The recent case of Stephen Petitioner offers some clarification regarding issues relating to the validity of appointment of administrators.
Administrators were appointed to a company by the holder of a floating charge. A director of the company challenged the validity of the appointment of the administrators by raising proceedings pursuant to paragraph 74 of Schedule B1 to the Insolvency Act ("the Act"). He argued that "many, if not all of the underlying transactions executed by the Bank… were invalid" and therefore that there were no sums actually due to the Bank that would entitle them to appoint administrators under the charge. In addition he argued that in order for a floating charge to be a "qualifying" floating charge, it was necessary for the charge to satisfy all of the criteria set out in para 14(a)-(d) of schedule B1 to the Act.
Lord Glennie decided that notwithstanding paragraph 64 (which prohibits directors exercising "management powers" after the appointment of administrators), company directors retain a residual power to bring proceedings to challenge the appointment of administrators. Lord Glennie noted with approval, "the general proposition that the board of directors has a residual power to challenge the appointment of a provisional liquidator, receiver or administrator as the case may be." He therefore commented, "I see no reason why the case of Administrator should be any different from that of a provisional liquidator in this respect".
Lord Glennie also held that on the "clear wording" of paragraph 14(2), a floating charge "qualifies" if one of the criteria set out in (a), (b), (c) or (d) are satisfied. The word "or" shows that the sub-paragraphs are disjunctive. If the opposite view been taken, it is likely that many existing floating charges would not be "qualifying" floating charges - with potentially disastrous effect for lenders.
This decision confirms that in administrations, directors have equivalent rights to contest the appointment of insolvency practitioners to those in other forms of insolvency. The case also confirms the common sense interpretation of requirements for the constitution of "qualifying" floating charges.