(2) is triggered retrospectively by the definitions of "relevant time" (s245(3)) and "onset of insolvency" (s245(5)), and the onset of insolvency in this case is the appointment of the administrator, there is a "scintalla of time" argument that the charge does not become invalid until the administrator is appointed, by which time he has been appointed under a (then) valid charge, his appointment was therefore valid and it remains unaffected by the charge's subsequent invalidity.

Alternatively, and on the face of it more pragmatically, there could never be a valid administration appointment within the 12 month (or two year) relevant time period because that was the clear intention of the legislation, an appointment by a floating charge holder that was not a "qualifying" floating charge holder by reason of the charge's invalidity is itself invalid, and an invalid appointment is sufficient to trigger the relevant time and to give the administrator the locus to apply for directions.

(b) Should the administrator plough on, seek directions or just walk away from the nullity?

Some answers:

1. the administrator's appointment is invalid and he should seek directions, which might include a declaration from the court declaring the appointment to be invalid and an order that the administrator be indemnified by the appointor. This is arguably the safest route for the administrator and a proper course to bring the matter to the court's attention. Since the whole matter is uncertain, it must be right for the (purported) administrator as (or in case he is) an officer of the court to bring the matter to the court's attention in this way. A separate administration application can then be made, possibly retrospectively to the time of the original, invalid appointment; or  
2. on the scintilla of time argument, the administrator's appointment was valid at the time he was appointed and he should just carry on. This might avoid a creditor or the directors having to make a fresh administration application, but there is a risk that someone might view the position differently and challenge the administrator's actions. If the court is not wholly persuaded by the scintilla of time argument, such a challenge might find favour with the court, with adverse cost and liability implications for the administrator; or
3. the whole appointment was a nullity and the purported administrator is not in a position to do anything, even make an application to the court, as the company is not subject to any insolvency proceedings.

Observations:

I have recently followed answer (1) in an unreported case, but I am aware of other cases where different Counsel advised along the lines of each of answers (2) and (3).

What is your view? Is it useful to have a precedent of seeking directions or is it preferable to retain the flexibility of being able to plough on in cases where there is little prospect of challenge? Is there a real prospect of the court declining to entertain a directions application from an administrator in these circumstances?

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An industry news snippet for those who missed it: Tenon's recent acquisition of Haines Watts BRI's insolvency practice was done through an administration pre-pack (PwC were the administrators).

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Leeds United's administration has insolvency interest not only because of potential breaches of s216 Insolvency Act 1986 (see our earlier post), but also because of the administrators' concerns about personal liability for wrongful dismissal of players.

Administrators have been concerned about the adoption of employment contracts since the well known Paramount case (Powdrill v Watson [1994] 2 All ER 513 (CA)) (summarised at para 15 here),  where the administrators had to pay pre-appointment employment liabilities as an administration expense and all manner of upheaval was caused to the estates of earlier administrations due to the retrospective effect of the decision.

The legislature moved immediately to restore the rescue culture and amend the offending s19 Insolvency Act 1986, introducing the Insolvency Act 1994, so that s19 applied only to employment liabilities arising after the date of administration.

One of the problems with Paramount was that although the administrators wrote to the employees within 14 days stating that they were not adopting the contracts of employment, the court found that the administrators had in fact adopted the contracts by their conduct in continuing the staff's employment and paying them in accordance with the contracts.

Paramount was distinguished in Re Antal International Limited ([2003] EWHC 1339 (Ch)), a case where I was the administrator. In that case, although I did not know that the employees in question were employees of the company until more than 14 days after my appointment, I then simply dismissed them and was found not to have adopted their contracts. (Why didn't I know about them? Well, they were employed in the group's Paris office, which the directors had told me and the accounts showed was a subsidiary that was not in administration, but which proved to be a branch. "Simply" is perhaps the wrong word for me to use to describe the dismissals, since the employment contracts were subject to French law.)

With the advent of the Enterprise Act 2002, the administration regime was changed and para 99, Schedule B1, Insolvency Act 1986 replaced parts of s19.

It was held in Re Allders Department Stores Ltd. & Ors [2005] EWHC 172 (Ch) (16 February 2005) that redundancy payments and unfair dismissal payments were not "wages and salaries" and therefore were not afforded priority by para 99, Schedule B1.

Then in Krasner v McMath [2005] EWCA Civ 1072 (10 August 2005), overturning the first instance decision of Peter Smith J and upholding those of Etherton J in Ferrotech Ltd and Granville Technology Group Ltd, the Court of Appeal held (with some criticism of the drafting of para 99, which was inexplicably changed from s19) that neither protective awards nor payments in lieu were afforded priority.

In Re Leeds United Association Football Club Ltd [2007] EWHC 1761 (Ch) (25 July 2007), Pumfrey  J  held that damages for wrongful dismissal were not payable in priority to other expenses pursuant to para 99(4) to (6) of Sch B1 to the Insolvency Act 1986.

The current position appears therefore now clearly to be that only straightforward (post-appointment) wages and salaries are payable as an administration expense where employment contracts are adopted by administrators.

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