Corporate insolvency - Court of Appeal issues guidance on Notices of Intention

9th May 2017

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In JCAM Commercial Real Estate Property XV Limited v Davis Haulage Limited [2017] the Court of Appeal has made it clear that a Notice of Intention filed where a company or its directors have only a conditional intention to appoint administrators will not be validly given. The effect of the decision is to clarify that it is not acceptable to file a Notice of Intention in order to obtain an interim moratorium while a parallel procedure – such as a Company Voluntary Arrangement – is pursued.

Background

The filing of a Notice of Intention to Appoint an Administrator under paragraphs 26 and 27 of Schedule B1 to the Insolvency Act 1986 is a necessary step where (i) a company or its directors wish to appoint an administrator, and (ii) there is a lender who holds a qualifying floating charge over the company’s assets. It also carries the benefit of creating an interim moratorium, which prevents creditors from bringing or continuing alternative insolvency proceedings or other legal process against the company. The interim moratorium lasts either until administrators are appointed, or the notice expires (which occurs after ten business days).

The interim moratorium can provide welcome breathing space from creditor pressure for companies and their advisors, and because of this the filing of a Notice of Intention (sometimes even several notices back-to-back) has been used as a way of protecting the company’s position while other options, such as a Company Voluntary Arrangement, are explored.

Court of Appeal decision

In this case however the Court of Appeal has made clear that, in order to validly file a Notice of Intention, the company or its directors must have a “settled and fixed intention” to appoint an administrator. A conditional intention (such as a belief that the appointment of an administrator is a second best choice in the event that other schemes being contemplated do not work out) is not sufficient. A Notice of Intention filed under those circumstances will be invalid and, technically speaking, an abuse of process.

The Court of Appeal noted that the circumstances in which a moratorium is available to a company are strictly limited by the current legislation, and that the Notice of Intention (and the interim moratorium provided by it) were only available where there was a lender who held a qualifying floating charge and therefore had a right to appoint an administrator which superseded the right of the company and its directors to do so. The Court held that the purpose of the Notice of Intention, and the interim moratorium, must therefore be to protect the company and its assets while the holder of a qualifying floating charge decides whether to appoint their own administrator, rather than giving the company an opportunity to obtain a moratorium indirectly in circumstances where it could not do so directly. The Court therefore concluded that a conditional proposal to appoint an administrator does not entitle or oblige a company or its directors to give a notice under paragraph 26 of Schedule B1.

Comment

This decision provides welcome clarity in relation to the validity of a Notice of Intention filed where administration is only one of a number of options being pursued, although we suspect that directors fighting to rescue companies in difficulty will miss the ability to obtain an interim moratorium in this way.

If you have any issues or queries regarding the above, please contact a member of our Business Recovery & Insolvency Team.

RELATED: CONTENTIOUS INSOLVENCY

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