Published: 27 April 2017
Area of Law: Restructuring
With the right intentions?
The decision handed down by the Court of Appeal earlier this month in the case of JCAM Commercial Real Estate Property XV Limited –v- Davis Haulage Limited is likely to have major implications for struggling businesses seeking protection against creditors, afforded by the moratorium arising under Schedule B1 of the Insolvency Act 1986.
The ruling will have a significant effect upon the actions of directors, their professional advisors and insolvency practitioners. In addition, it also raises the risk that previous appointments where NOIs were issued could be subject to challenge.
The brief facts
The director of the company in this case had filed and served four consecutive Notices of Intention to Appoint Administrators (NOIs) whilst he explored various options for the company including administration and latterly a proposed Company Voluntary Arrangement. The landlord creditor of the company issued an application challenging the fourth NOI on the basis the director did not have a fixed or settled intention to appoint an administrator. The Judge hearing the application at first instance held that at the point of filing a copy of the NOI, it was not necessary for the company or its directors to have a firm intention to appoint an administrator.
What did the Court of Appeal decide?
The Appeal judges overturned the original decision, making it clear that a company or its directors may only issue NOIs if there is a settled intention to appoint administrators and not if the appointment is only a possibility.
Also, the Court of Appeal made it clear that the NOI must only be filed in court if there is a person with a prior right to appoint an administrator, stating expressly that “a conditional proposal to appoint an administrator does not entitle or oblige a company or its directors to give a notice under paragraph 26 of Schedule B1”.
Why is this so important?
Insofar as the court did not overrule the decision in re: Cornercare Ltd, the established practice of filing successive NOIs may still be acceptable albeit the director will have to show a consistent settled intention to appoint from the outset. Clearly, insolvency practitioners will be unwilling to endorse NOIs if there is any doubt or concern in their minds about taking an appointment.
Furthermore, the fact that an NOI cannot be used in circumstances where there is no existing floating charge holder will severely inhibit efforts to restructure companies. Even though a company or its directors may be prepared to appoint immediately, insolvency practitioners may consider themselves to be insufficiently briefed or prepared to accept office in the absence of the 10 day period created by the NOI.
In circumstances where there is significant creditor pressure the absence of the protection of a moratorium could lead to a disgruntled creditor issuing a winding up petition preventing the director(s) from making an out of court appointment of administrators. The potential knock on effect is an increase in the number of Administration Applications pursuant to Paragraph 12(1)(b) of Schedule B1 and a further strain on the Courts time and resources.
It is doubtful that the decision is really consistent with the key principles which underpin the rescue culture. It also raises the risk that previous appointments where NOIs were issued despite there being no existing charge holder will be subject to challenge.
The next steps
Commentators have referred to the proposals for a restructuring moratorium in the Review of the Corporate Consultancy Framework issued by the Insolvency Service as a means of providing essential protection to distressed companies.
It remains to be seen whether there is any challenge to the decision or whether the Government is lobbied to introduce amendments to the provisions of Schedule B1 or to make other legislative changes.