High Court protects insolvency appointments

by Andrew Taylor

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01 Aug 2012

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INSOLVENCY PRACTITIONERS can breathe a sigh of relief following the outcome of a recent High Court case, which found their appointment could not be rendered invalid simply because insufficient notice has been given to a company. Despite this ruling practitioners should, as a matter of good practice, still serve notice.

As part of the Insolvency Act, a person proposing to appoint an administrator to the business is required to give five business days' written notice. However, the act stops short of elaborating on what form or timing notice is required or, importantly, the consequences of failing to give that notice. Prior to the ruling, case law was unsuccessful in establishing whether a failure to give notice to the company would be sufficient to render the administrator's appointment invalid.

In order to clarify whether failing to give ‘notice of intention' to the company prior to their appointment was sufficient to render the appointment invalid, a test case was brought by law firm Shakespeares on behalf of PwC administrators of charity BXL Services. In his ruling, Justice Purle found it should not.

This decision brings to an end to two years of turmoil caused by a series of conflicting judgments.

Insolvency professionals have effectively been on tenterhooks waiting for this High Court judgment and will be pleased with the final outcome. In his ruling, Justice Purle confirmed the appointment of administrators cannot be challenged simply on the grounds of a failure to give notice to the company. If it had turned out differently, the practitioners could have faced a raft of claims from various parties involved in past and present administrations on the grounds their appointment was invalid.

In this case, board minutes had confirmed the directors of BXL Services gave their consent to appoint administrators. However, due to a lack of time, no formal notice was served on the company and, once appointed, the administrators asked Shakespeares to seek court declaration to confirm their appointment was valid.

Time is of the essence in these situations and it is important to act quickly. For that reason, it is good news that the judge has determined a failure to provide notice of intention to the company, or other parties, should not automatically invalidate the administrator's appointment.

While the recent ruling is significant for insolvency practitioners, there still remains an amount of conflicting case law around the appointment of administrators that may only finally be put to bed when a case of this type reaches the Court of Appeal.

Andrew Taylor is a partner and insolvency law expert at Shakespeares

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