Re Tokenhouse VB Ltd [2020] EWHC 3171 (Ch) and the million dollar question

21 December 2020

Re Tokenhouse VB Ltd [2020] EWHC 3171 (Ch) and the million dollar question: does a failure to comply with the notice requirements of paragraph 26 of schedule B1 render an administrator’s appointment void or defective?

The problem

Paragraph 26(1) of schedule B1 provides that notice of intention to appoint an administrator must be given in the prescribed form and that a person who proposes to make an appointment under paragraph 22 shall give at least five business days’ written notice to any person who is or may be entitled to appoint an administrator of the company under paragraph 14.

The issue with this paragraph, which has been grappled with in a long line of inconsistent High Court authorities, is that it is silent on whether failure to comply renders the administrator’s appointment invalid from the start (void) or whether it is merely a procedural irregularity capable of remedy (defective). The distinction is important because, if an administrator’s appointment is invalid from the start, any and all acts done by the administrator during the course of the administration are also invalid.

In order to avoid having to deal with the issue, many judges have adopted a pragmatic solution: to order the current appointment, insofar as it is valid, to cease; to ‘re-appoint’ the administrators immediately; and to make the order retrospective by backdating the time of the appointment to the time of the original appointment (see for example Petit v. Bradford Bulls (Northern) Ltd (in Administration) [2016] EWHC 3557 (Ch)) (‘the Retrospective Solution’).

Re Tokenhouse VB Ltd [2020] EWHC 3171 (Ch)

In Re Tokenhouse VB Ltd, the QFCH sought an order that the appointment of the joint administrators by the company’s directors was void because it had not received the required notice of intention to appoint (‘Issue 1’). Alternatively, to the extent the appointment was valid, it should have the opportunity to appoint its own administrators (‘Issue 2’). Accordingly, the Retrospective Solution was not open to ICC Judge Jones and he was faced with the difficult task of resolving the issue based on the conflicting High Court decisions.

On Issue 1, ICC Judge Jones held (in summary) that:

(1) The issue was to be decided by focusing on the consequences of non-compliance and deciding whether the intention of Parliament was that a failure to give notice of intention should be treated as a fundamental breach or an irregularity.

(2) Failure to give notice to the chargeholder deprived the chargeholder of the ability to appoint its own administrator or to agree the appointee before the purported administration. However, classifying such a breach as a fundamental breach would be to mis-rank the importance of receiving notice above the importance of there being an administration (starting the process over could cause extreme detriment if the purposes of the administration are no longer reasonably likely to be achieved).

(3) It must have therefore been intended by Parliament that the breach should be treated as an irregularity allowing the chargeholder to apply to court for appropriate discretionary relief.

(4) That conclusion is entirely consistent with the reasoning of Mr Justice Norris in Re Euromaster Ltd that paragraphs 26–32 of schedule B1 are procedural and ‘naturally fall to be treated as irregular’, the fact that the purpose of out-of-court appointments was to ‘streamline the process’ and not to add a new layer of formality, which invalidates proceedings for want of compliance and it produces a result consistent with the consequences for a court appointment.

(5) Reference can also be made to the fact that the general intention of Parliament was for defects in appointment not to affect the validity of actions taken (see section 232 of the Act, paragraph 104 of schedule B1, rule 12.64 of the Insolvency Rules 2016 and the general power to rectify errors of procedure conferred by CPR Rule 3.10).

On Issue 2, although ICC Judge Jones was satisfied that the appointment was valid, it remained the case that it should not have occurred. In those circumstances, he held that the court should have regard to all relevant circumstances, in particular whether replacement would be conducive to the proper operation of the administration and likely to achieve justice between all those interested in that process and the commercial rationale for the relief sought and its potential outcome. In order to cure the breach, Judge Jones ordered that the current administrators were to be replaced with QFCH’s choice administrators.

Practical implications

This is a good example of the court adopting a ‘substance over form’ approach and looking to the real purpose of the requirements in schedule B1: paragraphs 22–25 relate to the power to appoint but paragraphs 26–32 relate only to procedural requirements for the exercise of the power. It makes sense therefore that breach of the former renders the appointment void but breach of the latter renders the appointment defective only and capable of cure.

If the breach is simply an irregularity, paragraph 31 of schedule B1 will be given effect and the presumptions of validity within s.332 IA 1986, paragraph 104 of B1 and Rule 12.64 of the IR 2016 will apply.

As to the future, pending a decision from a higher court, if the administrators do have the (albeit late) consent of the QFCH, the directors may still make an application to court for the Retrospective Solution.

However, if the administrators cannot secure the consent of the QFCH, ICC Judge Jones’ judgment (if followed) provides welcome comfort that their appointment is at least only defective and not invalid from the start.

Importantly, any future applications that require resolution of the issue should be made to the High Court.

Rachael Earle is a barrister at Wilberforce Chambers.