This case raised what is an often-discussed issue amongst insolvency practitioners and lawyers but one which, until now, has not been addressed fully by the courts, namely "does a company (or its director(s)) have to have a "settled intention" to appoint an administrator in order to file a Notice of Intention ("NOI") pursuant to paragraph 27 of Schedule B1 to the Insolvency Act 1986 ("Schedule B1")?". This question often raises its head when companies are seeking to have CVAs approved or are attempting to re-finance but want or need the protection of a moratorium until those processes can be completed.
The relevant facts can be summarised as follows. The Company was a tenant which was behind on its rent. The Landlord (the Appellant in this case) threatened to take possession of the premises for rent arrears and, in due course, issued possession proceedings. Prior to issuing those proceedings, the Company's director filed an NOI in Court and served it on a QFCH as required under paragraph 26 of Schedule B1, thereby creating an interim moratorium for a period of 10 business days (or until appointment of an administrator if earlier) pursuant to paragraph 44 of Schedule B1.
The NOI stated on its face that the director intended to appoint an administrator and was accompanied by a record of the director's decision to appoint administrators. Two further NOIs in substantially the same form were subsequently filed, extending the interim moratorium in each case. No appointment of an administrator was subsequently made.
A fourth NOI was duly filed after the director had filed proposals for a CVA with the Court. The proposals confirmed that if the CVA was not approved, the directors would put the Company into administration. This fourth NOI was in the same terms as the first, second and third, stating an intention to appoint administrators.
The Landlord issued proceedings to have the fourth NOI vacated and removed from the Court file on the grounds that it was an abuse of process. In short, the Landlord's argument was, simply, that the director did not actually intend to appoint administrators, he wanted a CVA to be approved and appointing administrators was only an after-thought.
At first instance, the Judge dismissed the proceedings, concluding that NOIs could be filed in circumstances where directors intended to appoint administrators as an alternative to a CVA (or, indeed, as an alternative, or one of many alternatives, to rescuing the company some other way).
On appeal, the Court of Appeal (with David Richards LJ giving the leading judgment) took a different, and it might be said, more straightforward approach. The Court was content that when the first three NOIs were filed, the appointment of an administrator was, at most, one of a range of possibilities. By the time of the fourth NOI, the position was that an administrator would be appointed only if the CVA was rejected.
Given those facts, the Court was primarily conscious of two things. Firstly, an NOI and the relevant parts of Schedule B1 refer repeatedly to an "intention". Whilst paragraph 26 refers to the company or director as a person who "proposes" to make an appointment, this (in light of the repeated references to "intention") should not be seen as different from "intend".
Secondly, save for "eligible companies" (i.e. small companies as defined by s382 Companies Act 2006), there is currently no means for a company proposing a CVA to obtain a moratorium until the proposal is considered by creditors. A general moratorium is a regular topic of discussion within the Insolvency Service (and there is currently a consultation document in circulation which proposes a wider moratorium for companies seeking a CVA) but, as things currently stand, there is none.
As such, the Court held that for a company or director to file a valid NOI it is a statutory pre-requisite that there is a "settled intention to appoint". In short, considering appointing administrators if other options fail is not sufficient. As such, companies seeking re-financing or proposing CVAs cannot file an NOI to achieve a moratorium whilst they try to rescue the company in other ways. Any NOI filed in such circumstances stands to be vacated and removed from the Court file.
In addition, the Court of Appeal clarified an issue that the editors of Sealy & Milman have long since pondered. An NOI is only to be filed if a copy is to be served on a QFCH (or a person entitled to appoint an administrative receiver). If there is no person able to appoint an administrator or administrative receiver (as defined in paragraph 26(1) of Schedule B1) to whom a copy of the NOI will be given, no interim moratorium can be created by the filing of the same. The Company or its directors simply appoints an administrator as and when they are ready to do so in the absence of a QFCH.
This practice, of filing NOIs without serving them in order to create a moratorium, is therefore now confirmed as being invalid.
The full version of the Judgment can be found here.