Insolvency Update

This article first appeared in Solicitors Joural.

Majority Rule

In the case of Minmar (929) Ltd –v- Khalastchi and another [2011] EWHC 1159(Ch) the Court considered whether an out of court appointment of administrators, made by the directors of a company, was valid where the decision of the directors was not taken in accordance with the company's Articles of Association.

The decision to appoint administrators was made by the majority of the directors of the company but the decision was made without a proper board meeting, no notice of the meeting had been given to directors, there was no quorum and only one person was in attendance.

The effect of Paragraph 105 of Schedule B1 of the Insolvency Act 1986 is that, where something is to be done by the directors of a company, it is to be done by a majority of the directors. The court held that this did not mean that the majority of directors could dispense with the rules of internal management set out in the Articles of Association. On these grounds it was held that the appointment was invalid and should be set aside.

In addition, the appointment was found to be invalid on the grounds that notice of intention to appoint an administrator was not given to the company. It was argued that this was not necessary since this is merely an additional obligation imposed by Insolvency Rule 2.20(2), to be complied with only in circumstances where persons entitled to appoint an administrator or administrative receiver were to be served with such notice, in compliance with Paragraph 26(1) of Schedule B1. The Court considered that the additional persons to be served with notice would be concerned with this whether or not there were persons to be served under Paragraph 26(1) and that notice should be given regardless. It was noted that there is no prescribed form or period of notice specified. As no notice was given to the company at all, the appointment of administrators was considered invalid on this ground too.

The Court acknowledged that it is difficult to reconcile paragraphs in Schedule B1 when trying to determine the notice that needs to be given. However, this decision gives some clarity as to the practice that the Court expects to be adopted in circumstances where the Insolvency Act is not only ambiguous but contradictory.

Moral Hazard

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