With much doffing of caps to the expertise of Frank Brumby of Isadore Goldman who first flagged this up at the SESCA Insolvency Conference, I want to bring to your attention the recent case of Re Frontsouth (Witham) Ltd [2011] EWHC 1668 (Ch). Without going into too much detail, this was an administration where the administrators had not followed the correct procedures to extend its duration and so were looking for the Court to sort out the problem by making an order to backdate their appointment 364 days using the Court’s general power to remedy defects in appointments under rule 7.55. The Court refused and then considered alternative methods of dealing with the problem.
The administrators themselves had arranged for the members to pass a resolution to remedy the defect, and the Court considered the effectiveness of such an approach. The short answer is that it did not work since the administrators were not validly in office and so could not convene the meeting, and the members themselves did not have the power to convene a general meeting of the company. This was because of the general rules of corporate governance whereby it is only the Board of directors who can resolve to convene a meeting of the company. The members themselves, even acting unanimously, cannot do so.
So what are the practical effects of this decision? These are two-fold, in respect of effecting the initial appointment as administrator and remedying defects in appointments.
In my article of 22 April following on from the decision in Re Minmar, I indicated that one solution to the issue of giving notice of intention to appoint to the company could be to have the appointment made by special resolution of the company. That is a valid solution, but in view of the Frontsouth judgement I want to take this opportunity to remind you of the process to follow, which is to hold a Board meeting at which a resolution is obtained to convene a meeting of the company to consider a special resolution to place the company into administration and to appoint an administrator, and then hold a meeting of the company to pass the resolution, ensuring that the meeting is properly held and the resolution validly passed. In other words, the procedure is akin to a CVL, but with a special resolution to place the company into administration and to appoint an administrator instead. The problem will come if there is either a dispute between the directors as in Minmar, or indeed between the members, in which case you should be taking legal advice on how best to effect the appointment. Indeed, you may consider that the whole process to effect an appointment by the company is too long winded and that it is quicker and easier to effect the appointment via a Board resolution and to just remember to give notice of intention to appoint to the company.
The main impact of the decision, however, will be in respect of trying to remedy defects in appointments in administrations since the Court confirmed that it cannot use rule 7.55 where the administrator has not been validly appointed and you will have to rely on the co-operation of the Board of directors to convene a meeting of the company to pass a resolution to fix the problem. As a result, if you find that you are not validly appointed as administrator then seek legal advice immediately.
