As a consequence the Joint Administrators were ordered to repay the remuneration they received for carrying out their duties. This stands as a word of warning to administrators out there who are appointed at the behest of a board.
A brief background to the case
The case concerned an appeal, by the creditors of a company in administration, to overturn the High Court's decision that the appointment of the respondent Joint Administrators was valid.
A husband and wife were the original directors and shareholders of the Company (75% and 25% shareholding respectively). The wife transferred her shares to a company (Belvadere) incorporated in the Isle of Man in the late 80's which was subsequently dissolved in 1996. The effect of dissolution meant that the assets of this company then passed to the Crown as bona vacantia by virtue of the now section 193 of the Isle of Man Companies Act 2006. The husband transferred his shares to his son, David, and he resigned as director, meaning David was now the sole director of the Company.
It was then decided that the Company was to be placed into administration and at a directors meeting in 2013, David acting as director purported to commence the process leading to the appointment of the Joint Administrators. The minutes of this meeting record that "a quorum was present". Crucially the Company's Articles of Association provided that a quorum was formed when two directors were present.
The issue
Initially it was argued successfully in the High Court that the Duomatic principle would override what the Company's Articles of Association said in relation to the quorum requirements.. By way of back ground the Duomatic principle established that where shareholders who have a right to attend and vote at a general meeting agree to something that could have been approved at a general meeting but otherwise was not, that agreement is binding as a resolution as if it had been made at a general meeting. David asserted that as a sole director of a single member company, all shareholders had voted and so this negated the need for complying with the Company's Articles of Association.
Notwithstanding reliance on the Duomatic principle it was also argued and agreed in the High Court that the Company's Articles had been informally varied by reference to the members conduct.
This argument however failed in the Court of Appeal on the basis that the word "member" in the reading of the relevant statute (Company's (Table A-F) Regulations 1985 Schedule 1 paragraph 40, and in the Companies Act 2006 ss.112-113, 123, 127 & 318) included any member registered in the Company's register of members, alive or dead, in an insolvency procedure or dissolved. Obviously a dissolved company cannot actively participate – however their successor in title could and in this case would essentially be the Crown as they were holding Belvadere's 25% shareholding. As a result David was not the sole shareholder of the Company.
The Duomatic principle that the respondents relied upon would have effectively allowed them to informally vary the Company's Articles so that as a single member company there would only need to be a quorum of one director. However, as set out above, the court found that on the reading of the Duomatic judgment there is a requirement to have the assent of "all shareholders who [had] a right to attend and vote at a General Meeting". As Belvadere (and by extension the Crown) was not notified and nor was their vote cast in relation to the appointment of the administrator's, the Duomatic principle could not be relied upon. Belvadere was still technically a "member" and even though incapable of casting a vote this was irrelevant in the circumstances, as their shareholding could not just be ignored.
Therefore the minutes from the board meeting advising that the meeting was quorate was incorrect when read in conjunction with the Company's Articles. The appointment was thus invalid.
The failure to adequately update the record of members meant that David was not the sole registered shareholder. Potential use of section 123 (2)(a) & (b) Companies Act 2006 (which provide for a company to potentially become a single member company provided the appropriate procedure is followed) was missed.
Hindsight is a wonderful thing
When the company was dissolved, under Manx law, the assets of that company pass to the Crown as bona vacantia – in order to effectively deal with the shares that were in that Company's name it would have been beneficial for the other shareholder to restore Belvadere to the register and effect a share transfer so that they were in fact holding 100% of the shares in the Company and the register of members should have been updated accordingly as quickly as possible to reflect this. They then could have updated the Company's Articles of Association in relation to the quorum requirement.
From the perspective of an Insolvency Practitioner, who is inevitably only going to get involved when the company is in trouble, it is important that they check that the directors who are seeking to appoint them as administrator can pass such a resolution by virtue of their Company's Articles and pursuant to paragraph 22 of Schedule B1 of the Insolvency Act 1986. However if this is not the case and there is time to do so, the company may be able to amend the articles or seek the required quorum to enable it to pass the required resolution.
It should be kept firmly in mind that the Director's power to appoint an administrator cannot be without regard to the Company's Articles.
In the event that an appointment cannot be validly made pursuant to paragraph 22, an alternative option would be to consider making an application to the court.
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