Court allows retrospective administration following invalid extension
Lord Braid has granted a backdated administration order against a company operating care homes after it was discovered that the previous administration had been extended invalidly.
This is the second opinion issued by Lord Braid in recent weeks connected with extended administrations, and both have involved issues concerning notices given to creditors.
The most recent opinion, issued in connection with the Petition of Methodist Homes for an administration order in respect of MHA Auchlochan, has its roots in an administration started in May 2023 and which had been extended in May 2024. It was subsequently discovered that, due to an oversight, the administrators had failed to obtain consent from all secured creditors when extending the administration. This rendered the extension invalid, leaving the company without a valid administrator in place since then.
The secured creditors who had not been contacted to obtain consent in this case were somewhat unusual. The securities arose from occupancy licence agreements at a residential retirement village which provided for the part repayment of the licence fee in certain circumstances, the repayment being secured by standard security over the property subject to the licence agreement. These standard securities had not been registered at Companies House.
As Lord Braid puts it, “in blissful ignorance of the invalidity [of the extension]” the administrators continued acting as administrators and operating the business in good faith, during which they concluded missives for the sale of the care home and progressed the sale of other assets.
Upon discovering the error, the administrators sought legal advice and the petitioner, Methodist Homes (MHA), applied for a retrospective administration order.
Recognising the public interest and the lack of authority on the issues under Scots law, Lord Braid has helpfully provided a written opinion with full reasons for his decision.
Court's Consideration
In considering the request for a backdated administration order the key issues which Lord Braid had to take into account included whether it was both competent and appropriate to grant a retrospective administration order, whether normal service and intimation requirements could be dispensed with, as well as considering the impact of the previous administration on the conduct of any new administration.
In setting out his consideration and decision, Lord Braid considered firstly whether it was necessary or appropriate to dispense with normal service and intimation requirements. As an approach this is clearly pragmatic as it is necessary to consider whether third parties should have knowledge of and be able to make representation to the Court in connection with the request for the order.
The court dispensed with these requirements due to the unique circumstances, including that all affected parties, except the Keeper of the Registers of Scotland, were informed of the petition and had no objections, the error in the original administration extension was technical and unintentional, there was some urgency to legitimise the “administrators'” actions and the lack of prejudice to any party.
On the substantive matter of whether a new administration order could be made and the appointment backdated. the court was satisfied that the criteria for making a new administration order were met. The company remained unable to pay its debts, the administration continued to be the best course of action for creditors and residents, and it would allow completion of ongoing asset realisations.
Lord Braid did have some reservations about the interpretation of the relevant legislation (Paragraph 13(2) of Schedule B1 to the Insolvency Act 1986) which allows the court to order that an administration shall take effect at a time appointed by the order. However, he acknowledged the established practice of granting retrospective orders to rectify procedural errors.
Lord Braid stated:
"While I share the misgivings expressed by others, not least because a natural reading of paragraph 13(2) is that it has prospective effect only, I also recognise that the practice of making a retrospective administration order to rectify a defect in the widest sense is long-established, and that for good pragmatic reasons."
He ultimately granted the retrospective order, concluding that he was persuaded “but only just” as to the competency of the order being sought, with the administration appointment taking effect from May 2024. In this way the actions carried out by the administrators after the lapsed administration because of the error in extending the administration were able to be legitimised and potential legal complications would be prevented.
Finally, Lord Braid agreed that in the circumstances it was appropriate to waive the requirements for the new administration to issue a statement of proposals and that the statement of proposals issued in the original administration be treated as the approved proposals for the purposes of the new administration.
He also waived the requirement that the administrators seek a statement of affairs of the company and ordered that any subsequent extension of the administration must be sought by application to the court.
Conclusion
While it is helpful to see that the Court has a willingness to find pragmatic solutions to rectify errors, it is perhaps worth noting that Lord Braid did express some significant reservations. It is perhaps therefore a fine line that is being trodden between what might be acceptable and unacceptable circumstances giving rise to the court applying their discretion.
This case also serves as a reminder that office holders need to act as soon as any error or defect is identified. The prompt and robust response to the error identified by the administrators, together with the somewhat unusual and unique circumstances surrounding the identification of the secured creditors, was undoubtedly taken into account by the court when considering their discretion to make the administration order.
Finally, the case acts as a further reminder of the need to pay very close attention to the identification of secured creditors and to obtain all secured creditors consent when seeking the extension of an administration. Failure to do so will result in an administration ending and its resulting consequences. It is somewhat unrealistic to expect that the court will always take a pragmatic approach in response.
