Care People Ltd, Re

An administrator’s appointment made before a secured demand has become enforceable may be an irregular exercise of an existing power, rather than a nullity. The court must distinguish between the absence of any power to appoint and a procedural defect in exercising that power. Where the defect is procedural, Rule 7.55 of the Insolvency Rules 1986 applies. The appointment remains valid unless the defect caused substantial injustice which cannot be remedied. In applying that test, the court must consider the interests of creditors as well as the company. A premature appointment will not ordinarily be invalidated where the company could not have satisfied the undisputed part of the demand and a valid appointment would shortly have followed.

The administrator of Care People Limited was appointed out of court by Ultimate Invoice Finance Limited, the holder of a qualifying floating charge. Ultimate had demanded payment, but the appointment was completed only six minutes after the demand was transmitted by email. The company challenged the appointment under paragraphs 14, 15 and 16 of Schedule B1 to the Insolvency Act 1986, arguing that the charge was not enforceable when the appointment was made.

The central issue was whether the premature appointment was a nullity or an irregular exercise of an existing power, and, if irregular, whether the defect caused substantial irremediable injustice.

1. The charge was a qualifying floating charge. Ultimate had, in good faith, formed the opinion that there had been a material adverse change in the company’s financial condition. The demand was therefore supported by an enforcement trigger, although insufficient time had elapsed before the appointment.

2. The appointment was probably premature and therefore irregular. Paragraph 16 of Schedule B1 prohibited appointment while the relied-on floating charge was unenforceable, but that requirement was procedural and was not fundamental to the existence of the power of appointment.

3. The court distinguished the absence of power to appoint from a defective exercise of an existing power. The former may render an appointment a nullity. The latter may be addressed under Rule 7.55 of the Insolvency Rules 1986.

4. Rule 7.55 provides that insolvency proceedings are not invalidated by a formal defect or irregularity unless substantial injustice has been caused and cannot be remedied. The premature appointment caused no substantial injustice. The company could not meet the undisputed part of the demand, and a valid appointment would have followed at most two days later. There was also potential prejudice to creditors if the administration were terminated.

5. The appointment was declared valid notwithstanding the defect, and the defect was waived so far as necessary.