A matter of form in administrations

Following the introduction of schedule B1 to the Insolvency Act 1986, the use of administration as a simple, quick and cost effective route to insolvency has been on the rise. Schedule B1 allows floating charge holders, companies, directors and creditors to appoint an administrator. Administrations are predominantly at the behest of floating charge holders, a company or the company’s directors. It is these administrations this article focuses upon.

The speed and simplicity of administration is founded upon the use of forms designed for use in a variety of circumstances. The forms can be found online at the Insolvency Service website http://www.insolvency.gov.uk/forms/scotlandforms.htm.

There are a number of forms for appointment of an administrator by floating charge holders, namely forms 2.4b(Scot), 2.5b(Scot) and 2.6b(Scot). Similar forms are for use by companies/directors, namely forms 2.7b(Scot), 2.8b(Scot) and 2.9b(Scot).

A brief summary of the forms is as follows:

• 2.4b(Scot) – used for a floating charge holder where there are other prior ranked floaters to whom intimation is required. This form is lodged in court then served upon the prior ranked floaters giving them 2 days’ notice of the proposed administration.
• 2.5b(Scot) – used for a floating charge holder (i) after the notice of the 2.4b(Scot) has expired, or  (ii) where prior ranked floating charge holders have consented or (iii) there are no prior ranked floaters.
• 2.6b(Scot) – used for a floating charge holder in similar circumstances to 2.5b(Scot) but used for an out-of-hours appointment. Essentially, the form is faxed to court then the principals lodged with an explanation as to why an out-of-hours appointment was necessary.
• 2.7b(Scot) – this mirrors form 2.4b(Scot) for an application by the company or directors. An important difference is that the company or directors give five days’ notice to the holders of floating charges.
• 2.8b(Scot) – used by a company or directors after notice of the 2.7b(Scot) has expired.
• 2.9b(Scot) – used by a company or directors where there is no floating charge holder.

Once the form is completed it is submitted to court for endorsement. There is no need for a sheriff to be troubled with the application. The court’s function is carried out by the sheriff clerk. Perhaps in view of the lack of judicial involvement, it is of the utmost importance that the correct form is used for the situation in hand. As the forms are so similar in most regards, it is all too easy to pick up the wrong style for submission to court. The use of the correct form is mandatory (see sched B1, paras 18 and 29, and rules 2.9 and 2.16 of the Insolvency (Scotland) Rules 1986).

What to do when errors are made

There are no reported decisions so far as the writer is aware of the court determining the effect upon administration of a failure to use the correct forms. However, it is likely that the courts would take a firm line that an appointment is invalid where the statutory requirements have not been complied with.

A similar approach has been taken in considering the validity of appointment of a receiver by the holder of a floating charge (see Elwick Bay Shipping Co v The Royal Bank of Scotland Ltd 1982 SLT 62, where Lord Allanbridge reduced the instrument appointing a receiver when it was executed by the bank’s law secretary, who was not one of five named individuals specified in the bond and floating charge, notwithstanding that the law secretary had the bank’s authority to sign on behalf of the named individuals).

In circumstances where the incorrect forms have been used at the outset, it is likely that the administrator will have gone about the business of the administration on the strength of the clerk of court’s stamp on the (incorrect) form. Indeed, it is plausible that the entire administration may run from start to finish without any objection being taken to the purported appointment.

However, the consequences of an invalid appointment are potentially very serious. The purported administrator might face delictual liabilities and claims for breach of contract. Any transactions concluded by the administrator will be challengeable for want of capacity to contract. The statutory framework provides that if the administration is invalid, the court may require the appointer to indemnify the purported administrator (see sched B1, paras 21 and 34). That may be of scant comfort where the appointer is an insolvent company.

Should the error come to light then it is prudent to take steps right away to remedy the defect. An application can be made for the court to exercise its discretion to waive the failure to comply with the requirements of sched B1 and to allow the correct form to be substituted. In common with other insolvency proceedings, the court has a wide discretion in terms of s 63 of the Bankruptcy (Scotland) Act 1985 to cure defects in procedure.

Conversely, if one is acting for a company or directors where the intervention of a floating charge holder has not been welcome, or perhaps another disgruntled floating charge holder or creditor, then the mere fact that an administration appears to have been endorsed by court should not be taken as conclusive evidence that the appointment is not challengeable. A fine toothcomb taken over the application may yield a line of challenge.

Given the apparent ease of completing a form for submission to the sheriff clerk, complacency is an obvious danger. The perception of clients may be that the forms are easy to complete and need to be submitted right away. There can be a lot of pressure on the practitioner to turn round an instruction immediately. Perhaps the old adage, less haste more speed, is apt. The endorsement of the application by the court provides no comfort that the niceties of sched B1 and the rules have been complied with. Practitioners in this area of law should take extra care when submitting forms for administration. As with any other area of practice, attention to detail and accuracy are key.