The background facts to this case are relatively straightforward: a group of companies consisting of the parent (‘AIL’) and three subsidiaries (‘the Subsidiaries’) operated in the energy sector.

A lender (‘Junior Creditor’) advanced approximately £39M to AIL, secured by qualifying floating charges (‘QFC’) over AIL and the Subsidiaries. A second lender (‘Senior Creditor’) subsequently lent £5M to AIL secured by a QFC over AIL but not the Subsidiaries.

On 20 September 2019 the Senior Creditor and Junior Creditor entered into a Deed of Priority which provided that the Senior Creditor (being the second lender) would rank ahead in priority to the Junior Creditor (being the first lender). As is common in this type of arrangement, the Junior Creditor agreed to seek the written consent of the Senior Creditor before enforcing any of its security (‘the Senior Creditor Consent’).

On 17 August 2020 the Senior Creditor appointed administrators over AIL with a view to selling the shares in the Subsidiaries.

On 28 September 2020 the Junior Creditor purported to appoint administrators over the Subsidiaries, somewhat thwarting the Senior Creditor’s plan for its appointed administrators to sell the shares in the Subsidiaries. The Junior Creditor did not seek nor obtain the Senior Creditor Consent.

The crux of the issue was whether the failure to obtain the Senior Creditor Consent by the Junior Creditor meant that its QFCs were not enforceable and therefore the purported appointments did not comply with Paragraph 16 of Schedule B1, which requires the QFC to be enforceable before an administrator can be appointed. This notwithstanding that the Junior Creditor’s QFC was enforceable in all other respects, insofar as there had been an Event of Default under the QFC and, but for the Deed of Priority, the Junior Creditor was clearly entitled to appoint administrators over the Subsidiaries.

The Senior Creditor argued that the question of enforcement was an objective one which involved 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.

In this particular case, the Senior Creditor argued that two conditions precedent had to be satisfied before the Junior Creditor’s QFC became enforceable. The first was that an Event of Default had occurred (and it was accepted, it had) and the second was the Senior Creditor Consent.

The Junior Creditor asserted the appointments were valid because:

1. Appointing administrators did not constitute “enforcement” of security as a matter of law because administration “is not an enforcement procedure”;
2. On a correct interpretation of this particular Deed of Priority, taking a step to “enforce” security did not included the appointment of administrators because the relevant clause did not specifically refer to such appointment;
3. Paragraph 16 of Schedule B1 is concerned with enforceability as between the chargeholder and the debtor company, and not whether such appointment breaches a separate agreement as between chargeholders – the court cannot look outside the QFC and position as between chargor and chargee;
4. The Senior Creditor was precluded from contesting the enforceability of the Junior Creditor’s QFC – the Deed of Priority contained a common clause whereby each creditor agreed not to challenge or question the validity or enforceability of the other’s security;
5. If the Junior Creditor’s QFCs were “unenforceable” for the purpose of Paragraph 16 of Schedule B1, due to failure to obtain the Senior Creditor Consent, it was a mere irregularity which could be cured by the court and not a nullity.

The court rejected all of these arguments, finding that:

• An out of court appointment by a QFC amounts to enforcement of the floating charge. In any event, the question to be addressed is not whether administration is an enforcement procedure but whether the floating charge on which the appointment relies is or is not enforceable.
• Enforceability or otherwise of a QFC is to be assessed objectively which involved 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. The Deed of Priority is part of the surrounding circumstances in which the question of enforceability has to be determined.
• The Senior Creditor Consent was a condition precedent to enforcement of the Junior Creditor’s QFC which had not been satisfied. The Junior Creditor’s QFCs were not capable of being enforced because prior written consent from the Senior Creditor had not been obtained. The QFCs were not enforceable.
• The agreement not to challenge each other’s charges did not make any difference – the question for the court was not whether a floating charge was enforceable under the Deed of Priority, but whether a floating charge is capable of being enforced under Paragraph 16 of Schedule B1.
• This was not a mere irregularity in procedure which could be cured, it was a fundamental defect and nullity. The purported appointment of administrators was invalid.

Comment

This case emphasises the importance of properly reviewing and interpreting security (and relevant documents) before enforcement, in particular ensuring that security is properly enforceable before relying on it for appointing administrators.

All procedural and substantive requirements should be followed to the letter and if any particular provision is ambiguous then an application to the court should be made.​​​​​​