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The Court’s jurisdiction to grant retrospective administration orders and extensions

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26/02/2021

In the matter of Mederco (Cardiff) Ltd sub nom (1) Philip Francis Duffy (2) Steven Muncaster v Mederco (Cardiff) Ltd [2021] EWHC 385, is the most recent case dealing with the Court’s ability to grant a retrospective administration order and an extension of such an order.  The particular issue arose due to the potential invalidity of a purported extension to the term of office of administrators and to the administration. The Court also addressed a new issue regarding whether an administration order with retrospective effect was to be treated as having opened before or after the Brexit transition period.

What were the facts?

Mederco (Cardiff) Limited (the Company) was a special purpose vehicle established to own and develop five blocks of student accommodation incorporating 350 self-contained studio style apartments, with a community centre and boxing club on former railway sidings land in Cardiff (the Property).

To raise funding for the development, the Company invited a number of investors to buy long leasehold interests in the apartments off-plan at a discount to market value and took a sizeable deposit from the investors upon exchange of the agreements for lease. In addition the Company acquired a loan facility with the peer-to-peer lender, Lendy Limited. Construction was intended to commence in February 2018 with completion later that year.  Despite the funding, it became apparent that funds had been misapplied and the construction and development of the Property was significantly behind schedule. As a consequence of increasing pressure from the Company’s creditors, joint administrators were appointed by the qualifying floating charge holder on 17 January 2019 pursuant to paragraph 14 of Schedule B1 of the Insolvency Act 1986 (Schedule B1).

The situation is similar to a number of other companies within the Mederco group which were set-up as investment vehicles, many of which suffered a similar fate. The secured lender, Lendy, has also since fallen into administration.

The issue

It was undisputed that the administrators had been validly appointed in January 2019. Thereafter, their one-year term of office, which was due to expire in January 2020, was purportedly extended by a further year by creditor consent until January 2021. However, it subsequently emerged that the consent obtained to extend the administration may not have been effective. It was arguable that those individual investors (who, having paid a deposit upon exchange of contracts, held protected liens), whose consent to an extension was neither sought nor obtained, ought to have been recognised as secured creditors[1] for the purpose of obtaining such consent.

In November 2020, in ignorance of that possible invalidity, the Court ordered a further extension of the administrators’ term to 17 January 2022. The main reason for the extension was to allow time for the administrators, on behalf of the Company, to complete the sale of the Property on which they had accepted an offer of a sum of just over £1.5 million. That sale has yet to be completed. Since the initial extension was potentially ineffective, the administrators therefore asked the Court to retrospectively extend their term of office on the assumption that the administration ended in January 2020. The main issues that arose before Judge Davis-White QC were as follows:

  • Can the Court make a retrospective administration order?
  • Can the Court extend the period of administration with retrospective effect, either from January 2020 or from January 2021?
  • If not, in the alternative, can the Court now make two administration orders with retrospective effect, one to take effect in January 2020 and one from January 2021?

[1] section 248 of the Insolvency Act 1986

Decision of the Court

The Court held that there was at the least an arguable case that the extension was invalid because the consent of all the secured creditors was not obtained. The Court was not asked to determine the underlying issue of whether, as a matter of law, the investors ought to be treated as “secured creditors” and therefore whether the extension was, or was not, valid and effective. However, the fact that the judge believed that there was an ‘arguable case’ meant that he could proceed to look at whether the purported invalid extension could be rectified retrospectively.

The Court was satisfied, in applying well established case law, that it was able to grant a retrospective administration order. On the evidence, the Court was satisfied that the Company had been insolvent throughout the relevant period and that there was a real prospect of achieving one of the statutory purposes of administration if an order was granted. The Court was also satisfied that the applicants (as former administrators) had locus to make the application for the making of an administration order in their capacity as creditors of the Company, such position arising in respect of unpaid work carried out during the period of the valid administration. The conditions for the making of a retrospective administration order were therefore met.

However, the next question arose because if the Court were to grant a retrospective administration order commencing 17 January 2020 (being immediately upon the deemed expiry of the initial administration), that administration would itself have expired on 16 January 2021. The Court held that the effect of paragraph 77 to Schedule B1 clearly prevents any extension once the term in office has already expired.

Similarly, the Court was not, as an alternative submission, prepared to grant two consecutive administration orders, with the second commencing on 17 January 2021, which it considered would be a clear subversion of the paragraph 77 limitation.

The Court was therefore prepared to grant an administration order, but one which only took effect 364 days before the judgment date. This gave the Court the appropriate jurisdiction to extend the administration that had been put in place by the retrospective order as it was still within the 12 month initial period. The retrospective administration was therefore extended to midnight on 17 January 2022.

Impact of Insolvency (Amendment) (EU Exit) Regulations on a Retrospective Administration Order

Given the Court was prepared to make an administration order with retrospective effect, a question was raised as to the appropriate application of the Insolvency (Amendment) (EU Exit) Regulations 2019, given that the United Kingdom has now left the European Union. The Court ruled, albeit without the benefit of full argument, that proceedings are considered to have been “opened” as at the date of the Court order, not the date of the effect of such order. These proceedings were therefore opened after the date of the Brexit transition period (which ended at 11pm on 31 December 2020) so the Insolvency Rules 2016 were to be applied, as amended by the Insolvency (Amendment) (EU Exit) Regulations 2019.

WM Comment

This judgment confirms that the Court has jurisdiction to make a retrospective administration order, but it has no ability to extend such an administration after the initial 12 month period has already expired. It would not have been a desirable position to leave the administrators out of office, and the Company back in the hands of its directors, so the solution was for the retrospective administration order to take effect from a date 364 days prior to its making. The Court identified that this did leave a “gap period” between expiry of the initial administration and the effect of the retrospective administration order, so in utilising this mechanism it is essential to check no material steps or action was taken by the administrators during that period in which they were out of office.

It is disappointing that the Court were not able to give a clear judgement on the question as to whether the investors, as the holder of liens, ought to be treated as secured creditors for the purpose of consenting to the extension of an administration, but the judgement at least provides a roadmap of how an administration which may have been invalidly extended can be salvaged.

[1] section 248 of the Insolvency Act 1986

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