Court: security just one factor when appointing administrators

Out-Law Legal Update | 07 Dec 2020 | 11:00 am | 3 min. read

Holders of a qualifying floating charge must consider all of the circumstances surrounding the terms of the charge when appointing administrators, the High Court in London has ruled.

In the case before it, a deed of priority included a condition precedent which required the junior creditors not to take 'any step' to enforce its floating charge without the prior written consent of the senior creditors'. It was on this basis, along with the point that senior creditors' written consent would not be obtained if sought now, that the enforceability of the junior creditors' floating charge was ruled null and invalid.

  • The court ruled that the junior creditors' qualifying floating charge was not "enforceable" within the meaning of paragraph 16 of Schedule B to the Insolvency Act 1986 (IA86) at the time of the appointment of administrators.
  • Advisors must consider all of the surrounding circumstances, not just the terms of the floating charge, when appointing administrators.
  • Arlington Infrastructure Ltd & Anor v Woolrych & Ors [2020] EWHC 3123 (Ch) 19 November 2020.

Arlington Infrastructure Ltd is a parent company with subsidiaries operating within the energy sector. Part of Arlington's role was to raise finance and lend money to its subsidiaries. It obtained funds from certain parties that took fixed and floating security from Arlington and its subsidiaries (the junior creditors). Other parties that advanced funds only took floating security from Arlington itself (the senior creditors).

By deed of priority dated 20 September 2019 (the DoP), it was agreed that the qualifying floating charge held by the senior creditors would rank ahead of the floating charge security held by the junior creditors in respect of the assets of Arlington. The junior creditors also agreed under the terms of the DoP that they would not take any step to enforce any security interest, which included its security over the subsidiary companies, without the prior written consent of the senior creditors.

Notwithstanding this, in September 2020, the junior creditors purported to appoint administrators over the subsidiary companies out of court without first obtaining consent. Arlington argued that by failing to obtain consent, the floating charges had not become "enforceable" and the appointments therefore did not comply with paragraph 16 of Schedule B1 to the IA86. That paragraph states that "an administrator may not be appointed under paragraph 14 while a floating charge on which the appointment relies is not enforceable".

The questions for the court to consider were:

  • whether the appointment of administrators constituted "enforcement" of the security – the junior creditors argued that they had not breached the DoP because no steps had been taken to enforce;
  • the meaning of "enforceable" under paragraph 16;and
  • if the security was not enforceable was the appointment invalid or was it capable of being cured by the court?

In dismissing the first point, the court relied on the Court of Appeal's decision in the case of SAW (SW) 2010 Ltd v Wilson concluding that an out of court appointment of an administrator under paragraph 14 amounts to enforcement of the floating charge. It held that it would make no sense for paragraph 16 to provide that an administrator may not be appointed under paragraph 14 while the floating charge on which the appointment relies is not enforceable.

In considering the meaning of "enforceable" under paragraph 16 of Schedule B1 to the IA86, the court also rejected the junior creditors' argument that it is not permissible to look outside the floating charge itself and the relationship between chargor and chargee. The court ruled that the meaning has to be assessed objectively and that such assessment involves consideration of all the circumstances including the terms of the debenture or other security document between the parties, any collateral contract or agreement, whether between the parties or between the floating chargeholder and a third party, any promissory estoppel and any statutory provision.

On that basis, the DoP could not be ignored – the junior creditors agreed they would not take any step to enforce their security against the subsidiaries without first obtaining the prior written consent of the senior creditors. This agreement represented a condition precedent to the enforcement of their security.

Lastly, the court ruled that the appointment of administrators under an unenforceable floating charge constituted a fundamental defect and on the basis that consent would not be provided if sought now, the "purported appointments were a nullity and cannot be cured".

This decision offers clarity on the meaning of 'enforceable' in connection with paragraph 16 of Schedule B1 to the IA86. Advisors must not only consider the terms of the debenture but also all of the surrounding circumstances, including any collateral contract or agreement, any promissory estoppel, and any statutory provision.