Frontsouth (Witham) Ltd & Anor, Re

Factual and Procedural Background

On 23 and 24 June 2011, the court heard multiple applications concerning the administration of Company A and its wholly-owned subsidiary The Hospital. The applications, mostly brought by the administrators Mr. Alexander Mackay and Mr. Robert Haw, were unopposed except for the last one. A significant legal question arose regarding the court's power under rule 7.55 of the Insolvency Rules 1986 to waive a defect in the appointment of the administrators of The Hospital. If such a waiver was impermissible, the court considered whether it had jurisdiction to make a retrospective administration order effective 364 days prior to the hearing, and whether it should exercise that power.

The Hospital was incorporated in 2004 to acquire and redevelop a Grade II listed hospital property called Homebridge Village, located in The City. Company A was incorporated a year later as a holding company to manage The Hospital and provide maintenance services at Homebridge Village. Homebridge Village consisted of two properties: a "retirement hotel" offering temporary accommodation and a sheltered residential development. Initially, occupation was restricted by planning conditions to persons aged 55 or older.

Funding for the redevelopment was provided by The Bank, secured by fixed and floating charges on the assets of both companies. The redevelopment was unsuccessful due to design defects and a declining property market, resulting in poor sales and vacancies.

In January 2009, insolvency advice led to the out-of-court appointment of administrators for both companies, including Mr. Mackay and Mr. Rollings initially, with Mr. Haw replacing Mr. Rollings later that year. The administrators engaged a property marketing firm, which struggled to sell units due to restrictions and market conditions. The age restriction was lifted by the local council in late 2009, but a care requirement restriction remained on one property.

The administrators sought a six-month extension of their appointments by consent before the expiry of their initial one-year term. For Company A, all consents were obtained properly, and the extension was valid. For The Hospital, however, consent was obtained from The Bank but not from another secured creditor, Company B, whose consent was necessary. This defect was overlooked, and the administration continued under the mistaken assumption of a valid extension.

Subsequently, a 12-month sale and marketing agreement was made with a property developer, Fairview New Homes Limited, leading to successful sales. The administrators applied for a further 12-month extension, which was granted by the court in June 2010, again on the assumption that the first extension had been valid.

The administrators now sought a final 12-month extension in 2011. While the application concerning Company A presented no issues, the application for The Hospital revealed the earlier defect regarding the missing consent from Company B, raising questions about the validity of the previous extension and the court's jurisdiction to grant further extensions.

Legal Issues Presented

1. Whether the court has the power under rule 7.55 of the Insolvency Rules 1986 to waive a defect in the appointment or extension of administrators where a required consent was not obtained.
2. If the defect cannot be waived, whether the court has jurisdiction to make a retrospective administration order backdated up to 364 days before the hearing.
3. Whether the court should exercise its discretion to make such a retrospective appointment.
4. Who has standing to make a fresh application for the appointment of administrators when a defect invalidates the previous appointment or extension.

Arguments of the Parties

Appellants' Arguments

• The administrators argued that the defect in obtaining the written consent of the secured creditor Company B should be waived under rule 7.55 to provide a simple and practical solution.
• They noted that similar waivers had been made in recent cases by Registrars of the Companies Court for defects of a comparable nature.
• Counsel submitted that the court should follow this practice to avoid prejudice and to validate the administrators' acts retrospectively.
• Regarding who should make the fresh application if required, counsel suggested either that the shareholders could make the decision by ordinary resolution due to impracticability of convening directors, or that the administrators had acted as de facto directors and could make the application themselves.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by examining the statutory framework governing administration appointments and extensions under Schedule B1 to the Insolvency Act 1986, emphasizing the mandatory nature of obtaining required consents for extending an administrator's term by consent. It found that the failure to obtain the written consent of the secured creditor Company B for The Hospital's administration extension was a fundamental defect, causing the administration to expire by effluxion of time on 26 January 2010.

The court analyzed rule 7.55 of the Insolvency Rules 1986, which allows the court to waive formal defects or irregularities in insolvency proceedings unless substantial injustice results. However, based on binding precedents, the court concluded that rule 7.55 cannot be used to cure fundamental defects in administrator appointments or extensions, particularly where no valid insolvency proceedings have commenced. The defect at issue was not a mere formality but went to the essence of the appointment.

The court further considered paragraph 104 of Schedule B1, which validates acts of administrators notwithstanding defects in their appointment, but agreed with prior authorities that this provision does not cure the absence of a valid administration itself.

Given the invalidity of the prior extension, the court addressed the possibility of making a fresh administration order with retrospective effect up to 364 days prior to the hearing, pursuant to paragraph 13(2) of Schedule B1. The court acknowledged that while the power to backdate appointments is somewhat controversial, it is a well-established and useful practice to regularize situations like the present one.

The court rejected the possibility of making multiple successive retrospective appointments to cover longer periods, aligning with prior judicial authority.

Regarding who should make the fresh application, the court held that the administrators lacked standing due to the invalidity of their appointment. It rejected the shareholders' ordinary resolution as insufficient to authorize the application because, under company law and the company's articles, decisions to place the company into administration rest with the directors. The court expressed reservations about counsel's alternative arguments that shareholders could act unanimously or that administrators had become de facto directors. Instead, the court identified the secured creditor, The Bank, as the appropriate party to make the fresh application, which was duly made and granted.

The court also noted the importance of strict compliance with internal company governance and statutory requirements to avoid corporate uncertainty and chaos.

Holding and Implications

The court held that:

• The defect in failing to obtain the written consent of the secured creditor for the extension of the administrators' term of office for The Hospital was fundamental and could not be waived under rule 7.55 of the Insolvency Rules 1986.
• As a result, the purported extension of the administration on 26 January 2010 was invalid, and the administrators had no authority from that date onward.
• The court has jurisdiction to make a fresh administration order with retrospective effect up to 364 days before the hearing, which it exercised in this case.
• The fresh application for the retrospective appointment must be made by a party with proper standing, here the secured creditor, The Bank, rather than the administrators or shareholders by ordinary resolution.

The direct effect of this decision is that the administration of The Hospital was regularized by the retrospective appointment order made on The Bank's application, validating the administrators' acts for the majority of the relevant period. The court rejected a practice of waiving fundamental appointment defects under rule 7.55, clarifying the limits of that rule and emphasizing adherence to statutory and corporate governance requirements. No broader precedent was established beyond the reaffirmation and application of existing principles regarding invalid appointments and retrospective orders.