Following obiter comments in the recent Court of Appeal decision in JCAM Commercial Real Estate XV Limited v David Haulage Limited practitioners must now review their stance on the use of a Notice of Intention to Appoint Administrators (“NoI”) where there is no qualifying floating charge holder (“QFCH”). This is a blow to the flexibility of the administration process as a rescue procedure.
The key issues in the case involved the successive use of NoI’s, and the Court of Appeal made clear that a NoI should only be issued where the proposed appointer has a settled intention to appoint an administrator(s). It is not sufficient for there to be a conditional proposal to appoint (e.g. we will appoint if a CVA is not viable). This provides useful guidance, but is (in my view) hardly unexpected. While it didn’t happen in the JCAM case, I’ve heard stories of up to 10 successive NoI's being issued, which must on the face of it suggest an abuse of process on any analysis.
However, in JCAM, the lead Judge’s comments regarding the inability to issue a NoI where there is no QFCH are more notable. While not central to the key issue the lead judgment clearing suggests that a NoI cannot be issued where there is no QFCH, which is concerning from a practical perspective. Most practitioners will agree that NoI’s (when not abused) provide an invaluable and important breathing space for debtor companies to take stock and prepare to implement the intended administration in a sensible, orderly and effective manner.
There has been an ongoing debate on this point between commentators for some time. There is an inherent tension between the wording of paras. 26-27 of Schedule B1 and the (now defunct) old prescribed form as against the previous industry practice that a NoI can be issued even where there is no QFCH. The recent rule changes did nothing to clarify that ambiguity. In a recent case in the Birmingham District Registry involving our firm this very point came up for debate, and the Judge in that case took the view that a NoI could be used where there was no QFCH because it was designed to enable the company and proposed administrators a short period to prepare for the administration.
The leading judgment of Lord Justice David Richard in JCAM clearly does not agree. It specifically states:
“It is thus apparent that the interim moratorium which arises in the case of a proposed appointment on an administrator…is directly linked to the existence of a qualifying floating charge or person entitled to appoint an administrative receiver, to whom notice of the proposed appointment must be given under paragraph 26. If there is no qualifying floating charge and no person who may appoint an administrative receiver, no occasion arises for the giving of a notice of intention to appoint an administrator or to file a copy of any such notice with the court. In those cases there is no moratorium prior to the appointment of the administrator by the company or its directors.”
It then goes on to re-iterate the point in more detail, when it comments that the purpose of the NoI is “limited and specific”, and that its purpose is to protect the company’s assets while a QFCH has the chance to consider whether to exercise their prior right of appointment or not. It goes on to conclude: “If there is no person to whom notice must be given under paragraph 26(1), there can be no interim moratorium“.
While the above comments are arguably obiter (they are aside from the key issue in the case), they are nonetheless clear and it would be a brave person to ignore them as the law currently stands – particularly where they have been given by a highly respected pre-eminent Appeal Judge and agreed by the two others sitting with him. Practitioners must therefore take serious heed of them and factor them into strategy when advising a company with no QFCH on their options (and whether an administration application may be preferable if an interim moratorium is required).
In my view this is a blow to the flexibility of administration as a protection and rescue procedure if a company has no QFCH and creditors threatening action. Interestingly the Judgment refers to the government’s consultation on a moratorium for companies in financial difficulty, but acknowledges that no firm proposals have been published as yet (and that the concept of an American style ‘debtor in possession’ moratorium was abandoned following consultation in 2009). Let’s hope that some sensible and practically helpful proposals come from this sooner rather than later.
In the meantime I suspect that various ‘work-arounds’ and alternatives will be created and implemented, leading to a possible plethora of further challenges by aggrieved creditors as the boundaries are tested further.