Complying with articles of association when appointing administrators - Randhawa v Turpin

In Randhawa v Turpin, a challenge to the appointment of administrators resulted in a reaffirmation by the Court of Appeal of the need for formality and strict compliance when managing the affairs of a company. Ali Tabari, of St Philips Stone, examines the court's decision and considers its implications.

Original news

Randhawa and another v Turpin and another (as former Joint Administrators of BW Estates Ltd) [2017] EWCA Civ 1201, [2017] All ER (D) 40 (Aug)

The judge had erred in holding that the sole director of a company, whose articles of association had required two directors for its board meeting to be quorate, had validly appointed joint administrators under paragraph 22 of Schedule B1 to the Insolvency Act 1986 (IA 1986). Among other things, the Court of Appeal, Civil Division, held that the sole director's resolution had been incurably invalid in the circumstances, and could not have been rendered valid by the application of the principle arising from the decision in Re Duomatic Ltd ([1969] 1 All ER 161) (the Duomatic principle).

What was the background to the case?

The company initially had two shareholders, a husband and wife. The wife's shareholding was transferred to a company, Belvadere (an Isle of Man company), which was later dissolved but remained on the register as being a member of the company. The husband was disqualified from being a director, and his son became the sole director, while still being apparently accustomed to receiving instructions from the husband.

The son appointed the respondents as administrators over the company. The appellants, having a final charging order over the husband’s shareholding in the company and also having taken an assignment of debt from one of the company’s creditors, appealed against the administrators’ appointment, which they claimed was invalid.

At first instance, HHJ Purle QC found that the administrators’ appointment was valid. For further reading on this decision, see News Analysis: Validity of appointment and costs of administration—application of Duomatic principle (Re BW Estates Ltd, Randhawa v Turpin).

What issues arose for the Court of Appeal’s consideration?

The key areas of dispute were whether:

  • HHJ Purle QC was wrong, in view of the quorum requirement, to find that the administrators’ appointment was valid even though the son had been the sole director making the decision
  • the administrators’ appointment was valid by reason of the Duomatic principle
  • there was acquiescence by the appellants such that the administrators’ appointment could be deemed valid or their objections would be an abuse of process

What did the Court of Appeal decide, and why?

The first point had three elements to it.

The first was the respondents’ argument that, when Belvadere was dissolved, the company then became a single-member company, thereby negating the need for a quorum of two directors. The Court of Appeal rejected this, saying that the list of members in the register was definitive, even if the members were dead or dissolved, and in this case Belvadere continued to be listed in the register as a member.

The second was the respondents’ argument that IA 1986, Sch B1, para 22(2) conferred a separate right on the director to appoint administrators, and that this was to be read separately from the quorum rules in the articles of association. The Court of Appeal rejected this, and found that any statutory powers must be exercised in accordance with the articles.

The third was that HHJ Purle QC had found that the articles had been varied by the conduct of the son and the husband to allow decisions to be taken by a sole director. The Court of Appeal also rejected this argument, saying that the articles could only have been varied by a properly constituted meeting, which it was not, or by the application of the Duomatic principle which, for the reasons below, did not apply.

On the second point, the Court of Appeal reiterated that the Duomatic principle was applicable only where all of the shareholders gave informed consent to a course of action. The Court of Appeal had already found that Belvadere remained a member of the company, and so was a shareholder which ought to have been informed of the proposed decision to appoint administrators—or, in respect of the first point of argument, above, to amend the articles. Given that it received no such notice nor gave notice of its consent, the respondents could not rely on the Duomatic principle to validate their appointment.

On the third point, the respondents argued that, before challenging the validity of their appointment as administrators, the appellants had first challenged their remuneration and, in doing so, acquiesced in their appointment such that they were debarred from now challenging it. After reviewing the authorities on abuse of process and acquiescence, the Court of Appeal rejected this argument. Not only did the facts not support such an argument, in any event the court was concerned with the factual and technical issue of whether the respondents were validly appointed, and in that sense it did not matter whether a challenge by a third party was subject to issue estoppel.

What are the implications for practitioners?

This decision reiterates that the management of company affairs requires a strict degree of formality and compliance with the articles of association, and that a company cannot simply cure procedural defects in an informal manner. This is even so where, as in this case, strict compliance would have been difficult. The company should either have restored Belvadere from dissolution in order to provide its consent to the appointment of administrators, which would have been unlikely, given the passage of time. Alternatively, another director should have been appointed to provide the quorum for management decisions. In the absence of those steps, there was no curing the defective appointment.

The decision also demonstrated the outer limits of the Duomatic principle, which should not be seen as a simple fallback option to correct procedural defects.

Finally, it was useful for the Court of Appeal to emphasise that, whatever the merits of arguments about acquiescence and abuse of process, ultimately the court was primarily concerned with the technical aspect of the respondents’ appointment, which reduced the importance of such considerations.

Interviewed by Robert Matthews. First published on Lexis PSL Restructuring & Insolvency

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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