Defects in the process of appointing an administrator

Was there a defect in an administrator's appointment if Financial Conduct Authority (FCA) agreement was not filed at same time as the notice of intention to appoint? The case of Re Harlequin Management Services Ltd (oral judgment handed down) adds to the long list of cases which discuss the issue of the validity of the appointment of an administrator in the face of a potential defect in process. Eleanor Stephens in our Restructuring & Insolvency team looked at the issues.

What were the key facts of the case?

Harlequin was a London based company which acted as agents for international property investors. It was therefore regulated by the FCA.

In April 2013 the directors took advice and instructed solicitors to place the company into administration.

Section 362A of the Financial Services and Markets Act 2000 (FSMA 2000) states that an administrator of the company may not be appointed without the consent of the appropriate regulator, that consent must be in writing and must be filed in court along with the notice of intention to appoint (emphasis added) or notice of appointment, as appropriate.

Prior to filing the notice of intention, solicitors for the directors phoned the FCA to enquire whether consent was required. They were told by phone that consent was not required, and so they proceeded to file the notice of intention with the court that day.

However, the following day the FCA emailed the solicitors, informing them that the advice given by them yesterday was incorrect, that consent was required, and attaching that consent with their email. The solicitors filed this consent with the court the same day.

The application to court

With a mind to the mire of case law concerning validity of appointment in light of defective procedures, the administrators and directors applied to the court to declare on the validity of the appointment in light of the fact that FCA consent was not filed on the same day as the notice. (For more discussion on this case law, see news analysis: The Minmar maze by Stewart Perry of Clyde & Co, and Out-of-court administration appointments—the procedure).

The applicants argued the appointment was valid on two grounds:

  • on true construction of FSMA 2000, s 362A, the words 'must be filed along with the notice of intention to appoint' did not require that consent be filed simultaneously with the notice of intention to appoint—they relied on Re Ceart Risk in this argument (an earlier case of Arnold J presiding here)
  • alternatively, even if there was a defect, that defect could be and had been cured when the consent was filed the next day.

What was the outcome?

The application was allowed and the administrators were declared to have been validly appointed.

How was the law applied?

While it was settled law that it was essential to obtain the FCA's consent in these circumstances, the wording of the FSMA 2000, s 362A was not clear that this consent had to be obtained prior to appointment. The submission that the wording of FSMA 2000, s 362A did not compel the consent to be filed at the same time as the notice, was also accepted.

In these circumstances therefore, there was no defect in the appointment that may invalidate the appointment, or require the defect to be rectified, and so the appointment was valid declared.

What does this mean?

This case supports the earlier similar case of Ceart Risk, and the other 'purposive approach' cases (such as Re Virtualpurple , Re Bezier Acquisitions , BXL , Euromaster and Re MF Global Overseas Ltd ), that have been heard subsequent to Minmar . This shows that the predominant pattern among Judges dealing with validity of appointment cases now appears to be that they are applying this sensible 'purposive' approach to what is essentially still confusing legislation, rather than the 'literal approach' favoured in Minmar and National Westminster Bank Plc v Msaada Group.

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