Court issues warning over unacceptable pre-pack timing and addresses appointment concerns

Insolvency Bitesize - October 2020

Advisors to distressed companies should take note of recent criticism by the court in a pre-pack administration case not to treat the exercise of its discretion as a rubber stamp.

In Re Nationwide Accident Repair Services [2020] EWCH 2420 (Ch), Fancourt J issued a stern warning to all insolvency professionals advising companies in distress and looking to carry out a pre-pack insolvency sale.

The company made a request for an urgent administration hearing at 7.52pm on 3 September 2020. It subsequently transpired later that evening that a planned pre-pack sale was conditional on the administration appointments being made by 11.59pm on 3 September 2020, otherwise the purchaser would pull out. The judge was strongly critical of this approach as “wholly unacceptable”:

  • it presented the court with an artificial ultimatum to make an important decision under undue pressure of time;
  • there was nothing in the evidence of the company’s affairs requiring an urgent application – the need for urgency stemmed solely from the terms agreed with the buyers; and
  • the exercise of the court’s discretion should not be treated as if it were a rubber stamp.

If the deadline for the administration appointment had been inserted in the deal documents at an earlier stage, the High Court made clear that a draft application should have been made much earlier but highlighting that the likely deadline for completion may necessitate an urgent hearing. However, if the deadline for appointment was only agreed once final sale terms had been agreed, then that was the wrong approach. The need for a fair hearing and the proper allocation of time should not be sacrificed to accommodate the preferences of intending applicants.

Another significant point to arise from this case concerned compliance with corporate governance requirements when appointing administrators.

The directors of a company have standing under Paragraph 12(1)(b) of Schedule B1 of the Insolvency Act 1986 to appoint administrators. Unless the directors act unanimously, a valid formal board meeting will be required at which they resolve to make the administration application. There may be situations, however, where the articles are unclear or it is simply not possible to comply with the internal governance rules.

In this case, there was doubt whether a sole director had authority to resolve on behalf of the various companies to seek the appointment of administrators. This was because the articles of most of the companies arguably required a quorum of at least 2.

The High Court decided, consistent with previous case law, that the director’s possible lack of authority was not an impediment to the application. There were essentially two key limbs to the court’s reasoning:

  • particularly in light of their duties, directors should be entitled to apply to court for administration where that is a better option than continuing to trade and there is no other realistic alternative to winding-up; and
  • questions of internal governance are relevant to the exercise of the court’s discretion but not to the director’s standing to apply to court. Key factors in this case were that the director was not at fault for the absence of quorum (indeed the shareholder had declined to appoint another director or amend the articles).

The decision highlights a key difference with out-of-court administration appointments by the directors – where an invalid board resolution is fatal to validity (e.g. inquorate board meetings rendered the purported out-of-court appointments of administrators void in Re BW Estates Ltd [2017] EWCA Civ 1201).