UK: FCA And Administrators’ Appointments: Filing Of The Financial Conduct Authority’s Consent With The Notice Of Intention To Appoint Administrator(s)

Last Updated: 31 October 2013
Article by Melania Constable

Re: Harlequin Management Services (South East) Limited ("the Company") [2013] All ER (D) 202

The Charles Russell team recently acted for the Administrators in the above reported case.

Section 362A of the Financial Services and Markets Act 2000 ("FSMA") provides that an administrator of a company or partnership may not be appointed by way of an out of Court appointment without the consent of the Financial Conduct Authority ("FCA"). Further, any consent of the FCA must be in writing and filed at Court "along with" the notice of intention to appoint. Alternatively, in a case where no notice of intention to appoint is required then that consent "must accompany" the notice of appointment.

Section 362A of the Financial Services and Markets Act 2000 ("FSMA") provides that an administrator of a company or partnership may not be appointed by way of an out of Court appointment without the consent of the Financial Conduct Authority ("FCA"). Further, any consent of the FCA must be in writing and filed at Court "along with" the notice of intention to appoint. Alternatively, in a case where no notice of intention to appoint is required then that consent "must accompany" the notice of appointment.

The issue for consideration in this case was whether the administrators had been validly appointed having regard to the fact that the FCA's consent had been filed at Court the day after the filing of the notice of intention to appoint administrators, rather than on the same date.

The Court held that on the proper construction of s.362A of FSMA, a consent filed on the day after the filing of a notice of intention to appoint administrators can still be said to have been filed "along with" a notice of intention to appoint or to "accompany" a notice of appointment. Accordingly, a declaration was granted that the administrators had been validly appointed.

Facts

On 19 April 2013, the directors of the Company sought to appoint administrators of the Company by way of an out of Court appointment pursuant to Paragraph 22 of Schedule B1 of the Insolvency Act 1986 ("IA86").

The directors instructed their own solicitors to act on their behalf in preparing and filing the notice of intention to appoint under Form 2.8B ("Notice of Intention").

The Company acted as an international property investment agent, specialising in the marketing and sales of luxury resorts in the Caribbean. The Company was a former "Appointed Representative" of Prestbury Financial Ltd between the period 7 March 2005 and 7 July 2005 and it undertook FCA regulated activities pursuant to FSMA to carry on insurance mediation activities.

Prior to filing the notice of intention, the directors' own solicitors contacted the FCA to enquire whether FCA consent was required prior to the filing of the notice of intention. A representative of the FCA informed the solicitors that consent was not required. Relying on that advice on 22 April 2013, the solicitors filed the notice of intention at Court without FCA consent.

In fact, the advice given by the FCA to the directors' solicitors was incorrect. This is in view that s362(1)(b) of FSMA provides that the provisions of s362A (namely, the requirement for filing FCA consent) applies in relation to a company which "is, or has been, an appointed representative". In this case, even though the Company had only been an "Appointed Representative" for a short period of 4 months 8 years prior to the proposed appointment of administrators, the provisions of s362A still applied.

The following day, the FCA sent an e-mail to the directors' solicitors, informing them that the previous information had been incorrect and that (on the basis the Company had been a former "Appointed Representative" of Prestbury Financial Ltd), the consent of the FCA was in fact required pursuant to s362(1)(b) of FSMA. Together with its response, the FCA attached its consent. On the same day (23 April 2013), the directors' solicitors filed the FCA's consent with the Court.

The notice of appointment of the administrators was thereafter filed in Court by the directors' own solicitors on 3 May 2013.

The administrators' concerns

If the party purporting to make an out of Court appointment fails to comply with the appropriate procedural formalities, the appointment may be invalid and a nullity. In particular, an invalid appointment means that the acts of the (invalidly appointed) administrator will have no legal effect. Further, this could lead to claims for damages resulting from a lost sale resulting from the invalid appointment or the delay in having to reappoint.

In light of this, the administrators of the Company instructed Charles Russell to advise them in connection with the validity of their appointment.

Considering that the validity of the appointment of the administrators might be called into question because the FCA consent had not been filed on the same day as the notice of intention (on a strict interpretation of FSMA), we advised that an application should be made to the Court for a declaration that the administrators had been validly appointed.

Issues before Court

The issue for consideration was whether the administrators had been validly appointed having regard to the fact that the FCA's consent had been filed at Court the day after the notice of intention, rather than on the same date.

Counsel for the applicants argued that:

  • First, on the true construction of s362A(3)(b) of FSMA, the words "must be filed along with the Notice of Intention" did not require that consent to be filed at Court simultaneously with the notice of intention.
  • Alternatively, even if there was a defect, such defect was curable and had been cured when the FCA's consent had been filed the day after the notice of intention was filed.

Arnold J (in the Chancery Division, Companies Court) granted the application. He held that it was settled law that the words 'may not be appointed... without the consent of the Authority' in s362A(2) of FSMA clearly indicated that it was essential to obtain the FCA's consent.

However, he held, on its true construction, the wording of s362A did not compel the conclusion that the consent had to be filed at the same time of the notice of intention or the notice of appointment, as the case might be. Following the decision reached in Re Ceart Risk Services Ltd [2012] BCLC 645, (which was also presided by Arnold J), it was held that s362A(2) should not be interpreted to mean that failure to obtain prior consent of the FCA should invalidate the appointment of administrators under paragraph 22 of Schedule B1 of IA 1986.

On this basis, it was held that there was no defect in the appointment of the administrators. The Court considered that the FCA's consent had been filed at Court "along with" the Notice of Intention even though it had been filed the day after the notice of intention. Failing this, and for the same reason he gave in Re Ceart Risk, Arnold J held that if there was a defect in the appointment of the administrators by virtue of the fact that the FCA consent had been filed the day after the notice of intention, then that defect was curable and had been cured when the FCA's consent was filed the following day.

Comments

This is yet another case where the Court has examined the issue of defects in the out of Court appointment procedure and construed the statute from the "purposive" point of view - by looking at the consequences that Parliament must have intended where there has been a failure to comply with a requirement or where those consequences are not set out explicitly in the statute. The general theme of the "purposive" approach is that the Court has an inherent discretion to declare an administration appointment valid, despite any formal defects in the appointment process.

However, practitioners should still be aware that it may be possible that the decision in this case (as well as earlier authorities such as Re Ceart Risk and Re BXL Services [2012] EWHC 1877 (Ch)) could be challenged and future cases distinguished on their facts and the principles of law they concern. For example, in the Harlequin case the FCA consent was only filed one day after the filing of the notice of intention. If the Court considered that the requirements to file FCA consent were being systematically overlooked, then it might have been less ready to sympathise with the administrators.

In the absence of a declaration, any defect (however minor) in the appointment process will mean that the appointment's validity may remain open to some question. Accordingly, we consider it remains prudent to seek an order declaring the administration appointment valid in such cases.

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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