When a borrower is in default and a lender is considering relying on its floating charge to appoint administrators to the borrower, there are a number of factors to consider. In this article, we look at some of the key considerations and some recent cases that highlight potential pitfalls in the appointment process.
Getting the basics right
When a lender is considering making an administration appointment, it may be helpful to keep the following questions in mind. For the purpose of this article, we have focused on the technical aspects of the appointment process. However, consideration will also need to be given to the pre-planning and strategic factors that lenders, their legal advisers and restructuring accountants will need to undertake in determining whether an administration appointment is the most appropriate course of action in any specific circumstance.
1) Is the floating charge valid and enforceable?
A security review should confirm whether a lender may rely on the floating charge and should highlight any discrepancies that may need to be addressed before enforcement action can be taken.
2) Is the borrower in default?
A floating charge will usually specify the event(s) that must occur before it may be enforced, such as a failure to pay the liabilities secured by the charge. This often means that a demand for payment will first need to be served on the borrower, and care must be taken to comply with the contractual requirements for issuing demands.
3) Who should make the appointment?
Depending on the circumstances, it may be preferable for the directors of the borrower to effect the appointment. In other cases, a lender may consider it appropriate to rely on its floating charge to appoint the administrators.
4) What is the status of the company?
It may not be possible to appoint administrators if a borrower company is already subject to insolvency proceedings. Another factor to bear in mind is that if the company carries out regulated financial services, the consent of the Financial Conduct Authority may be required before the directors of the borrower may appoint administrators (although the same restriction would not apply to a lender appointing administrators under a floating charge). There may also be other restrictions or procedural requirements, depending on the nature of the borrower’s business and any registrations that it holds, for example under the special administration regime for protected energy companies.
For companies that are not incorporated in the UK, an additional assessment will also need to be undertaken to ascertain whether administration is competent and, if so, whether it may be more appropriate to make a court application to effect the appointment rather than using the out-of-court procedure.
5) Who should receive notice of a proposed appointment?
Notice of a proposed administration appointment must be given to anyone holding a floating charge from the borrower (in the case of an appointment by directors) or to the holder of a prior floating charge (in the case of an appointment by a floating charge holder). This allows the floating charge holder to consent to the proposed appointment, take steps to appoint its own choice of administrator, or simply allow the notice period to expire.
For these purposes, a prior floating charge is one created before the charge that is being enforced and/or which has priority pursuant to the terms of a ranking or intercreditor agreement. Where such an agreement is in place, it should also be reviewed to check for any restrictions or procedural requirements for enforcement action.
What happens when notice is not given?
A series of recent cases has highlighted some of the potential pitfalls when dealing with these issues, as well as the differing attitudes of the courts in determining the consequences of a particular defect.
In Arlington Infrastructure Ltd and another v Woolrych and others, junior lenders failed to comply with a requirement under a deed of priority to obtain the senior lenders’ consent before appointing administrators to the borrowers. Although in this case the senior lenders only held security from the parent company of the borrowers, the junior lenders were still contractually bound to obtain their consent. The court held that the failure to obtain consent constituted a fundamental defect that was incapable of rectification, and therefore the administrators' appointment was void.
In contrast, in Re Tokenhouse VB Ltd, the court held that a failure by directors to give notice of a proposed administration appointment to the floating charge holder did not render the appointment void. The court concluded this breach could be cured by court order and the right of a lender to appoint its own choice of administrator should not have priority over whether the appointment proceeds at all.
Finally, in Re NMUL Realisations Ltd (in administration), a lender relied on the fact that Companies House records listed a prior floating charge as having been satisfied and did not obtain the creditor’s consent to the appointment of administrators. When it was discovered that the earlier charge had not in fact been satisfied, the court held that notice should have been given, but followed Tokenhouse and concluded that the failure to do so constituted a procedural irregularity and could be remedied.
Key takeaways for lenders and insolvency practitioners
When things go wrong, the court may be asked to determine whether a particular defect in the appointment process is fundamental and, if not, whether it is capable of remedy. These decisions make it clear that this analysis will always be fact-specific and so it can be difficult to predict how a particular defect will be categorised.
The better strategy is, of course, to plan carefully for an administration appointment to avoid any mishaps. A key stage of the planning process should be instructing a security review to confirm the validity and enforceability of the charges and help identify any obstacles to an appointment. As ever, preparation is key to achieving a smooth and effective appointment process.
If you would like more information on this subject please contact Suzanne Knowles or your usual Shepherd and Wedderburn contact.
Additional reporting by Alec Fair and Olivia Steven.