Irwin Mitchell Experts Highlight The Importance Of Recent High Court Ruling For Insolvency Practitioners

A recent decision of the High Court should serve as a reminder to Insolvency Practitioners that actual consent of the secured creditors is necessary to extend an Administration and that an extension by deemed consent will be deemed to be deficient and ineffective.

The decision in (1) Jason Daniel Baker (2) Geoffrey Paul Rowley v Biomethane (Castle Easton) Ltd [2019] EWHC 3298 (Ch) confirms that actual consent is necessary but that, helpfully, in some very rare cases, the Court may cure any deficiency in extending the Administration and therefore, validate the extensions.

The rules relating extending an Administration

An Administration will automatically terminate after a period of 12 months after the day the company entered Administration. However, an Administrator can seek an extension if further time is required to complete the purpose of the Administration either on the application of an Administrator, the Court may make an order to extend the term or it may be extended by consent (Schedule B1 Paragraph 76(2)(b) of the Insolvency Act 1986) (the Act). 

Schedule B1 Paragraph 78(1) of the Act further provides that such consent means consent of the secured and unsecured creditors of the company.

S246ZF of the Act applies where a company’s creditors need to make a decision which is not required to be made by a qualifying decision procedure under the Act or by virtue of a court order and which does not relate to remuneration. 

Facts

Biomethane entered into Administration in August 2017 with the purpose that a secured lender of the company would provide funding to enable a trading administration whilst negotiating with the other lender (who was also majority shareholder) to refinance.

When the negotiations stalled in July 2018, the Administrators sought to extend the Administration for a further year by utilising the provisions of s.246ZF of the  Act, namely a deemed consent procedure. However, although they obtained the consent of the unsecured creditors by "seeking a decision" from those creditors, and had used the deemed consent procedure for that purpose, they also used this procedure to obtain the consent of each secured creditor. That consent from the secured creditors had to be actual consent and the deemed consent procedure was not available to obtain it. 

The Administration continued to trade resulting in £2.8million being paid to unsecured creditors but in August 2019, the Administrators made an application to Court for a further extension of the Administration and it became apparent that the original extension in July 2018 was ineffective.

Held

It was held that the Court had jurisdiction to make a new Administration Order with retrospective effect to essentially ‘cure’ any deficiencies in the first extension. However, the decision was given with a health warning that the Court should apply extreme caution before exercising that retrospective jurisdiction.  

Conclusion

This recent decision acts as a reminder going forward that consent to an extension must be obtained by actual consent of the secured creditors and that deemed consent would not be effective to secure that consent. For any Administrations that have already been extended pursuant to Schedule B1 Paragraph 76(2)(b) of the Act, it may be worthwhile checking that the correct procedure was followed at the time.

Should there be any issues where actual consent was not obtained, an application for an Administration Order with retrospective effect (such as the one in Biomethane above) could be sought, however, it is worth bearing in mind that whilst the Courts presently have the apparent jurisdiction to make such an Order, the case law is clear that it should exercise that jurisdiction with extreme caution and it is subject to review/new precedent if such an application ever goes to the Court of Appeal. It is likely that the decision in Biomethane was influenced by the fact that there had already been a high value of distributions to unsecured creditors and the extension had not caused prejudice to the creditors.