Limits on the availability of a statutory moratorium on administration

The Court of Appeal has considered circumstances in which filing a notice of intention to appoint administrators did not give rise to the interim moratorium normally available under the Insolvency Act 1986 (JCAM Commercial Real Estate Property XV Limited v Davis Haulage Limited).

Background

Under the Insolvency Act 1986, administration of a tenant company gives rise to a moratorium, which prevents the landlord from forfeiting a lease or taking proceedings against the tenant to recover arrears or damages without the consent of the administrators or permission from the court. If the appointment of the administrators is to be made out of court by the company or its directors then notice of intention to appoint must be given to the holder of any qualifying floating charge (to enable the holder of the qualifying floating charge to exercise its own right to appoint administrators first). The notice of intention to appoint must be filed at court and an interim moratorium of up to ten business days comes into effect at that point, which can give a tenant company valuable breathing space by preventing a landlord from exercising remedies which would otherwise be available.

This case concerned warehouse premises in Crewe occupied by Davis Haulage Limited as tenant. The tenant fell into arrears and in January 2016 the landlord signalled that it would take steps to recover possession if payment was not received in full. Some days later, the landlord issued proceedings for possession, but in the meantime, unknown to the landlord, Mr Davis, the sole director of the company, had filed notice of intention to appoint. Ten business days later, a further notice of intention to appoint was filed, and a third notice of intention to appoint was filed ten business days after that, but no appointment of administrators ensued.

A proposal for a company voluntary arrangement (CVA) was then made and a meeting of creditors convened. Mr Davis filed a further notice of intention to appoint an administrator, giving rise to a further interim moratorium covering the period up to the date of the creditors’ meeting and the landlord applied to the court for an order that the latest notice of intention to appoint should be vacated and removed from the court file as an abuse of process. The basis of the landlord’s application was that Mr Davis could not validly file a notice of intention to appoint administrators as he had no fixed or settled intention to do so; he only intended to do so if the CVA proposal was unsuccessful. The landlord was unsuccessful at first instance but appealed.

The decision

The Court of Appeal found in favour of the landlord and ordered that the notice be removed from the court file on “the straightforward ground that the notice was invalidly given, because the statutory pre-requisite of a settled intention to appoint was not satisfied”.

The court emphasised the purpose of a notice of intention to appoint. The benefit to the company that arises from giving such a notice is the interim moratorium which arises, but the notice can only be given by the company or directors if there is a person with a prior right to appoint an administrator and the actual purpose of the moratorium is to protect the company and its assets whilst that person decides whether to make an appointment itself. It was only because the company had entered into a qualifying floating charge that an interim moratorium became relevant.

The court also highlighted that the process of giving notice to a qualifying floating charge holder if the company or its directors propose to appoint an administrator is a mandatory obligation. That fits with the purpose of the notice referred to above and works easily and logically if the trigger is a settled intention to appoint administrators. If a company is considering various options, it cannot be correct that the obligation is triggered just because there is a possibility that an administration appointment might be the right course to follow if a prior course of action, such as a CVA, fails.

There are limited circumstances in which a company can obtain the benefit of a moratorium in aid of a proposed CVA. The court disapproved of the notion that, if a company is proposing a CVA and is not directly entitled to a moratorium whilst the CVA proposals are being considered, the company could instead obtain a moratorium indirectly by giving notice of intention to appoint administrators. A proposal to appoint an administrator which is merely conditional on the CVA not proceeding, or on any other factors, does not oblige, or even entitle, a company or its directors to give notice of intention to appoint.

Comment

There was some discussion about whether it is common practice for companies to file a succession of notices of intention to appoint administrators in order to obtain a moratorium and create breathing space whilst pursuing a range of solutions to resolve financial problems. Landlords may have anecdotal examples of this. The court found that there was no reason to suppose that Mr Davis or his experienced professional advisers did not believe he was entitled to give and file the notices, but the case is a warning against trying to obtain an interim moratorium in the future by giving notice of intention to appoint administrators if there is anything less than a settled intention to appoint. The possibility of a landlord being thwarted in the future by a spurious notice of intention to appoint has been reduced.

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