As the insolvency profession in Scotland continues to get to grips with the new corporate insolvency rules, Re Sprout Land Holdings Ltd (in Administration) serves as a timely reminder not to forget the basics when dealing with the appointment of administrators by the directors of a company.
The Insolvency (Scotland)(Company Voluntary Arrangements and Administration) Rules 2018 and the Insolvency (Scotland)(Receivership and Winding Up) Rules 2018, taken together, the Insolvency Scotland Rules 2018, came into force on 6 April 2019. A significant feature of the Insolvency Scotland Rules 2018 is the move from prescribed statutory forms to prescribed content.
Prior to the Insolvency Scotland Rules 2018 coming into force, the out of court appointment of administrators, a process introduced in 2003 by the Enterprise Act 2002, relied heavily on prescribed statutory forms. Now, rather than completing prescribed forms to effect the appointment of administrators, it is necessary to prepare and complete notices containing the prescribed standard and rule specific content.
Insolvency practitioners and solicitors will no doubt be focussed on ensuring that any notices of appointment comply with the Insolvency Scotland Rules 2018 and take into account case law from south of the border generated by equivalent provisions in the Insolvency (England and Wales) Rules 2016 (e.g. Re Spaces London Bridge Ltd.). However, it remains essential that the steps involved in appointing administrators prior to completing any such notices are carried out correctly.
In the Matter of Sprout Land Holdings Limited (in Administration) the appointment of joint administrators was declared invalid almost 3 months after the date of the purported appointment. Judge Prentis of the High Court of Justice Chancery Division had earlier decided that the written resolution purportedly passed and appointing Mrs M as a director of the company was incapable of doing so, because it failed to comply with the requirements set out under the Companies Act 2006. On the same day on which Mrs M was purportedly appointed as a director, she purported to form a quorum with one of the two existing directors at a directors’ meeting where it was purportedly resolved to appoint administrators. Judge Prentis was not persuaded that Section 161 (Validity of acts of directors) of the Companies Act 2006 assisted in these circumstances and considered himself bound by the decisions in Minmar (929) Ltd v Khalastchi and Another and Melodius Corporation. Consequently, he declared the appointment of joint administrators invalid.
In accordance with the Insolvency Scotland Rules 2018, when the directors of a company appoint administrators the notice of intention to appoint or, if there is no such notice, the notice of appointment itself must contain a statement that the notice is accompanied by a record of the decision of the directors to appoint an administrator. Any such decision must, of course, be validly taken and the directors, and their advisers, must ensure compliance with the company’s constitutional documents and the Companies Act 2006. As Re Sprout Land Holdings Ltd (in Administration) demonstrates, failure to get these basics correct can result in the invalidity of an administration appointment which follows thereon.