To appoint an administrator, directors require authority and must give notice to the Company of their intention to appoint an administrator.
A company can enter administration by one of two routes. Either by a formal petition made in court or by the out-of-court procedure whereby certain documents are simply filed at court. The latter method can only be exercised by the company itself, the company director or the holders of a qualifying floating charge over the company assets (paragraphs 14 and 22(2) Schedule B1 of the Insolvency Act 1986).
In a recent decision by the High Court of Justice in England, the court struck down the decision of company directors to appoint an Administrator to the company because they had failed to comply with the company's Articles of Association and had not given notice of their intention to make the appointment to the Company.
In Minmar (929) Ltd v Khalastchi and another  EWCH 1159 (Ch) a majority of the directors decided to place the company into administration using the out-of-court method. The decision was made without a board meeting and dissenting directors were not informed. Further, no notice of the directors' intention to appoint an administrator was served on the company itself. The appointment of administrators was set aside by the High Court following a challenge by a dissenting director.
The court ruled that a single dissenting director could challenge the decision of a majority of the directors to appoint an administrator.
The court held that whilst paragraph 105 of Schedule B1 of the Insolvency Act 1986 provides that something done by the majority of the company directors will be construed as being done by the directors as a whole, this cannot be interpreted as validating an act that was contrary to the company's Articles of Association. Minmar's Articles stipulated that the directors must act either uniformly or through authority granted from a formal board resolution. In this case neither of these occurred and consequently the directors lacked the authority to appoint the administrator.
Furthermore, the court ruled that paragraph 28 of Schedule B1 of the Insolvency Act 1986 requires the company to give notice to prescribed persons, including the company itself, of the intention to appoint a administrator in every case. Indeed, notice must still be given even where, as was the case here, there are no qualifying floating charge holders. In this case Minmar failed to give notice of the purported appointment to the company itself and the appointment was therefore invalid.
Prudent insolvency practitioners should therefore ensure that there is clear board approval for an out-of-court administration appointment by a company's directors or, alternatively, seek their appointment by the company itself, a qualifying floating charge holder or the court. If the proposed appointment is not following a unanimous decision of the directors of the company then the insolvency practitioner(s) should check the articles of the company to establish the position relating to voting rights and disputes before accepting the appointment.
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.