Not too early, is the warning from the recent case of E Realisations 2020 Limited.
In this case, the administrators had sought consent early in the administration (2 months following appointment) at the same time that fee approval was sought and proposals were circulated. The voting form asked creditors to consent to an extension of twelve months “if required” – which they did.
At the time of seeking consent, the administrators did not know for certain whether an extension would be necessary. It turns out it was, and some 8 months after creditor consents had been provided, the administrators filed notice of the extension at Companies House.
Although an initial extension can be dealt with by creditor consent, any subsequent extension has to be ordered by the Court. It was on this application that the judge raised concern that the first extension may not be valid in light of the fact, that the notice seeking consent did not comply with rule 3.54(2) of the Insolvency Rules 2016. Accordingly, the administrators issued a second application seeking a declaration that the administration had been validly extended.
As a reminder, Rule 3.54(2) provides that when seeking creditor consent to an extension, the notice “must state the reasons why the administrator is seeking an extension”.
Was there a breach of r3.54(2)?
Obtaining consent at the time proposals are circulated does seem like a sensible way of saving additional time and costs down the line. This might also be a pragmatic way of addressing the problem sometimes faced by practitioners in obtaining consent from a secured creditor who has been paid before the end of the one-year anniversary, and therefore no longer wishes to engage with the process. However, the difficulty with this approach is that it is not always clear at the outset if an extension is required, let alone the reasons.
The consents in this case were obtained on an ‘if required’ basis and at the time of seeking consent, the administrators had not reached a final decision about whether an extension would be necessary and therefore could not state the reason for an extension, as required by r3.54(2).
In light of the recent decision in Caversham (where a similar issue arose), it was not unsurprising that the court found that the notice seeking consent was defective, and remedied the defect under r12.64. However, the main takeaway from this case, arises from the judge’s comments about the practice of obtaining consent early – can this be done and when?
When should creditor consent to an extension be sought?
The judge commented that the practice of obtaining consent as a “matter of routine” at a “relatively early stage of an administration” is unlikely to fulfil the requirements of Rule 3.54(2). In addition keeping consents in the “back pocket” to be used at a later date, also brings into question compliance with para 78(5) of Schedule B1, which requires consents to be filed as soon as reasonably practicable.
The Insolvency Rules do not spell out that administrators must have reached a firm decision before seeking consent to extend an administration, but it is clear that consent cannot be contingent (i.e. on an if needed basis) without thought as to whether an extension is required.
If administrators have applied some thought and have some reasoning as to whether an extension will be necessary then it is probably ok to seek consent at that point (even if there are still some contingencies about whether an extension will be needed) because they should be able to give reasons why an extension is likely and therefore comply with Rule 3.54(2). However, as the judge said in this case, the “practice of obtaining consent to an extension prior to the decision in question being taken would seem to make clear compliance with the Act and the Rules difficult.”
As this case, and Caversham demonstrate, failure to comply with Rule 3.54(2) is likely to mean that an extension by creditor consent will be defective. In most instances, the defect will be remediable under r12.64, but this is not ideal and leaves uncertainty regarding any further extension by court application. The court will not order an extension if the first one is defective.
Also, in different circumstances, if the court were to find that there had been substantial injustice then there is a risk that the initial extension may be invalid.
Although obtaining consent early is not ruled out, given that this is the second case, within weeks to consider whether the requirements of Rule 3.54(2) have been complied with, practitioners should exercise some caution on timing – and if in doubt, speak to advisors. What is common practice may not always reflect the legal requirements and no one wants there to be uncertainty that may cause additional (and unnecessary) cost to rectify.