Can a creditor sue a company that has filed a Notice of Intention to Appoint an Administrator?

Administration is a formal procedure in which an insolvency practitioner is appointed to manage the company’s affairs in the interest of creditors with the goal of restructuring the business or realising its assets.

Administration is commonly used by companies to buy a breathing space to try to rescue their businesses. There are several routes into administration but the most common is the quick and effective out-of-court process where a director of a company can file a Notice of Intention to Appoint an Administrator (“NOI”) with the court.  That action secures a moratorium (the breathing space) for the company and, generally a stay of all legal actions against it.

Once the NOI has been served on the appropriate parties there is a breathing space of 10 business days until a further document, the Notice of Appointment of an administrator (“NOA”), is filed at the Court at which point the company is deemed to have been placed into administration.

This article will focus on three recently decided cases where companies have filed the NOI but are not yet in administration. Increasingly, the Courts are taking a robust approach to prevent abuses at this early stage and creditors can now take comfort in the fact that a NOI can only be filed if there is a fixed or settled intention to appoint an administrator. If there is not, creditors may, in certain circumstances, be able to continue with proceedings against the company.

In JCAM Commercial Real Estate Property XV Limited v David Haulage Limited (2017) EWCA Civ 26 the respondent, Davis Haulage Limited (“the Company”), was a tenant of the applicant, JCAM Commercial Real Estate Property XV Limited (“JCAM”). The Company fell behind on rent and JCAM issued possession proceedings. Six days before those proceedings were issued the Company’s director filed a NOI at Court and served the same on the Company’s qualifying floating charge-holder (“QFCH”) (as required by the Insolvency Act 1986 (“the Act”)) which triggered the 10-day moratorium blocking the continuation of possession proceedings. The interim moratorium expired, a further NOI was filed heralding another 10-day moratorium, and the pattern continued until a fourth NOI was filed. In the meantime, the Company’s director had filed proposals for a company voluntary agreement (“CVA”) with the court.

JCAM applied to set aside the fourth NOI on the grounds it was an abuse of process. It argued that a company must have a fixed or settled intention to appoint an administrator when filing a NOI and it was obvious in this case that the director was primarily concerned with getting the CVA proposal approved and that the appointment of an administrator was contingent on the CVA proposal failing to gain creditor approval.

At first instance, the judge held that it was not necessary for a company or its directors to have a settled intention to appoint an administrator when filing a NOI and saw nothing wrong in a director proposing both a CVA and an administration simultaneously.  JCAM appealed and won, the Court of Appeal finding that a person must unconditionally propose or intend to appoint an administrator when filing a NOI. As a result, the fourth NOI was set aside as a breach of process.

The effect of the decision of the Court of Appeal is that, going forward, a conditional proposal to appoint an administrator will be insufficient. Any tactical use of NOI’s to simply secure a breathing space from creditor pressure, absent a fixed intention to appoint administrators, will no longer be tolerated.

In South Coast Construction Limited v Iverson Road Limited [2017] EWHC 61 (TCC) the Technology and Construction Court (“TCC”), giving summary judgment in the claimant’s favour, held that even if a moratorium had continued over the defendant company the claimant’s application for permission to enforce an adjudicator’s award would have been granted.

Iverson Road Ltd (“Iverson Road”) appointed South Coast Construction Ltd (“South Coast”) as contractor over a development at 163 Iverson Road, London. On 5 September 2016, South Coast referred a dispute between the parties to adjudication and on 21 November 2016, the adjudicator found in South Coast’s favour requiring Iverson Road to pay South Coast the sum of £861,235.00.

Iverson Road did not pay and on 30 November 2016 South Coast applied to the TCC for summary judgment to enforce the decision. At the same time (and without informing either South Coast or the Court) Iverson Road issued three NOI’s in succession effectively imposing a moratorium up to and including 18 January 2017. South Coast cross applied for permission for the enforcement proceedings to continue.

On the permission application, Coulson J decided that, based on the principles set out in Re Atlantic Computer Systems [1992] 1 All ER 476, he would have granted permission for the enforcement proceedings to continue. In particular, he stated that having the enforcement application determined would cause no prejudice to the other creditors or jeopardise the purpose of the moratorium but would in fact assist the administrators because they would have an answer to the only issue between South Coast and Iverson Road. Coulson J also took Iverson Road’s conduct into account commenting that, in issuing serial notices without appointing an administrator and in failing to inform either South Coast or the court until two days before the hearing, Iverson Road had been playing a ‘deliberate double game’.

This case provides clear indication that in appropriate circumstances, the court will exercise its discretion to lift a statutory moratorium imposed by the Act in favour of adjudication enforcement proceedings.

In the latest case, Bernard Sport Surfaced Ltd v Astrosoccer4u Ltd [2017] EWHC 2425 (TCC), the Court again held there had been an abuse of process finding that the NOI was “entirely bogus” filed simply to avoid paying a legitimate debt.

The claimant, Bernard Sport Surfaces Ltd (“Bernard”) was engaged in a dispute with the defendant, Astrosoccer4u Ltd (“Astrosoccer”) in connection with a football pitch at Whyteleafe Football Club in Surrey and obtained an adjudicator’s award against Astrosoccer for £175,962.47. When Astrosoccer refused to pay, Bernard commenced adjudication enforcement proceedings in the TCC.

Several weeks before the hearing, solicitors for Astrosoccer wrote to Bernard’s solicitors seeking mediation. They gave Bernard an ultimatum of either accepting mediation or their client would enter an insolvency process.

Bernard said this was either an abuse of process or trading whilst insolvent to which Astrosoccer responded “You will get nothing then. Goodbye”.

Astrosoccer’s solicitors then advised their client, copying in Bernard’s solicitors, to draft a NOI to prevent Bernard from obtaining priority over other creditors.  Astrosoccer duly wrote to Bernard on 21 August 2017 enclosing a draft NOI. Shortly before the hearing, a NOI was filed with the Companies Court.

At the time of the hearing of the adjudication enforcement proceedings, the NOI had not been filed with Companies House by Astrosoccer and was in any event considered defective by the TCC as it was not accompanied by minutes detailing the decision to file it.

Additionally, the original letter of 21 August 2017 only contained a draft notice which the Court found Astrosoccer had no intention of serving at that time.

The TCC considered that Astrosoccer had no genuine intention of appointing an administrator, and its threat of administration was solely to pressurise Bernard into withdrawing the court proceedings. Furthermore, Astrosoccer was still trading through its website and the TCC found that there was no evidence of actual insolvency.

The Judge found that Astrosoccer’s conduct was “a classic example of two directors endeavoring to use Victorian company legislation to avoid paying a due debt”. The court was highly critical of Astrosoccer’s conduct and enforced the Adjudicator’s Decision.

The above decisions highlight three key points for creditors:

• a company or its directors can only file a NOI if there is a fixed or settled intention to appoint an administrator – where this is doubtful the creditor should dispute it
• contrary to common practice and previous judicial authority (eg Re Virtualpurple Professional Services Ltd [2011] EWHC 3487 (Ch)), JCAM confirms that appointers cannot file an NOI where there is no QFCH – This process is a specialist one and therefore taking the right advice is crucial.
• the tactical use of NOIs to fend off creditors while other methods of rescuing a company are explored will no longer be tolerated by the court.

If you are a creditor or debtor company and experience any issues similar to the above, please get in touch with us on 01603 611370.  Alternatively, please email sleonard@isadoregoldman.com with your contact details and we will arrange for you to be called back. There is no charge for this initial contact.

Disclaimer: this article is not to be relied upon as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.