In the recent case of Minmar (929) Limited and Teejinder Paul Chohan v Freddy Khalatschi and Martin John Atkins [2011] EWHC 1159 (Ch), a director of Minmar applied to the High Court of Justice Chancery Division for an order setting aside the appointment of Administrators by the directors using the “out of court” route. The application was opposed by the directors who had appointed the Administrators. The Administrators adopted a neutral stance.
Minmar Background
Minmar was incorporated in January 2010 to operate a gambling business. Minmar’s Articles of Association provided, amongst other things, that:
- decisions of directors could be taken at directors’ meetings by majority, or in writing where unanimous;
- directors had to be given notice of meetings (though not necessarily in writing); and
- the quorum at a directors’ meeting was 1 if there was a sole director and 2 if there was more than 1 director appointed.
Events leading up to appointment
Towards the end of 2010, Minmar unsuccessfully attempted to purchase a number of gambling businesses out of administration. These acquisitions ultimately failed due to lack of funding. They were acquired by a competitor, Baleday. Minmar had paid a substantial non-refundable deposit and remained the owner of the licences necessary to operate the targeted businesses.
Following on from the failed acquisitions, agreements were entered into which would later become relevant to the appointment of the Administrators.
A number of events took place on 16 March 2011. The share capital in Minmar was transferred to the competitor company, Baleday. Three new corporate directors were appointed to Minmar on the basis of a resolution passed by Baleday. A Board Meeting was held and one party attended, representing one of the corporate entities appointed as a director of Minmar that day. At the Board Meeting, a resolution was passed to place Minmar into administration. The notice of appointment was lodged on 17 March 2011, and a copy was sent to Minmar’s solicitors by email around 4pm that day. Also on that day, the Administrators agreed to sell the licences held by Minmar to Baleday.
Challenging the Administrators’ appointment
The validity of the appointment of Administrators was attacked on a number of grounds including:
- the three new directors appointed to Minmar on 16 March 2011 were not validly appointed;
- even if they were validly appointed, they did not form a majority, as there were three pre-existing directors of Minmar;
- the pre-existing directors were not given notice of the Board Meeting so it was not validly convened;
- the Board Meeting was not quorate;
- the decision of the new directors was not in Minmar’s interests and was therefore a breach of fiduciary duties; and
- no notice of the intention to appoint administrators was given to Minmar under paragraph 26 of Schedule B1 of the Insolvency Act 1986.
Defending the validity of the Administrators’ appointment
A number of arguments were put forward to support the validity of the appointment including:
- one director out of six did not have standing to bring the application to challenge the appointment;
- reference to paragraph 105 of Schedule B1 dealing with majority decisions of directors was a defence to the suggestion that the meeting was invalidly called and that there was no quorum; and
- the obligation to give notice to parties including the company under paragraph 26(2) of Schedule B1 which only arises where there is an obligation under paragraph 26(1) to give notice to the floating charge holder.
The decision
The Court concluded that the Administrators’ appointment was invalid and ought to be set aside for the following reasons:
- paragraph 105 of Schedule B1 does not validate the appointment of the Administrators. In addition, no notice of the Board Meeting was given to the existing directors. The ”meeting” which was held was therefore invalid and no quorum was present. Paragraph 105 is designed to give force to a majority decision (as if it were unanimous) but it goes no further than that; and
- no notice was given to Minmar as required by paragraph 26 of Schedule B1 and Insolvency Rule 2.20 (the Scottish equivalent being 2.13 of the Scottish Insolvency Rules). The appropriate course in the case of a directors’ appointment is to give notice to the company regardless of whether there is a floating charge holder with power to appoint.
Lessons to learn
When contemplating a directors appointment, the company’s memorandum and articles need to be carefully reviewed to ensure all provisions are complied with, particularly where the Articles are extensive and onerous. The current officers of the company should also be confirmed.
Notice should be given to the company in the case of a directors’ appointment whether or not there is also a floating charge holder to notify in order to avoid any challenge as to validity by a dissenting director.