Earlier in the year, we published a blog regarding the impact of the moratorium introduced by the Corporate Insolvency and Governance Act 2020. In particular, we flagged that the moratorium may result in a significant loss of control for secured lenders and qualified floating charge holders (QFCH). In a recent case, Re Tokenhouse VB Limited [2020] EWHC 3171 (Ch) (Tokenhouse), ICC Judge Jones has dealt another blow to QFCHs’ control by finding that failure to serve a notice of intention to appoint administrators (NOI) by directors of a company on a QFCH does not automatically void an administration.

This finding may come as a surprise given that the reason for giving notice is to enable a QFCH the opportunity to appoint its preferred choice of administrator.  QFCHs should therefore be aware of the risk that the appointment of an administrator may be valid, even if they don’t receive an NOI.

The court found that failure to give notice was a defect capable of remedy, however despite the court recognising that the QFCH was prejudiced by losing its right to appoint its own administrators it does not necessarily follow in all cases that the court will remedy that by appointing the QFCHs chosen administrators.

The judge considered what the purpose of serving the NOI was and whether parliament intended  that failure to give notice would automatically void the administration, concluding that parliament could not have intended that to be the consequence.

Consequences of Tokenhouse for a QFCH

Following the removal of the right to appoint administrative receivers by the Enterprise Act 2002 for post-Enterprise Act charges, and the introduction of administrations, qualifying floating charge holders were given the right to receive notice of an intention to appoint administrators if the directors of the company intended to appoint administrators.  This gave QFCHs some element of control over the administration and the opportunity to appoint their preferred administrator.

The impact of Tokenhouse means that a QFCH might be left with no choice but to accept the administrators chosen by the company or its directors, particularly if there is significant delay between the irregular appointment and any application by the QFCH to challenge.

Whilst the Court recognised that failure to give notice was prejudicial to the QFCH (by losing its right to step in and appoint their own administrators) it found that it could not have been parliament’s intention that the administration was automatically void. The consequences of that could be detrimental to achieving the purpose of the administration, given the potential delay in time to rectify a void appointment.

The court also noted that administrators are insolvency practitioners and officers of the court and, as such, should be independent and act in the interests of creditors as a whole – seemingly addressing any concerns that a QFCH might have over the identity of the administrators.

The fact that the QFCH may also wish for the company to go into administration and any delay might be dangerous to achieving the purpose of the administration (and therefore adversely impacting any return to the QFCH) also weighed in favour of the finding that the appointment was defective, but remedial.

What can a QFCH do if it does not receive notice of intention to appoint administrators?

A QFCH can apply to court for directions to remedy such a defect and in doing so seek directions from the court that their preferred IPs are appointed.

In Tokenhouse when considering whether the QFCHs chosen IPs should be appointed, the court said that failure to give notice was an important factor with considerable weight when determining that question.  However that in itself will not guarantee that a QFCH’s preferred insolvency practitioner will be appointed in place of those chosen by the directors.  That will be determined by the specific circumstances of the case.

In Tokenhouse, the director appointed administrators were replaced by the QFCH nominated administrators. However, the administration was still at a very early stage, there was no likelihood of a going concern sale and because one of the QFCH’s chosen administrators had already been appointed this had allowed him time to get familiar with matters. Therefore replacing the administrators would not have been disruptive to the progress of the administration.

In a different scenario, perhaps where there is a pre-pack and negotiations are advanced, replacing the administrators with administrators chosen by the QFCH may adversely impact the administration and as such we would not expect the court to simply rubber stamp an application by the QFCH to replace the administrators simply because the QFCH did not receive notice.

Perhaps of comfort to QFCHs is that in order to appoint administrators out of court, directors must make a statutory declaration that includes confirming procedural requirements have been complied with (which would, if relevant, include filing and serving an NOI). Filing a false statutory declaration without an honest belief in its truth has potential criminal liabilities and indemnity obligations. Therefore, the risk of directors deliberately circumventing notice requirements to remove the administration from the QFCH’s control is hopefully low.

Although the risk of loss of QFCH control may be largely theoretical, QFCHs should keep such risks in mind and ensure borrower companies are well monitored and robustly checked, to further minimise such risks.

This post was also written by Emily Davis.