In his latest Coffee Break Briefing webinar, Frettens’ own Insolvency Guru Malcolm Niekirk gave a refresher on administrations and what can go wrong, particularly with the appointment itself.
As always, the briefing was directed towards appointment-taking insolvency practitioners and those working with them.
This is the summary of that briefing.
If you'd like to watch the webinar back, you can do so below, if not, read on for our summary...
Quick links
- Appointments by secured creditors (qualifying floating charge holders; when can they appoint?)
- Appointments by the company or directors (who should appoint?)
- Notice of intention to appoint (the tight timetable)
- When you need to tell the FCA
- Unknown winding up petitions
- Special administration regimes (watch out for different legislative rules)
- Mitigating the risk of a hostile appointment
- Avoiding accidental phoenixes
Appointments by secured creditors
Before Schedule B1 of the Insolvency Act, administrations could only be opened by a court order; and banks had the right to use their security to appoint administrative receivers.
That all changed with the Enterprise Act 2003 which:
- Brought in the current court-filing procedure, which replaced most court orders
- All but abolished administrative receivers
- Allowed banks to appoint administrators instead, also by a court-filing procedure
When is a QFC enforceable?
A QFC (qualifying floating charge) has to be enforceable before an administrator can be appointed (per paragraph 16 of schedule B1). But how does it become enforceable?
If the terms of the loan and debenture have been properly drafted, then the QFC becomes enforceable when the debtor is in default (it’s not enough for the loan to be in arrears).
There is a procedure which has to be followed:
- The lender has to make a formal demand,
- Give the borrower enough time to pay (one banking hour is the legal minimum),
- And check that the notice clauses in the loan agreement and debenture are being followed
What is the QFC appointment timetable?
Here’s a hypothetical example…
- 11am Friday – formal demand emailed to company directors
- The notice clause (in this scenario) says that it’s treated as received at 9am the next business day
- Monday is a bank holiday (in this case), so it’s not a business day
- Assume 9am Tuesday – the formal demand is treated as served on the company
- 9:30am Tuesday – banks open for business
- 10:30am Tuesday – the charge is now enforceable (one hour later)
- 12:00am Tuesday – the secured creditor files the appointment in the High Court
- 2:30pm Tuesday – the High Court issues the sealed appointment
In this example, the right timetable was followed, and the QFC was enforceable when the appointment was made.
Appointments by the company, or directors – does it matter which?
For the directors to appoint, you need a board resolution.
For the company to appoint, you need a member’s resolution which is:
- Proposed by the new directors
- Then passed by the members either as a written resolution or at an EGM (probably on short notice)
Why an appointment by the company might work best
It’s much easier to get an appointment by directors, so insolvency practitioners often take the simpler approach.
However, appointment by the company avoids potential conflicts of interest. It means your pre-appointment engagement terms remain wholly consistent with you working for the company (and not the directors) in getting you appointed as administrators.
Notice of intention to appoint administrators (NoItAA)
Where there is a bank that holds a QFC, and therefore is itself entitled to appoint, the process has to start with a NoItAA (when the company or its directors are appointing administrators).
When it’s a debtor’s appointment (by the company or directors), and there’s a secured creditor (holding a QFC) who may be able to appoint, then the appointer must give five days’ notice to the QFC holder (in the right form). They cannot appoint administrators – even during the ten-day window – until the QFC holder has had their five days’ statutory notice (unless the QFC holder consents to an appointment in that time).
The appointment procedure (when there is a NoItAA)
- Swear the statutory declaration (part of the form)
- File the NoItAA in court
- Serve it on the QFC holder
- Also give it to these (if any):
- Bailiffs (executing judgements or distraining for rent)
- Any CVA supervisor
- The company (if its directors are appointing the administrators)
Once the notice is filed, the ten-day appointment window is open. It is open for ten business days, with ‘day one’ being the day that it is filed.
Furthermore, the pre-appointment moratorium opens upon filing of the notice, to protect the company’s assets, for the same ten business days.
Appointment is not valid after the window is closed, although a second NoItAA can be filed to start the process again.
The QFC holder must be given a minimum of five clear business days’ notice, (not including the day of service). Unless the QFC holder consents to the appointment – and very often they do not – the time for making the appointment is very short. Very often there is only a couple of days, after the QFC holder has had their notice, before the appointment window closes.
Here’s a hypothetical example:
- Day 1 - Monday - NoItAA filed in court and posted to QFC holder
- Day 2 - Tuesday
- Day 3 - Wednesday - NoItAA now served on QFC holder
- Day 4 - Thursday - Day 1 (of 5) of notice on QFC holder
- Day 5 - Friday - Day 2 (of 5) of notice on QFC holder
[Saturday, Sunday and, in this case, suppose Monday is 30 November - St Andrew's Day, a bank holiday in Scotland – so none of those three days are business days]
- Day 6 - Tuesday - Day 3 (of 5) of notice on QFC holder
- Day 7 - Wednesday - Day 4 (of 5) of notice on QFC holder
- Day 8 - Thursday - Day 5 (of 5) of notice on QFC holder
- Day 9 - Friday - Appointment possible
[Weekends and bank holidays, including bank holidays in England and Wales or Scotland are not counted]
- Day 10 - Monday - Appointment possible (last day)
- Day 11 - Tuesday - Appointment window now closed
The timetable can be made less tight if the appointers don’t post the NoItAA to the QFC holder, and instead use email, or hand delivery (personal service). However:
- Sending the NoItAA to the QFC holder by email does not comply with the rules for delivery (service), unless the QFC holder has agreed that the appointer can use email to serve the NoItAA.
- Hand delivery (personal service) is also an option.
Alternatively, it may be possible to send the NoItAA to the QFC holder before it is filed in court. But that would leave the company without the protection of the pre-appointment moratorium until the NoItAA is filed in court. It could be a risky approach.
What you need to tell the FCA
The Financial Conduct Authority (FCA) have some requirements, which can be a minefield…
Special pre-appointment rules apply when the company:
- Is, or has been, an ‘authorised person’ (or recognised investment exchange)
- Is, or has been, an ‘appointed representative’
- Is carrying on, or has carried on, a ‘regulated activity’ in breach of the ‘general prohibition’
The FCA requirements
These are very wide and include firms that:
- Are no longer carrying on a regulated business
- Should presently be FCA authorised and aren’t
- Should once have been FCA authorised and never were
In any of those cases, you need to:
- Get written consent from the FCA to appoint
- File a copy of the consent with:
- The NoItAA, or
- The appointment (if there’s no NoItAA)
- Send the FCA copies of any notice given to creditors
The FCA has published guidance for this (May 2021), including a template consent letter, which is on their website here
What if you get it wrong?
If you fail to obtain consent, the appointment will likely be invalid. You may be able to put this right, but that will involve a court application which may not succeed.
It’s important to identify, in good time, whether the FCA have an interest – so you’ll need to ask the directors and check the FCA register.
Things to be aware of
- When checking the register, be aware that the name may not match exactly, and
- the FCA may not know about unauthorised firms.
For example, the company may be registered at Companies House as ‘A.N. Example Limited’, put ‘AN Example’ at the top of its notepaper, ‘A N Example Limited’ at the bottom, and be registered at the FCA as ‘A.N.Example Limited’. You should search against every variation you can think of.
Unknown winding-up petitions
You can only use the notice-filing procedure to appoint if there is no winding up petition running against the company.
When a winding-up petition is running:
- A QFC holder can appoint administrators by using the court-filing procedure, but
- The directors or company can appoint administrators only through a court application for an administration order.
This means it is very important to find out if any creditor has presented a winding up petition against the company. Unfortunately, there is no fool proof way of checking (because there can be a delay between a court – perhaps a County Court – issuing a petition, and its details being put on the computerised file in the High Court).
The High Court has a premium rate number you can call to ask for a check. The number is 0906 754 0043.
Special administration regimes
Special administration regimes are for businesses in particular sectors. The insolvency legislation (the Act and Rules) are often heavily amended in special administration regimes. Very often you need consent from a regulator or other third party before you can be appointed.
This list (of businesses that have special administration regimes) may not be complete, but they include:
- E-Money and payment institutions
- Investment banks
- Social landlords
- Further education and sixth form colleges
- Railways
- Public-private partnerships
- Water companies
- Air traffic administration
- Energy companies
- Postal services
- Health trusts
- Charitable incorporated institutions
- [Airlines and tour operators may be given their own special administration regime in the future]
Mitigating the risk of a hostile appointment
There are, generally, two types of hostility when it comes to appointment:
External hostility – typically from creditors – can often be managed with the administration moratorium.
Internal hostility – from a faction on the board, or shareholders (or both) – is less easy to control with the administration moratorium.
Remember that corporate governance may make it difficult to exclude a minority from involvement with the administration appointment process.
How to mitigate hostile appointments…
I think it’s better to flush out trouble in advance.
Its far better for the court to decline your appointment before you take office, than it is for the court to remove you after you have been appointed.
I recommend you apply to court for an administration order, present all of the facts to the court and the potential hostile faction and let them fight it out in court.
You’ll need the support of a majority (shareholders or directors) to be appointed.
Accidental phoenixes
Phoenix pre-packs are now regulated (by the Administration (Restrictions on Disposal etc to Connected Persons) Regulations 2021). The regulations bite when you’re selling a substantial part of the business within the first eight weeks to a connected party.
In those cases, you must either get creditor approval or ensure that the buyer has the sale reviewed by an evaluator.
There’s a risk that the regulations could be triggered inadvertently.
A substantial part of the business could be, depending on the business, as little as the information on a laptop. Or, a substantial part could be acquired in a series of minor unconnected transactions over the eight-week period.
You may not necessarily know that the buyer is connected (the range of possible connections is very broad, and you probably will not have all the facts you need to assess it yourself).
How to protect against the risk of an accidental phoenix
- You should get warranties from the buyer, to confirm that they aren’t a connected party no matter how trivial the transaction is.
- And you should make sure that your engagement terms, for your agents, instruct them to comply with the regulations and, not to sell a substantial part of the business to a connected party within the first eight weeks.
- When you can, you might decide to wait eight weeks before you sell anything.
You can download a full copy of the presentation here.
Our next briefing
Thank you for reading this summary. You can watch back our previous briefings and read back previous summaries here.
Our next Coffee Break Briefing is taking place on Monday 14th November, with the topic being remuneration in bankruptcies. You can book your place here.
To keep informed on upcoming Coffee Break Briefings, events and insolvency news you can sign up to our email list for free here.
Specialist Insolvency Solicitors
We hope you found the briefing useful. If you are an insolvency practitioner who would like to discuss the content of this article further, or instruct us, please do not hesitate to get in touch.
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