Challenge to lender's appointment of administrators fails in the Court of Appeal


Re Property Edge Lettings Ltd: Saw (SW) 2010 Ltd and another v Wilson and others [2017] EWCA Civ 1001

The Court of Appeal has dismissed an appeal against His Honour Judge Hodge QC's decision [1] to strike out an application which challenged a lender's appointment of administrators. The appellants maintained that at the time of the appointment the lender did not hold an enforceable and/or qualifying floating charge and so the administrators had not been validly appointed. The case considers whether a valid floating charge could be granted when a company has no assets (or at least no un-charged assets), and explores the effect of an "automatic crystallisation" clause.

Addleshaw Goddard acted in the appeal for the successful lender and the former administrators.

Background 

In December 2007, a property business, Property Edge Lettings Limited (Property Edge), agreed loan facilities with Capital Homes Limited (CHL) and granted CHL security over six flats and their rental income (CHL Charges). Each of the CHL Charges [2] contained not only a fixed charge of the relevant land and rental income but also, unusually, a floating charge over all of Property Edge's undertaking, property and assets. The CHL Charges contained clauses typical of modern bank lending including covenants not to create any security interest in the property subject to the charges without CHL's consent ("negative pledge"). There was also a specific provision dealing with the circumstances in which the floating charge would crystallise – if Property Edge "encumbered howsoever" the property subject to the floating charge without CHL's prior consent, the floating charge would have effect as a fixed charge ("automatic crystallisation").

In 2008 Property Edge sought to acquire a further site and approached Derbyshire Building Society (Derbyshire) for funding. A loan of £3.9m was offered subject to various conditions precedent including the grant to Derbyshire of a debenture and a legal charge over the new property. Neither Property Edge nor Derbyshire obtained the consent of CHL prior to the grant of the the legal charge and the debenture. Nationwide Building Society (Nationwide) later acquired Derbyshire's loan and security.

Nationwide appointed administrators over Property Edge in January 2012 (pursuant to the floating charge in Derbyshire's debenture). The following day, Nationwide's solicitors realised that there was an earlier floating charge in the CHL Charges. CHL was approached and endorsed a fresh Notice of Appointment which was also filed at Court.

Subsequently, Saw (SW) 2010 Ltd, Property Edge's shareholder and a creditor, and another creditor, Neil Wilson Accountancy Ltd, issued proceedings in the High Court seeking, among other relief, to challenge the validity of the administrators' appointment [3]. The Defendants applied to strike out the claim and the question arose of the impact of the automatic crystallisation provision in the CHL Charges on the validity and enforceability of the floating charge in the Derbyshire debenture.

The High Court decision

At the hearing before HHJ Hodge QC in December 2015 the Appellants argued as follows:

  • The legal charge in favour of Derbyshire over the new site had been signed on the morning of 9 May 2008 and the debenture had been signed in the afternoon.
  • The automatic crystallisation provision in the CHL Charges engaged when the Derbyshire legal charge was signed, such that all of Property Edge's assets (which had been subject to a floating charge) became instantaneously subject to a fixed charge in favour of CHL.
  • Accordingly, by the afternoon, Property Edge had no assets over which Derbyshire's debenture could float.

The learned judge concluded as follows:

  • The grant of the Derbyshire legal charge was not an event which triggered the automatic crystallisation of the floating charge in the CHL Charges.
  • The principle set out in the case of Abbey National Building Society v Cann [4] (an authority not referred to by counsel for either party) applied to the facts: because the monies loaned by Derbyshire were used to acquire a new property, the acquisition of the legal estate by Property Edge and the grant of the legal charge to Derbyshire had been one indivisible transaction.
  • On this analysis, Property Edge only ever acquired the equity of redemption in the new site; at no point had the site vested in Property Edge free of the Derbyshire legal charge.
  • The Derbyshire debenture contained a floating charge within the meaning of section 251 of the Insolvency Act 1986.
  • Further, the Derbyshire offer letter contained representations and warranties that: (i) Property Edge was not in default of any existing facility; (ii) entering into the Derbyshire facility would not constitute an event of default under any existing facility; and (iii) the execution of the Derbyshire facility and security would not result in it being in breach of any law, mortgage or debenture. This letter was counter-signed by Property Edge. In view of this, it was not open to Property Edge (nor its shareholders or creditors) to contend that the Derbyshire debenture was ineffective as a valid floating charge.

The Court of Appeal decision

The Court of Appeal held that the learned judge had been right to conclude that the debenture was a qualifying floating charge for the purposes of the Insolvency Act 1986 (Act) and that it was enforceable at the time the administrators were appointed, albeit for different reasons (principally because the parties' positions had developed since first instance):

  • There was nothing in the leading cases of Re Yorkshire Woolcombers Association Limited [5] and Re Spectrum Plus Limited [6] which supported the argument that the validity of a floating charge depended upon the existence of uncharged assets at the time of its creation, or the company's ability to acquire assets in the future free of fixed charges arising from the crystallisation of a prior floating charge.
  • The reasoning of the first instance decision in Re Croftbell Ltd [1990][7] was approved such that:
    • a floating charge can be validly granted by a newly formed company setting up a business by borrowing working capital before it has any significant assets over which the charge can attach; and
    • even where there is a prior fixed charge over all or part of the company’s assets, a subsequent floating charge can still attach to the company's equity of redemption which could potentially become valuable in the event that the prior fixed charge is redeemed.
  • On the issue of automatic crystallisation, the Court held that this did not impact on the validity of the Derbyshire debenture: it was simply a question of ranking as between the crystallised CHL floating charge and the Derbyshire fixed charge. Briggs LJ said that he was prepared to assume, without deciding, that the Australian case of Fire Nymph Products Limited v The Heating Centre PTY Ltd [8] would be followed such that an automatic crystallisation clause could have an immediate effect so as to create fixed charges having priority to those created by the later instrument which triggered crystallisation. Arden LJ held that crystallisation took place "instantly such an event occurs", meaning forthwith and immediately upon the occurrence of the event.[9]

To read the full judgment please click here.

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Jean Boldero

Jean Boldero

Legal Director, Business Support and Restructuring
Manchester, UK

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Judith Hughes

Judith Hughes

Associate, Business Support and Restructuring
Manchester

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[1] [2015] EWHC 4069 (Ch)
[2] (described as a "Deed of Charge")
[3] Unusually this was not a challenge by a debtor company. See Closegate Hotel Development (Durham) Ltd and another v McClean [2013] EWHC 3237 (CH) which confirms that directors have standing to cause a debtor company to mount such a challenge notwithstanding that the company is under the administrator's control. Addleshaw Goddard represented the successful appointing charge-holder.
[4] [1991] 1 AC 56
[5] [1903] 2 CH 284
[6] [2005] 2 AC 680
[7] [1990] BCC 781
[8] (1992) 1ACSR 365
[9] As the Court was constituted of only two Lord Justices, there is no binding ratio.