Appointment of administrator by qualified floating charge holder valid when made after court hours? It should be…

17 December 2019

The High Court decision in Re All Star Leisure (Group) Limited (2019), which confirmed the validity of an administration appointment by a qualified floating charge holder (QFCH) out of court hours by CE-Filing, will be welcomed.

The decision accepted that the rules did not currently provide for such an out of hours appointment to take place but it confirmed it was a defect capable of being cured and, perhaps more importantly, the court also stressed the need for an urgent review of the rules so that there is no doubt such an appointment could be made.

There have been a series of cases arising from the law surrounding the appointment of administrators using the mandatory CE-Filing system in recent months. CE Filing allows court applications to be filed online 24 hours a day and the system must be used across England and Wales where filings are made by professional users (namely solicitors) in a wide range of courts. The types of courts and filings include insolvency applications, including the process of appointing an administrator by filing documents.



Background

All Star Leisure Group Ltd was the parent of five subsidiaries which owned and operated bowling alleys. A winding up petition was presented against the company, but not the subsidiaries, although it was decided that all the group companies would be placed into administration so as to enable a pre-pack sale of the combined business.

The sale was ready to proceed on 17 September 2019, subject to the group companies being placed into administration. The directors appointed administrators in relation to the subsidiary companies, however, the outstanding petition against the parent company meant a QFCH was approached to appoint administrators so as to enable the proposed sale to take place.

The charge-holder instructed solicitors to file the notice of appointment, which they duly tried to do by electronic filing on two occasions before the Birmingham court office closed at 4:00pm. The notice and relevant documents were successfully filed at 4:18pm, and the pre-pack sale was completed at 5:12pm the same day.

Questions were raised as to the validity of the administrators' appointment, as a result of the notice having been filed after the court office had closed. If the notice was not valid then the administrators' appointment may be invalid, as too may the sale and all related transactions. This could have had serious consequences for those affected by the operation of the business, including its employees and creditors. An application seeking validity of the administrators' appointment was therefore made to the court.

Decision

The court held that the out of hours appointment of the administrators by the qualifying floating charge holder (QFCH) was not valid, however, it was a defect that could be cured in accordance with rule 12.64 of the Insolvency Rules 2016 (IR 2016).

The reason for the question as to validity lay in the interaction between the rules governing electronic filing and the provisions of the IR 2016, which deal with the filing of notices out of hours, as expanded by the terms of the Practice Direction on Insolvency Proceedings (PDIP).

The electronic filing system is governed by the Civil Procedure Rules (CPR) Practice Direction (PD) 51O which states (at paragraph 2.1) that "Electronic Working enables parties to issue proceedings and file documents online 24 hours per day every dayallyear round, including out of normal Court office opening hours and on weekends and bank holidays except ... (c) where the filing is of a notice of appointment by a qualifying floating charge holder under Chapter 3 of Part 3 of the IR 2016 and the court is closed, in which case the filing must be in accordance with rule 3.20 of the IR 2016".

Rule 3.20 requires out of hours appointments by a QFCH to be made by fax or email, with the hard copy documents lodged at court the next working day. That exclusion was expanded to include notice of appointment by any person (not just a QFCH) by the terms of the PDIP.

The case of Re Skeggs Beef (2019) had earlier questioned why this carve out was needed and the court considered that the provisions of PD 51O authorised electronic filing only so long as that would not be inconsistent with other rules such as rule 3.20 of IR 2016. The High Court in this case disagreed with that reasoning, but acknowledged there appeared to be no reason why a carve-out for notices filed by QFCHs would be required.

The court questioned whether the carve out may have been needed if it had been thought the IR 2016 provided a mandatory system for filing notices of appointment outside normal court hours, but they do not and they do not directly conflict with the CPR provisions that allow for 24 hour e-filing. In summary:

  • The Insolvency Act 1986 (IA86) requires a notice of appointment to be filed at Court but it does not expand on what was meant by "file with the court". Any question as to what is an effective filing is therefore a matter for the rules and procedure of the court itself;
  • The IR 2016 could, in principle, operate to expand or restrict what was permitted by the CPR in relation to insolvency proceedings. IR 2016 r.1.46 restricted the ability to deliver documents to the court by electronic means to such circumstances as may be "expressly permitted" by the CPR, PD or the IR 2016. Rule 3.20 set out the circumstances in which the IR 2016 permitted electronic delivery of notices of appointment, however, it does not specify those circumstances as being exclusive and it was still open to the CPR to provide for other circumstances or methods of electronic delivery;
  • Rule 3.20 did not regulate the times when the court was open. The evident aim of the IR 2016 was to provide a mechanism, outside the structure of the CPR, for circumstances in which filing in accordance with the general rules of court was not possible, so as to avoid a situation in which an urgent appointment was required but could not be made. It was not necessary to prevent parties from making use of existing or new court procedures for filing that would likewise avoid that situation. Rule 3.20 did not prevent parties from using an alternative procedure if one was provided by the CPR;
  • It was not therefore necessary for PD 51O to have a carve-out for appointment notices filed by QFCHs. If it did not have that carve-out, a filing out of hours would be electronic delivery expressly authorised by the PD, and therefore falling within the methods permitted by IR r.1.46.

There may have been policy decisions why out of hours administrator appointments were prevented from being made out of hours, but the court did not accept that these were required.

The fact that the rule 3.20 out of hours process was only available to QFCHs and not for company or director appointments was not a reason to prevent QFCHs from using CE-File outside court hours. The current system already creates an uneven playing field - creditors can petition for a company's winding up outside of court hours but directors cannot block the petition by appointing an administrator. If it was considered appropriate to give creditors and QFCHs more appointment options than the company and its directors, this would be a reason to allow QFCHs to appoint administrators through CE-filing outside of court hours, not a reason to restrict all parties from doing so.

As currently drafted the carve-out meant that it was not open to a QFCH to use the electronic working scheme to file a notice when the court was closed. The fact thatallcourts did not have the same published opening hours only served to confuse matters further. It was bizarre that the appointer could have filed electronically if he had specified the court of issue as London, but not when he specified Birmingham because that court closed earlier.

The judge was satisfied that using electronic filing outside the permitted hours could be considered an "irregularity" under IR r.12.64. No injustice had been caused and an order curing the defect was appropriate. The appointment was therefore to be treated as taking effect at 16.18 on the day of filing (17 September 2019).

Commentary

The judge in All Star Leisure was clear in his criticism of the interaction between the PDIP and PD 51O, and the fact that it could not have been the intention or effect of the pilot scheme to impose draconian sanctions on CE-Filing users which would have the potentially disastrous effects that could have been seen in this case.

While the decision accepts that administration appointments cannot be made outside of court hours by CE-Filing it should encourage other judges to take a pragmatic approach when (rather than if) the same issue comes before the court again. We echo the view of the judge and hope an urgent review of the drafting of the provisions governing electronic filing is undertaken and the 'carve-out' is removed from PD 51O and the PDIP.


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