In this case, the court considered whether one of two directors of a company could apply to appoint an administrator without the agreement of the other director and a validly passed board resolution.
The court found that in order for a director to bring an application for an administration order, they would need authority from a valid board resolution, passed by a majority of the board of directors.
Abigal Boura (the “Applicant“) was one of two directors and shareholders of LYHFL Limited (the “Company“).
The Applicant considered that the Company was in financial distress. Accordingly, the Applicant decided that the Company ought to be placed into administration. The Applicant did not obtain approval of the other director. Nor did the Applicant obtain approval through a board resolution.
Despite this, the Applicant applied to the court for an administration order (the “Application“). Her application was made under paragraph 12(1)(b) of schedule B1 of the Insolvency Act 1986. This provision allows “the directors of the company” to apply for an administration order.
Leigh Harmer (the “Respondent“) was the other director of the Company. He disagreed with the Applicant that the Company should be placed into administration. He opposed the Application, on two grounds.
The Judge only considered the first ground on the basis that if the Respondent succeeded on that ground, then the Application would be disposed of.
The issue was whether the Applicant, as one of two directors, had standing to apply for an administration order without the agreement of the board of directors and without a valid board resolution.
The Judge reviewed case law on the meaning of “the directors of the company” and made the following observations.
First, a unanimous decision of the directors was not required. However, a majority was needed.
Second, a formal decision of the directors was required. Before a decision to place a company into administration, a valid board resolution compliant with the company’s constitution was needed.
Third, there was authority that where a company only has one director, that single director could apply to the court in urgent circumstances for an administration order, even where the articles of association required more than one director to be quorate. However, in the present case, that authority could be distinguished as the Company had two directors.
Accordingly, as the Applicant was only one out of the two directors (and so did not have the requisite majority) and a valid board resolution had not been passed, the Applicant did not have standing to bring the Application. Therefore, the Judge refused to make an administration order in respect of the Company.
This case illustrates the importance of taking all necessary steps to ensure that the applicant is actually able to initiate the appointment of administrators. In particular, consideration should be given as to whether a director has the requisite authority in accordance with the company’s Articles. It is key to check the company’s constitution to identify any limits on director decision making and also ensure a sufficient proportion of the board are in agreement as the court has no power to initiate an appointment in the absence of such agreement.
Taking the appropriate steps to ensure that board decisions are validly made, and documenting them appropriately, are vital as they court will assess this when making a decision on an application for an administration order or when considering the validity of an appointment made using the out of court process.
Advice should always be sought before making an appointment, in order to determine whether all relevant requirements have been met, or alternatively what additional steps can and should be taken.