In a judgment that will undoubtedly impact what has become fairly common practice when filing notices of intention to appoint an administrator (“NOITA”), the Court of Appeal has held in JCAM Commercial Real Estate Property XV Ltd v Davis Haulage Ltd that a company seeking to give notice of intention to appoint under paragraph 26 of Schedule B1 to the Insolvency Act 1986 (the “Act”), and to file a copy of it with the court, triggering the interim moratorium, must have a settled intention to appoint an administrator.
JCAM Commercial Real Estate Property XV Limited (“JCAM”) was the owner of premises of which Davis Haulage Ltd (the “Company”) was the tenant. In 2015 the Company was struggling to make the rental payments due and by early 2016 the rent was in arrears in excess of £200,000. JCAM notified the Company that they would take steps to recover possession of the premises if the arrears were not settled in full within seven days. On 28 January 2016, with no payment having been received, JCAM issued possession proceedings. On 22 January 2016, and unknown to JCAM, the sole director of the Company had filed a NOITA. The NOITA was served on the Company’s qualifying floating charge holder. The NOITA was not sent to JCAM at that time.
The filing of the NOITA gave rise to an interim moratorium and during the course of the interim moratorium, the proposed administrators wrote to JCAM sending a copy of the first NOITA and advising that the proposed administrators’ firm was working with the Company “to find a feasible solution to secure the business going forward”. Three subsequent NOITAs were filed upon the expiry of the first interim moratorium. At no point during the course of the interim moratoriums were administrators appointed and the Court of Appeal noted “it seems clear that the notices were given and copies filed with the court in order to secure the automatic moratorium while consideration was given to the best means of securing the future of the company or its business”.
Prior to filing the final NOITA, the Company’s solicitors informed JCAM’s solicitors that the Company was in the course of preparing a proposal for a company voluntary arrangement (“CVA”), which was approved with modifications on 6 April 2016. The automatic moratorium in administration proceedings is unique and although there is provision for a moratorium during a CVA, this is only available in very limited circumstances and only for certain types of eligible companies. The CVA subsequently failed in December 2016 and the Company entered administration.
JCAM issued proceedings on 11 March 2016 seeking an order that the fourth NOITA be vacated and removed from the court file on the grounds that it constituted an abuse of process. JCAM further sought an order allowing for retrospective commencement and continuation of proceedings against the Company. The judge in the first instance granted the orders to commence/continue to proceedings and rejected JCAM’s argument in respect of the fourth NOITA. In his decision the judge focussed on the use of the word ‘proposes’ in paragraph 26 (1) of Schedule B1 to the Act and said that the word ‘proposes’ could not be read as intends and a director of a company may propose to do something without “having any settled intention to do that thing”.
Court of Appeal decision
The Court of Appeal did not agree with the approach taken by the judge. In his decision Lord Justice David Richards concluded that in the context of paragraph 26 the words ‘proposes’ and ‘intends’ are synonyms and where paragraph 26(1) of Schedule B1 of the Act requires “a person who proposes making an appointment” to give written notice to certain persons that should be read as “a person who intends making an appointment”.
Further, Lord Justice David Richards noted that the purpose of a NOITA is both specific and limited and this notice is only given to persons who have a prior right to appoint an administrator. To the extent that there are no persons who have this right there is no need give and file a NOITA (obtaining the corresponding interim moratorium) nor would it be appropriate to do so.
Lord Justice David Richards further considered the question of how strong the possibility of a subsequent appointment should be for an NOITA to be filed, given the requirement to file a NOITA upon certain persons where there is the possibility of an administrator being appointed. Filing the NOITA where the intention to appoint an administrator was still questionable, could lead to companies entering administration needlessly where a qualifying floating charge holder decided to exercise its right to appoint its own choice of administrator upon receiving the NOITA, thereby potentially derailing the restructuring that the directors and/or company are trying to put in place. The implication therefore appears to be that the possibility should in fact be a firm probability.
Finally, Lord Justice David Richards noted that a moratorium in a CVA is only available in very limited circumstances and by allowing the use of subsequent NOITAs in this manner the court would be allowing the Company an indirect means to obtaining a moratorium that is not otherwise directly available. He commented that a previous consultation had been carried out by the Insolvency Service in 2009 querying whether it would be appropriate to extend the CVA moratorium to medium and large companies. Following responses to the consultation, it was decided not to extend the moratorium provisions because there was insufficient support for a further support of the moratorium. It was not for the court to second guess policy on this point.
The appeal was allowed and it was ordered that the fourth (and final) NOITA be removed from the court file on the basis that the prerequisite of having a settled intention to appoint administrators was not met.
Impact of decision
It has become common practice to file a NOITA (and subsequent NOITAs) for a variety of reasons (e.g. where a buyer is sought for a prepack or to provide a breathing space where funding options are being explored). In an email provided to the Court of Appeal by a partner of the Company’s solicitors it was noted that “it was not uncommon in situations like this where the success of a CVA is uncertain to run a parallel process and seek protection in that period”.
An unforeseen consequence of this judgment combined with the advent of e-filing (in London at least) may be an increase of applications to court for the appointment of administrators as opposed to out of court filings. The the moratorium will commence from the moment the administration application is filed at court, but there is often a delay between the application and the actual hearing during which the company might seek to resolve its issues (and then seek the dismissal or withdrawal of the administration application in a relatively routine step).
While the judgment is helpful in clarifying the law it does in itself raise a number of questions and has the potential to put directors of distressed companies under pressure to make a decision on the appointment of administrators at an earlier stage than they would have necessarily done before. It will be interesting to see whether this judgment will put to an end or at the very least dampen the practice of filing successive NOITAs whilst discussions on future options are still ongoing – a point that Lord Justice David Richards notes “for the future, it will be clear, by reasons of this court’s decision, that a conditional proposal to appoint an administrator does not entitle or oblige a company or its directors to give a notice under paragraph 26 of Schedule B1”.