UK: Directors Of A Company In Administration Retain Residual Powers To Challenge Appointment Of Administrators

Last Updated: 2 August 2011
Article by Damien Bechelli

A recent case brought before Lord Glennie in the Outer House of the Court of Session has determined and clarified two distinct matters relating to paragraphs 14 and 74 of Schedule B1 to the Insolvency Act 1986 (the "Act").

Firstly, it confirmed that where a company is in administration, the Company and the board of directors retain residual powers which include instructing solicitors to challenge the appointment of an Administrator.

Secondly, it confirmed that a floating charge is a "qualifying floating charge" if any one of the sub-sections in Paragraph 14(2) of Schedule B1 to the Act are satisfied.

Facts of the Case

The Petition sought to challenge the validity of the appointment of Administrators by The Royal Bank of Scotland pursuant to a floating charge created in favour of the Bank.  The Petitioner argued that many of the transactions executed by the Bank purportedly pursuant to a loan agreement with the company were invalid.

Paragraph 74 of Schedule B1 to the Act provides that a creditor or member of a company in administration may apply to the court claiming that the Administrator is acting or has acted or proposes to act in a way which would unfairly harm his interests.

Lord Glennie considered the use of paragraph 74 of Schedule B1 to the Act and disagreed that this provision acted as a prohibition against a company in administration or officers of such a company from bringing proceedings to reduce the appointment of Administrators.  In coming to this conclusion, Lord Glennie found that paragraph 64 of Schedule B1 to the Act, whereby neither a company in administration nor an officer of such a company may exercise a "management power" without the consent of the Administrator, would not have the effect of preventing the Company bringing proceedings to reduce the appointment of the Administrators. Instead, this provision is designed to prohibit the exercise of a power which would interfere with the exercise of the Administrators' powers and an action which merely calls into question whether the Administrators were validly appointed (and therefore whether they even had any powers to exercise in the first place) would not be caught by this prohibition.

Furthermore, following the decision of Plowman J in Re Union Accident Insurance Co Ltd [1972] 1 WLR 640, Lord Glennie confirmed that the board of directors of a company retain residual powers which include the power to instruct solicitors and counsel to oppose a petition for winding up a company and also to act in interlocutory proceedings including a motion to discharge a provisional liquidator.  It was therefore held that such residual powers held by the board of directors could be exercised in the course of challenging the appointment of an Administrator.

The Petitioner sought to raise a second averment in respect of the floating charge created in favour of the Bank.  The Petitioner referred to Paragraph 14 of Schedule B1 to the Act.  In particular, paragraph 14(1) entitles the holder of "a qualifying floating charge in respect of a company's property" to appoint an administrator of the company.  Paragraph 14(2) of Schedule B1 defines a qualifying floating charge as follows:-

"For the purposes of sub-paragraph (1) a floating charge qualifies if created by an instrument which:-

  1. states that this paragraph applies to the floating charge;
  2. purports to empower the holder of the floating charge to appoint an administrator of the company;
  3. purports to empower the holder of the floating charge to make an appointment which would be the appointment of an administrative receiver within the meaning given in section 29(2); or
  4. purports to empower the holder of the floating charge in Scotland to appoint a receiver who, on appointment, would be an administrative receiver."

While it was conceded by the Petitioner that the floating charge in question met the requirements of 14(2)(b), it was argued that this was not sufficient and that the charge also had to comply with 14(2)(a).  This argument was rejected by the Court on the basis that the wording of paragraph 14(2) makes it very clear that a floating charge "qualifies" if (a), (b), (c) or (d) are satisfied.  Lord Glennie held that the use of the word "or" indicated that the four sub-paragraphs were disjunctive and therefore only one requires to be satisfied for the floating charge to qualify.  The Court confirmed that a conjunctive approach to the sub-paragraphs would negate the entire purpose of paragraph 14(2).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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