Introduction
There have been two court decisions where the court was required to consider whether an office holder should have sought the consent of paid secured creditors to extend the period of administration under paragraph 76 of Schedule B1. In both cases the court determined that the administration period had been validly extended and the consent of the paid secured creditors was not required.
Seeking an extension
Paragraph 76 of Schedule B1 to the Insolvency Act 1986 ‘Automatic end of administration’ states the following –
“76(1)The appointment of an administrator shall cease to have effect at the end of the period of one year beginning with the date on which it takes effect.
(2)But–
(a)on the application of an administrator the court may by order extend his term of office for a specified period, and
(b)an administrator’s term of office may be extended for a specified period not exceeding one year by consent.”
Paragraph 78(1) of Schedule B1 to the Insolvency Act 1986 states the following –
“78(1)In paragraph 76(2)(b) “consent” means consent of–
(a)each secured creditor of the company, and
(b)if the company has unsecured debts, the unsecured creditors of the company.
(2)But where the administrator has made a statement under paragraph 52(1)(b) “consent” means–
(a)consent of each secured creditor of the company, or
(b)if the administrator thinks that a distribution may be made to preferential creditors, consent of–
(i)each secured creditor of the company, and
(ii)the preferential creditors of the company.]
(2A)Whether the company’s unsecured creditors or preferential creditors consent is to be determined by the administrator seeking a decision from those creditors as to whether they consent.]
…”
The key phrase here is ‘each secured creditor of the company’.
The Insolvency Service
Since the introduction of The Insolvency (England and Wales) Rules 2016 (the “Rules”), there have been debates amongst the profession as to whether a secured creditor whose debt is subsequently paid ceases to be a secured creditor for the purposes of Schedule B1 to the Insolvency Act 1986 and the Rules, and therefore whether their consent is required to amongst other things, an administration extension. Several respondents, including R3, to the First Review of the Insolvency (England and Wales) Rules 2016: Call for evidence asked the Insolvency Service to clarify the position. In its reply published in April 2022: First Review of the Insolvency (England and Wales) Rules 2016 the Insolvency Service said…
“It has been the Government’s position for some time that the classification of a creditor is set at the point of entry to the procedure and that this remains, even if payment in full is subsequently made. We believe that to legislate away from this position could cause more problems than it would seek to solve. Accordingly, the Government has no plan to change its long-standing view on this matter.”
It is because of this statement that the administrators in both cases (set out below) sought confirmation from the court that the relevant administrations had been validly extended when the consent of one of the secured creditors had not been obtained.
Re Pindar Scarborough Ltd (in administration) 2024 EWHC 908 (Ch) (13 March 2024)
ICC Judge Prentis heard an application by administrators for an extension of the administration period. As part of that application the court was also asked to make a retrospective appointment, if necessary, if a potential flaw in the earlier extension by consent meant that the administration has not been validly extended.
The administrators had previously extended the administration by consent having obtained the consent of the company’s secured creditor (who was unpaid), and the preferential creditors. However, the administrators did not get the consent from Barclays Bank plc, who had been repaid in full after the administrators’ appointment. With Barclays having confirmed to the administrators that they no longer had a secured interest and were not in a position to consent to the administrators’ fee proposals – having at that point been paid in full – the administrators did not then seek consent from Barclays when extending the administration by consent.
In light of the Insolvency Service’s Report (see above) the administrators asked the court to consider whether a retrospective appointment was necessary because if the consent of Barclays should have been obtained there was concern that the first consensual extension was invalid.
The question for the court was “what is meant by “secured creditor” in the context of paragraph 78(2)(b)(i)?”
The court considered the definition of secured creditor which is set out in s248(b) of the Insolvency Act 1986 (which is applied to Schedule B1 by virtue of s8 of the Act) taking note of the language of that section which is framed in the present tense. S248(b) defines a secured creditor as “a creditor of the company who holds…a security” and the judge decided that a creditor who had once held security would not be within the definition. Therefore, at the time that paragraph 78 was engaged, the court found that Barclays was no longer a creditor within the definition of s248 and as such the consensual extension was valid.
In this case there was one other secured creditor who had not been paid and who did consent to the first extension. The consent of the preferential creditors was also required and that was obtained. There was no issue with either of those consents.
Boughey & Anor v Toogood International Transport and Agricultural Services Ltd (Re Insolvency Act 1986) [2024] EWHC 1425 (Ch) (11 June 2024) (Link)
The factual background of this case is similar in some respects to Pindar above. The administrators made an application to court to extend the administration having previously extended the administration by consent from one secured creditor and the unsecured creditors – a paragraph 52(1)(b) statement having been given.
In this case however the administrators had not sought consent from two other “secured” creditors – one of which had been paid following the administrators being appointed, the other’s debt had been transferred prior to the appointment (the charges register at Companies House not reflecting this on appointment). The administrators took the view – having taken legal advice – that they did not need the consent of these creditors because they had no economic interest in the administration.
HHJ Paul Matthews also examined the definition of a “secured creditor” in s248, agreeing with ICCJ Prentis view but also saying that: “A secured creditor is defined as “a creditor … who holds … a security”. Even if one were to construe “security” as including a reference to a security for a debt of zero ….section 248 still refers to “a creditor”. A creditor who has been repaid is no longer “a creditor””.
HHJ Paul Matthews concluding that:
“A secured creditor is one who is owed a debt that is secured. Any creditor whose debt has been paid off is ex hypothesi no longer a creditor, and therefore no longer a secured creditor. Nothing in the legislation suggests, let alone compels, the conclusion that the position is to be governed only at the point of entry into the administration process. And, as it seems to me, that is as it should be. Only those who have an economic interest in the outcome should be concerned to make decisions about the continuance of the administration. There is no reason why a commercial organisation such as a bank that has been repaid in full should have to be bothered thereafter with making administration decisions that do not affect it. Why should it spend its time, unremunerated, in doing so?”
HHJ Matthews went on to say this about the Insolvency Service’s view about the classification of creditor
“If the Government wishes there to be a different result, then it must legislate more clearly than it has done, and moreover explain why those with no economic interest in the outcome of an administration should nevertheless determine what happens. In the meantime, I hold that a secured creditor whose debt is paid off ceases to be a secured creditor for the purposes of Schedule B1 of the 1986 Act, and its consent is no longer needed for any decision requiring the consent of such a creditor. No prejudice can be or is caused to such a person by not obtaining its consent.”
R3’s Position
Whilst the decisions, on the face of it, are welcomed by the profession, it is important to note that the persuasive weight of these judgments is likely to be limited, as each was argued on one side only and was accordingly reached without the benefit of adversarial argument. Although judges considering the point in the future are likely to be willing to have regard to them, strictly speaking the cases are not citable as authorities pursuant to the ‘Practice Direction (citation of authorities) [2001] 1 W.L.R 1001’ for this reason. [Updated 8 August 2024]
Neither do they address questions such as: “what if all secured creditors have been paid in full?” or “is a consent valid if the secured creditor is only owed £1?”. The court was not asked to consider these questions, because they were not an issue in either case.
Given that it is unclear how these decisions could be applied in other factual circumstances and that they lack authority, until there is further clarity on this point – by way of legislative change or further case law – members should seek legal advice on which creditors they should obtain consent from when seeking to extend an administration by consent.
R3 is also aware that the language in rule 18.18 of the Rules reflects the language in para 78 of Sch B1 of IA86. For the reasons given above, members should seek legal advice in respect of which creditors they should obtain consent from when seeking remuneration approval.
Given the findings in these cases which conflict with the views of the Insolvency Service and given the resulting uncertainty. R3, will be liaising with the RPBs and The Insolvency Service to see what can be done to make the position clearer for the profession.
Note – Whilst every care has been taken in its preparation, this note is intended for general guidance only, and does not constitute legal advice.