Administrators can be validly appointed to a company by the holder of a floating charge which was given by the company in breach of a negative pledge in favour of an existing secured creditor and even if, both at the time of the purported creation of that floating charge and on the day of the purported appointment of administrators, the company had no assets which were the subject of the floating charge.
So held the Court of Appeal in considering a challenge, brought by shareholders and unsecured creditors, to the validity of the appointment of administrators made by Nationwide Building Society under a second ranking floating charge.
The case is a useful reminder of some fundamental points of law that underpin the right of a secured creditor to appoint administrators under the Insolvency Act 1986, including (i) what constitutes a floating charge, (ii) when a charge becomes enforceable and (iii) what the effect is of the automatic crystallisation of an earlier floating charge.
This decision of the Court of Appeal will be welcomed by secured lenders as confirmation that the conditions to be met for a secured creditor to appoint administrators using the ‘out of court’ route are exhaustively set out in paragraphs 14-16 of Schedule B1 to the Insolvency Act 1986 and without any need to consider what assets may be caught by the creditor's floating charge.
See below for more information on the decision (Saw (SW) 2010 Limited and another v Wilson and others, 25 July 2017).
SAW (SW) 2010 Ltd & Anor v Wilson & Ors
Issue of law
The Court of Appeal had to consider a single issue of law, namely: whether the purported appointment of administrators of a company was invalid.
Background
In brief, the background to the case was as follows.
Nationwide Building Society (“Nationwide”) was the holder of a debenture dated 9 May 2008 (the “Debenture”) over a company called Property Edge Lettings Limited (the “Company”) as successor to Derbyshire Building Society (“DBS”).
The Company had previously, on 18 December 2007, given security to another party, Capital Home Loans Limited (“CHL”). That security included a negative pledge under which the Company was prohibited from giving any other security without CHL’s prior written consent. It also included a provision under which, if the negative pledge was breached, CHL’s floating charge would automatically take effect as a fixed charge.
Neither the Company nor DBS obtained the consent of CHL to the grant of the Debenture, with the result that the automatic crystallisation clause outlined above was triggered.
The Company experienced financial difficulties and, on 27 January 2012, Nationwide purported to exercise its rights under paragraph 14 of Schedule B1 to the Insolvency Act 1986 (“para 14”) to appoint administrators to the Company. Prior to doing so, Nationwide obtained the consent of CHL in accordance with paragraph 15 of Schedule B1 to the Insolvency Act 1986 (“para 15”).
An application challenging the appointment of the administrators was launched on 24 June 2015.
Decision
The appeal was dismissed and accordingly it was found that the administrators had been validly appointed. Briggs LJ gave the leading judgment. Arden LJ concurred with the decision, although with a slightly different analysis.
Analysis
The issue turned on two questions:
- whether the Debenture created a qualifying floating charge (“QFC”) within the meaning of para 14; and
- whether, if so, the floating charge created by the Debenture was, or was not, enforceable on the date of the purported appointment of the administrators.
The main arguments made by the appellants to challenge the validity of the administrators’ appointment were:
- the Debenture held by Nationwide was granted without the prior written consent of the holder of an earlier floating charge which caused a simultaneous crystallisation of the floating charge contained therein;
- accordingly, there was not at the time of grant of the Debenture any property to which the floating charge contained therein could attach and the directors had no power to acquire any property for the Company to which it could attach in the future; and
- the Debenture was not enforceable at the time of the appointment of the administrators because there remained no property of the Company to which, even then, the floating charge created therein could attach.
In short, all of these arguments were rejected by Briggs LJ.
As well as considering the relevant statutory provisions (para 14 and para 15), Briggs LJ returned to the leading cases relating to the characteristics of a floating charge, namely re Yorkshire Woolcombers Association Limited [1903] 2 Ch 284 and Spectrum Plus Limited [2005] 2 AC 680. Briggs LJ found that nothing in those cases lent any support to the appellants’ argument that the validity of an instrument created as a floating charge depends upon the existence of uncharged assets of the company creating it or upon the power of the company to acquire assets in the future free from any fixed charge arising from the crystallisation of a prior floating charge. He found that: ‘On the contrary, both those leading cases concern the alternative classification of a charge as a fixed or as floating, by reference simply to the construction of the relevant instrument creating the charge’ (para 24 of the judgment).
Furthermore, Briggs LJ found that Re Croftbell Ltd [1990] BCC 781 directly contradicted the appellants’ argument. Briggs LJ found that Vinelott J’s analysis in that case made two perceptive points:
- the company may well wish to grant a floating charge for the purposes of setting itself up in business by borrowing working capital, before it has any significant assets to which the charge can attach; and
- a prior fixed charge over all or part of the company’s assets nevertheless leaves a subsequent floating charge to attach to the company’s equity of redemption under the fixed charge i.e. when the prior fixed charge is redeemed, the subsequent floating charge may be valuable security.
It was held that, assuming that the entirety of the Company’s assets were subject to simultaneous fixed charges caused by the crystallisation of the floating charge granted to CHL, nonetheless the Debenture was a QFC at the time of its creation because, on its true construction, it manifested the essential characteristics identified by Romer LJ in re Yorkshire Woolcombers Association Limited and affirmed by House of Lords in the Spectrum Plus case.
It was further held that, although there is no direct authority or academic commentary on the point as to the effect of the automatic crystallisation of an earlier floating charge upon a later floating charge, such as there is ‘tends to affirm the view that provisions in the earlier charge affect only the priority rather than the validity of the later floating charge’(para 28 of the judgment).
As for the question of enforceability, Briggs LJ held that the requirement in paragraph 16 of Schedule B1 to the Insolvency Act 1986 (“para 16”) that the floating charge relied upon for the appointment of administrators “be enforceable” is concerned with the question whether the charge has the right to enforce, rather than with the question whether there are free assets to which the chargee can have recourse for the purposes of enforcement: ‘A floating charge is in my judgment enforceable if any condition precedent to enforcement has been satisfied (such as an event of default) and there remains a debt for which the floating charge stands as security’ (para 33 of the judgment). Briggs LJ also relied on the fact that the procedure in para 15 (junior creditors’ right to appoint with consent of prior ranking creditors of their consent) plainly assumes that a second or lower-ranking floating charge may authorise the appointment by the chargee.
Comment
A key right for a secured lender is its right, if the circumstances so require, to appoint administrators to the company and to do so using the ‘out of court’ route provided for in para 14. This, older readers will recall, was the quid pro quo for secured creditors losing the right to appoint administrative receivers under security created after September 2003 under the reforms made by the Enterprise Act. It is important, therefore, for secured creditors to have absolute clarity as to the conditions they must meet to be able to exercise that right and without an application to court. This case is helpful in confirming that para 14, para 15 and para 16 exhaustively set out the statutory conditions that must be met in order for the holder of a QFC to appoint an administrator. In particular, there is no additional condition that there must be assets available within the floating charge at the time of its creation or enforcement.
SAW (SW) 2010 Ltd & Anor v Wilson & Ors [2017] EWCA Civ 1001 (25 July 2017)
