The importance of doing pre-appointment checks and doing them right—Pui-Kwan v Kam-Ho

John McDonnell QC at 13 Old Square Chambers discusses the judgment in Pui-Kwan v Kam-Ho and its implications for insolvency practitioners who agree to be appointed administrators out of court by a company or its directors.

Original news

Pui-Kwan v Kam-Ho and others [2015] EWHC 621 (Ch), [2015] All ER (D) 133 (Mar)

The Companies Court held that a company had never been placed in administration where a meeting of its directors, purporting to enter it into administration, pursuant to the Insolvency Act 1986 (IA 1986), Sch B1, para 22(2), had been inquorate.

What was the background to the application?

The application concerned a BVI company (Melodious Corporation) which the parties, who were both from Hong Kong, acquired in 1995 to hold their intended matrimonial home in England. They separated in 1998 which resulted in litigation reported as Chan v Leung [2001] All ER (D) 455 (Nov) and [2002] EWCA Civ 1075 where the full history can be found. Mr Leung (who held 49% of Melodious) sought to have it wound up and Miss Chan (who held 51%) sought to establish a beneficial interest in the house and the right to remain there until she finished a course of studies. Miss Chan was successful and the court held:

  • that Melodious held the house in trust for the parties, and
  • so far as its own assets and liabilities were concerned (which were the result of some investments in English properties for letting), there was no need for the expense of compulsory winding-up since the company was solvent and any issues could be resolved by the taking of an account

Six years after the conclusion of that litigation Mr Leung had returned to Hong Kong and become bankrupt, the house was still unsold and Miss Chan was advised to consult an insolvency practitioner. He advised her to register Melodious as an overseas company with a UK branch (in order to establish jurisdiction under IA 1986) and then put it into administration with him as administrator. She was able to do so because the directors were herself and her mother—so Melodious was purportedly put into administration by its directors in late 2007 and Miss Chan went back to Hong Kong leaving the administrator in charge.

Two and a half years later, nothing had been achieved and Miss Chan was dissatisfied. By then the administrator was claiming to have become the liquidator by filing a conversion notice under IA 1986, Sch B1, para 83—but it was observed by Miss Chan’s new solicitors that he had filed a conversion notice under para 84 by mistake, with the result that Melodious was deemed to be dissolved (even though it was in perfectly good standing in the BVI). It was also noticed that the minutes of the board meeting, where it was resolved to go into administration, and which the administrator had prepared himself, only showed one director present (Miss Chan), even though the articles provided that if there were only two directors the quorum for a board meeting was two.

What were the factual and legal issues that the Chancellor of the High Court had to decide in this application?

The questions for the Chancellor were:

  • whether Melodious ever went into administration, and
  • whether the administration had been successfully converted into a liquidation

There were factual issues because the administrator claimed that:

  • Miss Chan’s mother was present at the original board meeting even though he did not record that in the minutes, and
  • having realised that he had sent the wrong form to Companies House he had corrected his error by sending the correct form by the end of the next day (the importance of that being that the administrator’s year was going expire only a week later)

Having received oral evidence from the three persons concerned, the Chancellor did not believe that Miss Chan’s mother was at the board meeting, though he accepted that if she had been present she would have supported Miss Chan. He did, however, believe ‘albeit with hesitation’ that the administrator had sent off a conversion notice in the correct form before the administration expired—though it could not be established that it had reached the Registry at all or (if it did) whether it had arrived in time.

So the two legal issues were:

  • given that the board meeting was inquorate, but the absent director would have supported the resolution, was the appointment of the administrator saved by the Insolvency Rules 1986, SI 1986/1925, r 7.55? That provides that ‘No insolvency proceedings shall be invalidated by any formal defect or by any irregularity, unless the court before which objection is made considers that substantial injustice has been caused by the defect or irregularity, and that the injustice cannot be remedied by any order of the court'
  • was it sufficient for an administrator to ‘send’ (eg commit to the post or DX) a conversion notice before his year expired or must the notice be received by the Registry before that date?

What did the Chancellor decide, and why?

As to the first issue, he held that the purported appointment of the administrator was a nullity which could not be saved under rule 7.55. He followed previous decisions in Re Frontsouth (Witham) Ltd (Henderson J) [2011] EWHC 1668 (Ch) and Re Euromaster Ltd (Norris J) [2012] EWHC 2356 (Ch) in holding that rule 7.55 cannot be used to remedy a defect or irregularity in the process of entering administration since in such a case there are no ‘insolvency proceedings’ to start with. He also referred to Minmar Ltd and another v Khalatschi [2011] EWHC 1159 (Ch), [2011] All ER (D) 99 (Oct) where Sir Andrew Morritt C reached the same conclusion as to the effect of an attempt to appoint an administrator at an inquorate board meeting, though by reference to different remedial provisions in IA 1986 itself.

As to the second issue, which it was not strictly necessary to decide in view of the outcome of the first issue, he held that an administrator can effectively ‘send’ a conversion notice to the Registrar within the meaning of IA 1986, Sch B1, paras 83(3) or 84(1) even if the notice arrives at the Registry after his appointment has expired. The Chancellor followed a statement by Judge Purle QC in Re Property Professionals + Ltd [2013] EWHC 1903 (Ch), [2013] All ER (D) 110 (Jul) which was actually obiter since on the facts in that case the notice was received a few hours before the administration expired. In view of the outcome of the first issue, he did not go on to resolve the problems in the case before him arising out of the fact that there was no evidence that the right conversion notice (ie the copy sent before the administration expired) was ever received by the Registrar and the fact that the wrong notice was actually registered (the problem there being that under the relevant transitional provisions the power to rectify the Register under the Companies Act 2006, ss 1093–7 are only exercisable in relation to documents delivered to the Registrar on or after 1 October 2009 and our events were in October 2008).

To what extent is the judgment helpful in clarifying the law in this area?

The judgment is helpful in respect of the first issue because it shows that the appointment of an administrator by a company or its directors which does not comply with the formal requirements of the company’s constitution will be irredeemably null and void even if the formal requirements could easily have been satisfied had they not been overlooked. In the previous cases that was not so starkly clear.

The judgment is interesting in respect of the second issue, though it will be strongly arguable in another case that the conclusion of the Chancellor (and Judge Purle QC) was contrary to the reasoning in the ratio of the Court of Appeal’s decision in Re Globespan Airways Ltd [2012] EWCA Civ 1159, [2012] All ER (D) 144 (Aug), where Arden LJ (with whom the other members of the court agreed) explained very clearly that ‘sending’ and ‘filing’ are distinct and different concepts in IA 1986, Sch B1 and that what is required before the statutory period for ‘registration’ can be extended by what is now called ‘the Globespan extension’ is receipt of a conversion notice by the Registrar as recorded by the affixing of the Registry’s label including the date and bar code.

What practical lessons can those advising take away from the case?

The practical lessons to be learned from this case are:

  • that insolvency practitioners who agree to be appointed administrators out of court by a company or its directors must examine the company’s constitution for themselves and satisfy themselves that the formal requirements for a valid resolution by the members or directors have all been satisfied
  • that administrators must constantly have in mind the date when their administrator’s year will expire and plan carefully so as to ensure that any conversion notice they intend to file reaches the Registry, and can so far as possible be shown to have reached the Registry, before its expiration

John McDonnell QC’s main areas of practice are chancery, company, insolvency and commercial litigation. In addition to these four broad areas, the cases John has appeared in have included other areas of law, from human rights and judicial review to medical negligence to ports and rivers. He regularly acts overseas and has particular experience of conducting litigation in Hong Kong. In Pui-Kwan v Kam-Ho and others John was counsel for the applicant.

Interviewed by Kate Beaumont.

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

Further Reading

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Out of court appointments—who can apply and in what circumstances?

Out-of-court administration appointments—the procedure

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First published on LexisPSL Restructuring and Insolvency

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