As some may be aware, the Court of Session last year issued a Practice Note on the subject of making applications to extend the period of administration beyond the initial 12 month period.
Although the Insolvency Act 1986 seems only to anticipate the consent of creditors being required if the period of administration is being extended without recourse to the court, the Insolvency Judges of the Court of Session have taken the view that creditor consent is also required for an application to court. The 12 month period was introduced by the Enterprise Act 2002 to speed up the process of either recovering a failing business, or finally putting it out of its misery and giving creditors whatever return they may receive more quickly, but there is a concern that in fact administration has become liquidation by another name, particularly if extensions are granted “on the nod”.
It is becoming clear that before an application for extension will be granted the court needs to be satisfied that :-
- The creditors have been made aware that an application for an extension is very likely to be made;
- The reasons why an extension is required; and
- The creditors are given a reasonable length of time to object to the application before it is made.
The normal means of communicating this information to creditors is in the context of a Progress Report. As the court wants to be satisfied that the creditors have had sufficient time to consider whether to object, in practice that means that a clear declaration of the intention to make an application needs to appear in the 6-month report, with sufficient information about the need for an extension to enable creditors to take an informed view, together with a clear deadline for a response.
If the need for an extension is not apparent at that time, the alternative would appear to be to send a separate letter to creditors as soon as it becomes clear that an extension is desirable, again setting a deadline by which objections need to be lodged with the administrator. How long creditors are given to voice any objections will depend on the circumstances of the case, but the court has indicated that it must be a reasonable period – perhaps 28 days or even longer.
In addition to being able to demonstrate that creditors are aware of the application and have had a chance to object to it, the court is also expecting to see the specific consent of secured creditors. Although the court has been willing in some cases to accept evidence of that consent obtained at the point at which the application is being made, the indications are that that is a concession and must not be treated as being indicative of such ad hoc consent being acceptable in all cases. It would seem that as well as circulating the creditors in general, the administrator will have to approach secured creditors separately, and instead of assuming they have no objections, they are actually required to obtain their consent before the application is made.
In practice, therefore, it would seem that there is no difference in the work that requires to be carried out between seeking an extension informally by way of creditor consent, and making an application to the court (at least if the court is the Court of Session). It may be that in some cases, where only a short extension is needed, an informal extension is now a more attractive proposition, however if there is a need for a longer extension or there is the possibility of being in the position to make a distribution of the prescribed part, then a court application will still be required. However, the court is making it clear that making an application should not be considered a box-ticking exercise, nor should the grant of an extension be assumed to be the administrator’s right.