Monday, March 07, 2016

Fee approval and extension consent in Paragraph 3(1)(c) purpose Administrations


This is another really technical point, but please don’t blame us, as we didn’t write the legislation. We thought it would be pretty obscure when we first spotted it, but we made amendments to our documentation to bring it to our clients' attention in April 2015. We have since had a few related queries, so it is worth repeating.

The problem arises when you state that you cannot pursue the purpose set out in paragraph 3(1)(a) or 3(1)(b) of Schedule B1 and are therefore just going to distribute to a secured creditor. We are seeing more secondary lenders appointing IPs under para 14 and not using panels like the big banks, resulting in a lot more para 3(1)(c) purposes among our clients. Paragraph 52(1)(c) says that you shall not hold an initial (Paragraph 51) meeting if you have said that neither purpose (a) nor (b) can be achieved.  

Rule 2.106 sub-sections 5 and 5A set out when it falls to the secured and preferential creditors to approve fees, and I have highlighted the problem wording. 

(5) If there is no creditors' committee, or the committee does not make the requisite determination, [and the case does not fall within paragraph (5A), the basis of] the administrator's remuneration may be fixed (in accordance with [paragraphs (2), (3A) and (3B)]) by a resolution of a meeting of creditors; and paragraph (4) applies to them as it does to the creditors' committee.

[(5A) In a case where the administrator has made a statement under paragraph 52(1)(b), if there is no creditors' committee, or the committee does not make the requisite determination, [the basis of] the administrator's remuneration may be fixed (in accordance with [paragraphs (2), (3A) and (3B)]) by the approval of—
(a) each secured creditor of the company: or
(b) if the administrator has made or intends to make a distribution to preferential creditors—
(i) each secured creditor of the company; and
(ii) preferential creditors whose debts amount to more than 50% of the preferential debts of the company, disregarding debts of any creditor who does not respond to an invitation to give or withhold approval.

If you have made a statement under paragraph 52(1)(c), saying that you are pursuing objective c), that means that the case does not fall within sub-section 5A. As a result, under sub-section 5, it falls to the committee, or a meeting of creditors to fix the remuneration. It clearly makes sense to get approval from the secured creditor as well, but the statutory requirement is to get the committee or meeting of creditors’ approval.

The legislation is contradictory. On one hand it says that you cannot hold a paragraph 51 initial meeting, but on the other hand it says that you have to have your fees approved by the creditors at a meeting. In theory, therefore, you should give creditors notice that you are not holding a paragraph 51 meeting and the proposals will be deemed approved, but at the same time convene a meeting under paragraph 62 to approve your fees. 

If you set out paragraph 3(1)(c) as your purpose, obtained fee approval only from the secured creditors (and 50% of preferential creditors, if any) and did not convene a paragraph 62 meeting for creditors to approve your fees, it could be argued that you have no fee approval.

We think that the likely solution to this would be either to convene a meeting of creditors to approve the fees and pre-appointment costs, or a court application for directions. As ever, it is worth checking with a good insolvency lawyer, in case they can find a suitable alternative.

This then has a knock-on effect for extending an administration where you have said that you will pursue the paragraph 3(1)(c) purpose. 

Paragraph 76 allows you to extend the administration by applying to court or by “consent”. Paragraph 78(1) says that “consent” means consent of— (a) each secured creditor of the company, and (b) if the company has unsecured debts, creditors whose debts amount to more than 50% of the company's unsecured debts, disregarding debts of any creditor who does not respond to an invitation to give or withhold consent. Paragraph 78(2) allows you to drop the unsecured creditors and just seek approval from the secured creditors and any preferential creditors, but only in cases where you have made a paragraph 52(1)(b) statement. As with the remuneration problem above, if you are pursuing paragraph 3(1)(c), then you should not make a paragraph 52(1)(b) statement and you will need consent from each secured creditor and a majority of voting/responding unsecured creditors.

This issue is, if anything, even more tricky to resolve. If you still have time, you could seek the right approval. However, that is unlikely in our experience and paragraph 77(1)(b) specifically prohibits the court from extending the administration if it has already expired. Again, you will need a good insolvency lawyer to help you resolve the problem, but it might be possible to have a new administration backdated to the expiry of the old one, validating any action taken in the interim, or the court might be prepared to make a winding up order and back-date it, also validating the office holder’s prior actions within those proceedings. Unlike the remuneration issue that a paragraph 3(1)(c) purpose could cause, it is unlikely that you would be able to leave invalid consent unresolved, and we have heard of at least one case where we believe that the company had subsequently moved to CVL, on a paragraph 83 notice, issued after the administration had expired because of a faulty consent, which then casts doubt on the validity of that CVL.