Pui -Kwan v Kam-Ho & Ors

The court decided that Melodious Corporation, a British Virgin Islands company with a branch registered in the United Kingdom, was never validly placed into administration because the board meeting said to have resolved to appoint an administrator was inquorate under the company’s articles. The purported appointment therefore amounted to a nullity and rule 7.55 of the Insolvency Rules 1986 could not rescue it. The judge also considered the date and effect of conversion notices under paragraph 83 of Schedule B1 to the Insolvency Act 1986 and held that a conversion notice sent before expiry of an administrator’s term will trigger paragraph 83 notwithstanding any delay in registration by the Registrar, but that factual preconditions for such an outcome were not satisfied on the material before the court. The judge found that the administrator had failed to check the articles of association and that the stakeholder funds were not thereby protected from transfer by any valid administration or liquidation.

Background and parties:

• Applicant: Esther Chan Pui-Kwan, a director and 51% shareholder of Melodious Corporation.
• Respondents: Gilbert Leung Kam-Ho, Melodious Corporation, HSBC Bank plc and Simon Geoffrey Paterson (the insolvency practitioner).

Nature of the application: An application to determine (A) the status of Melodious (whether it had been validly placed into administration or liquidation and whether Mr Paterson was administrator or liquidator) and (B) the disposition of monies in a joint stakeholder account ordered to be paid into court in earlier proceedings; remedies sought included rectification of the register and transfer of the stakeholder funds and an order for costs against Mr Paterson.

Key factual background: Melodious is a BVI company owning Hill House. Two directors (the applicant and her mother) were on the register. In October 2007 forms were filed purporting to register a UK branch and minutes recorded a directors’ meeting on 29 October 2007 authorising out-of-court appointment of Mr Paterson as administrator under paragraph 22(2) of Schedule B1. Forms and notices were sent to Companies House and to the court; later, in October–November 2008, Mr Paterson sought to convert the administration into a creditors’ voluntary liquidation by filing Form 2.34B, but Companies House records showed Form 2.35B had been entered and there was dispute about the timing and receipt of the correct conversion notice.

Issues framed by the court:

• Whether Melodious was ever validly placed into administration (validity of the directors’ resolution given the company’s articles and attendance of Madam Ho).
• Whether any purported administration was properly converted into creditors’ voluntary liquidation by the effect of a Form 2.34B conversion notice sent or registered before the expiry of the administrator’s one‑year term.
• What should be done with the stake-holder account funds.

Court’s reasoning and conclusions:

• The articles required both directors to be present for a directors’ meeting to be quorate. The judge concluded, on the balance of probabilities, that Madam Ho did not attend the meeting on 29 October 2007 and that the meeting was therefore inquorate. The purported resolution to appoint an administrator was a nullity.
• Because there never was a valid decision of the directors to appoint an administrator under paragraph 22(2), there were no insolvency proceedings to which rule 7.55 could be applied to cure a formal defect: rule 7.55 cannot salvage an appointment that is a nullity. The administrator’s failure to check the articles was a critical causative factor.
• Separately, the judge analysed the position under paragraph 83 of Schedule B1 and authorities (Re E Squared, Globespan, Re Property Professionals). He adopted the view that a conversion notice sent before expiry of the administrator’s term will trigger paragraph 83 even if registration occurs after expiry, to avoid dependence on postal vagaries. However, on the facts before him he concluded that the evidence did not establish that a conversion notice had been received by Companies House before the expiry of the administrator’s year and, in any event, the administration had been invalid from the outset.
• The court concluded that transfer of the stake-holder account monies to another account under the control or direction of the parties was not precluded by any valid administration or liquidation of Melodious.

Procedural observations: The judge noted the tight timetable, wasted time on irrelevant allegations and warned about fixed-ended trials and potential adverse costs consequences for irrelevant material.

At first instance the court held that Melodious Corporation was never validly placed in administration because the purported directors’ meeting of 29 October 2007 was inquorate under the company’s articles and therefore the appointment of an administrator was a nullity; rule 7.55 of the Insolvency Rules 1986 could not validate that nullity. The court further held that transfer of the stakeholder funds was not prevented by any administration or liquidation. The judge also explained that a conversion notice sent before expiry of an administrator’s term will, in principle, satisfy paragraph 83 of Schedule B1 even if registration by the Registrar occurs later, but that the factual preconditions to rely on that principle were not established on the evidence in this case.