Appointment of administrators: Is the lack of FCA consent prior to appointment a curable defect?

May 18, 2020

By Lisa Feng

Re A.R.G. (Mansfield) Ltd is the latest in a long line of cases considering the consequences of a defect in the appointment of administrators. The case involved a similar problem encountered in Re M.T.B. Motors Limited [2010] EWHC 3751 (Ch) where the need for FCA consent prior to the appointment of administrators was not appreciated at the time due to the manner of the initial search.

On granting the directors’ application for a retrospective appointment in Re A.R.G (Mansfield) Limited, HHJ Davis-White QC gave a detailed reserved judgment which examines the apparent uncertainty in the existing authorities as to whether the lack of FCA consent at the time of filing the notice of appointment amounts to a curable or incurable defect. This article seeks to highlight the key elements of HHJ Davis-White QC’s Judgment

What are the practical implications of this case?

In considering the consequences of a potential defective appointment and thus the route to regularising the position, it may assist to consider the five questions identified by HHJ Davis-White QC in paragraph 91 of the Judgment; namely:

1. What are the statutory requirements regarding the appointment?
2. If the statutory requirements have been breached, is the consequence, as a matter of construction of the provisions, that there is only a procedural defect or is the appointment a nullity?
3. If the appointment is subject to a procedural defect, is substantial injustice caused by what would otherwise be validation under r12.64?
4. If there is such substantial injustice, can this be remedied by Court order?
5. If the appointment is a nullity, can and should the defect be cured by a retrospective order?

Practically speaking, if a defect is not a nullity and is “curable”, the administrators may only need to seek a declaration under paragraph 104 of Sch B1 to confirm the validity of their acts. On the other hand, if the defect is a nullity and “incurable” there would need to be an application to appoint the administrators with retrospective effect in order to regularise the position.

There is ample (and unfortunately occasionally conflicting) case law on the types of defects considered by the Courts to be curable and those considered to be incurable.

The Judgment in A.R.G (Mansfield) Limited helpfully sets out in detail much of the relevant authorities dealing with defective appointments.

In the case at hand, the Court was specifically examining the issue of whether the lack of prior FCA consent made the purported appointment a nullity. To that end, amongst other things, the apparent conflicting decisions of Re M.T.B and Re Ceart Risk Services Limited [2012] EWHC 1178 (Ch) were considered. Ultimately, HHJ Davis-White QC expressed the view (albeit said to be obiter) that such lack of consent does render the purported appointment a nullity.

It would follow from this conclusion that in order to regularise the position, an application to appoint administrators retrospectively would need to be made (and the Court would need to be satisfied that such appointment was appropriate).

Although the judgment makes clear that this view is obiter, it would seem that should such circumstances involving lack of FCA consent arise, a compliant application for retrospective appointment should be at least made in the alternative to any orders seeking a declaration under paragraph 104 of Sch B1.

What was the background?

A notice of intention to appoint administrators in respect of A.R.G (Mansfield) Limited (“the Company”) was filed on 7 January 2020. The qualifying floating charge holder consented to the appointment on 9 January 2020. On 10 January, a notice of appointment was filed by the directors of the Company. On 3 March 2020, it was brought to the Administrators’ attention that during a periodic review, a search of the FCA’s financial services register was carried out. This revealed that the Company was previously an Appointed Representative but that it had been registered on the relevant FCA Register under the name “A R G (Mansfield) Limited” omitting the full-stops after each of the capital letters “A”, “R” and “G”. Previous searches prior to appointment had been carried out based upon the correct punctuation after the Company’s name.

In the circumstances, it was not appreciated prior to appointment that the Company is regulated by the FCA and that accordingly there is a requirement to obtain FCA consent under section 362A of the Financial Services and Markets Act 2000 (“FSMA 2000”). Consent was thereafter sought and granted by the FCA on 5 March 2020.

In recognition of the irregularity, the directors thereafter made an application to seek retrospective appointment of the administrators.

What did the court decide?

HHJ Davis-White QC considered the apparent conflicting decisions in M.T.B Motors and Re Ceart as to the impact of the failure to obtain FCA consent prior to appointment. In M.T.B Motors, HHJ Hodge QC concluded that the failure to lodge the consent of the relevant regulator (then the Financial Services Authority) rendered the purported appointment void and not capable of being cured under either r7.55 IR 1986 nor paragraph 104 of Sch B1. However, Arnold J in Re Ceart Risk Services Limited [2012] EWHC 1178 (Ch) considered that the lack of regulator consent was not so fundamental so as to invalidate the appointment but that the appointment took effect from the date consent was filed. Further, as regards the period between the date of the filing the original purported appointment and the date of filing the consent from the regulator, Arnold J treated the actions of the purported administrator as validated by paragraph 104 Sch B1. Unfortunately, the case of M.T.B Motors was not cited or examined in Re Ceart.

In practical terms, if the approach of Re Ceart were to be followed, there would not be any need for a retrospective appointment, the Court would merely need to declare that the actions of the administrators may be validated under paragraph 104 Sch B1.

After undertaking a detailed review of the authorities, HHJ Davis-White QC considered that in relation to the first of the five questions mentioned above, section 362A of the FSMA 2000 and paragraph 29 of Schedule B1 requires that written consent from the regulator must be obtained and lodged at the latest by (and with) filing of the notice of appointment. In relation to the second question, namely, the effect of breaching the statutory requirements, the Judge expressed a view that the appointment (in the absence of FCA consent) is a nullity (see paragraph 119 of the Judgment). However, it was made clear that this view was obiter because the practical approach in Petit v Bradford Bulls (Northern) Limited [2016] EWHC 3557 (Ch) was followed. In Bradford Bulls, there was an application for a declaration as to the validity of a purported appointment, alternatively for the making of an administration order with retrospective effect. In essence, in order to save time and with the agreement of the parties, Mann J in that case made an order for retrospective appointment (on the basis that the criteria for the same had been satisfied) without deciding whether the original purported appointment by the charge holders was ineffective or not. There was provision made in the order removing the purported administrators from office with retrospective effect insofar as necessary.

In adopting a similar approach to the Bradford Bulls case, HHJ Davis-White QC made an order appointing the administrators with retrospective effect (to the date of their original purported appointment) and if, and to the extent that their original purported appointment was only irregular and not a nullity, removing them as administrators under such appointment.

In the circumstances, the Judge considered that third and fourth questions posed above did not arise and the only issue was the fifth question, namely if the defect should be cured by a retrospective order.

The Court was satisfied on the facts of the case that a retrospective appointment was appropriate taking into account, amongst other matters the following: (a) the applicants (all the directors having been joined) had locus to apply for an administration order (b) the statutory conditions for making an administration order were made out as at the date of the hearing and (c) as a matter of discretion, an administration order was appropriate on the evidence.