Giving notice of intention to appoint administrators – case update
Before putting a company into administration directors may have to serve notice of their intention to appoint an administrator – this is a legal requirement if the company has Qualified Floating Charge Holders (QFCHs). In practice, however, a notice of intention was often filed where there was no QFCH, although it was somewhat unclear whether this would confer on the company a 10 business day moratorium against all legal claims.
The Court of Appeal’s recent judgment in the case of JCAM Commercial Real Estate Property XV Ltd v Davis Haulage Ltd has received much attention. The court said that serving a notice of intention to appoint an administrator would be an abuse of process if there is no “settled” (i.e. real) intention to do so.
In this case, four notices were served back-to-back in order to protect the company against legal claims while the directors pursued a CVA. The court was advised that it was not uncommon for notices to be served in a “parallel process” to attempts to enter a CVA on the basis that, if the CVA proposal fails, an administrator can be appointed as ‘plan B’. As only “small” companies have the benefit of a moratorium during a CVA proposal, companies have tended to serve notices of intention to appoint an administrator as a means of bringing about a moratorium pending either a CVA or the appointment of an administrator.
Whilst much has been made about the fact that a director must first have settled in their mind the decision to actually appoint an administrator, the court also made another point: It is not possible to give a notice of intention to appoint an administrator if there are no QFCHs. So, no matter how “settled” your intention to appoint administrators is, if there are no QFCHs ultimately the moratorium is not available.
How, then, can a director protect a company from claims by creditors if there are no QFCHs? If administration is the likely route, the only thing to do is to make the appointment of administrators straight away. Once an administrator has been appointed the company will have the benefit of a statutory moratorium.
And what about CVA proposals made by medium and large companies? Unless the company is “small” no moratorium is available while a proposal is being considered. The old practice of protecting the company’s position via a parallel administration process is no longer available: If there is a QFCH and you do serve notice of your intention to appoint an administrator, it follows from the Court of Appeal’s decision that you cannot also have an intention to enter into a CVA.
If a “medium” or “large” company has no QFCHs, is trying to decide between the CVA and administration routes, and is faced with a significant and imminent legal claim, the immediate appointment of an administrator may now be the only real option.
For further guidance and information on this topic please visit our restructuring & insolvency page