Re LYHFL Limited 2023 – What you need to know

In the recent case of Re LYHFL Limited [2023] EWHC 2585 (Ch), the High Court has considered the proper interpretation of paragraph 12(1)(b), Schedule B1 of the Insolvency Act 1986, by which directors can apply to court for an order putting the company into administration.

Drawing on previous authorities concerning this and similar provisions, the Court concluded that an individual director has no power to make such an application without the approval of the majority of the company's directors and a valid board resolution.

Facts

Ms Boura and Mr Harmer were the only directors and shareholders of LYHFL Limited (LYHFL). Ms Boura alleged that LYHFL was or was likely to become unable to pay its debts and applied for an administration order under paragraph 12(1)(b) of Schedule B1 to the Insolvency Act 1986 (the Application).

Opposing the Application, Mr Harmer alleged that Ms Boura was improperly attempting to use it to engineer a "quasi pre-pack" administration without board approval. On the facts, he denied that LYHFL was in fact unable (or would likely become unable) to pay its debts. He further opposed the Application on grounds that one of two appointed directors has no standing alone to apply for an administration order under paragraph 12(1)(b).

The case came before Mr David Halpern KC sitting as a deputy judge in the High Court, where the focus centred on the proper interpretation of paragraph 12(1)(b).

Paragraph 12(1)(b)

Paragraph 12(1) of Schedule B1 to the Insolvency Act 1986 states that an application for an administration order can be made only by the persons listed in that paragraph. Among those listed are "the directors" of the company (in paragraph 12(1)(b)).

Mr Harmer argued that the term "directors" for these purposes refers to all or a majority of the directors of a company acting pursuant to a valid board resolution. He further argued that the word "only" entails that the court is not permitted to hear applications from persons not falling within one of the categories listed in paragraph 12(1).

Relying on provisions of the Interpretation Act 1978 which provide that the plural includes the singular, Ms Boura argued that the term "directors" must include one of two directors where the board is deadlocked. With respect to the word "only", she relied on the decision of Marcus Smith J in Re Brickvest Ltd [2019] EWHC 3084 (Ch) to contend that paragraph 12(1) did not create a jurisdictional barrier by requiring all or a majority of the directors to seek an administration order.

Decision

The Court dismissed the Application.

In interpreting paragraph 12(1)(b), Mr Halpern KC looked first to how that provision was originally enacted in section 9 of the Insolvency Act 1986. That section had allowed "the company, or the directors" to petition the court for the appointment of an administrator. He took guidance in this context from the case Re Equiticorp International plc [1989] 1 WLR 1010 which had been decided under that original regime. In that case, Millett J had found that, whilst the term "directors" does not require unanimity, it nevertheless requires a resolution to be passed by a majority at a properly constituted board meeting.

Mr Halpern KC noted that a similar conclusion was subsequently reached by Morritt V-C in Minmar (929) Ltd v Khalastchi [2011] BCC 485. That case concerned the appointment of an administrator out of court under paragraph 22 of Schedule B1 which, like paragraph 12(1)(b), also refers to the relevant action being taken by "the directors". In that case, Morritt V-C held that not only must a decision of the directors be a decision of all or a majority of the board, but it must also be made at a properly convened board meeting. In Mr Halpern KC view, it was clear that Morritt V-C intended the position under paragraph 22(2) to be the same as that under paragraph 12(1)(b). He further considered Minmar to have been expressly approved by the Court of Appeal in Re BW Estates Ltd (No 2) [2018] Ch 511.

The judge went on to consider the decision in Brickvest where a different approach had been taken. That case had involved an urgent unopposed application for the appointment of an administrator by the sole director of a company whose articles required it to have at least three directors. Mr Halpern KC acknowledged that Brickvest could potentially be distinguished from the earlier cases of Equiticorp, Minmar and BW Estates on grounds that it dealt with a different point, being whether the term "directors" includes a sole director in cases where, in breach of the articles, only one is appointed. However, even so, Mr Halpern KC was prepared to depart from Brickvest, noting among other things that the decisions in Equiticorp, Minmar and BW Estates did not appear to have been sufficiently brought to Marcus Smith J's attention in that case.

The judge also noted Re Nationwide Accident Repair Services Ltd [2020] EWHC 2042 (Ch) as another example of an urgent unopposed application under paragraph 12(1)(b). However, he similarly dismissed its application to the present case, having been a decision based on very specific circumstances involving a sole director and where (unlike here) reference to the Interpretation Act 1978 had been appropriate.

Comment

The reasoning in Re LYHFL Limited is consistent with the principles derived from previous authorities regarding the requirement for the majority of directors to approve, via a valid board resolution, an application for an administration order under the Insolvency Act 1986. Notably, the judge went to some length to distinguish this case from that of Brickvest and Nationwide, which he sought to confine to their specific facts and circumstances.

That being said, pending a Supreme Court decision on the point, there remains a degree of ambiguity surrounding the correct approach to paragraph 12(1)(b) applications. In our view, therefore, where possible directors should err on the side of caution and follow the guidance of this case (and the previous authorities of Equiticorp, Minmar and BW Estates), seeking majority board approval via a valid board resolution to apply for an administration order and then evidencing that approval in their application under paragraph 12(1)(b).

It also remains to be seen what the implications of this line of cases may be (if any) for interpreting statutory references elsewhere (i.e. outside of the Insolvency Act) to acts of directors.

Finally, it is not clear on the facts of this case whether, as an alternative to seeking administration, any thought was given by Ms Boura to the Court’s separate jurisdiction to order just and equitable winding up (under section 122 of the Insolvency Act 1986). Indeed, unlike paragraph 12(1)(b), standing to seek such an order extends also to the company’s “contributors”. For this reason, it is often used in scenarios where 50/50 joint ventures find themselves in deadlock and with a deadlocked board.