In a decision that will be welcomed both by second-ranking secured creditors and by administrators, the Court of Appeal recently held that a second-ranking floating charge (SRFC) was still capable of being a qualifying floating charge for the purposes of Schedule B1 of the Insolvency Act 1986 despite the earlier crystallisation of a prior-ranking floating charge (PRFC). In addition, the SRFC was capable of being enforceable notwithstanding the fact that there were no assets of the chargor which were not covered by the PRFC. Accordingly, the appointment of administrators by the holder of the SRFC was valid. Case: Saw (SW) 2010 Ltd v Wilson  EWCA Civ 1001
In 2007, Property Edge Lettings Limited (“PEL“) granted security to Capital Home Loans Limited (“CHL“) including a floating charge over all of PEL’s assets and undertaking, present and future (the “CHL Floating Charge“). The security was duly registered at Companies House.
The CHL security documents contained a negative pledge from PEL not to create or permit any additional security without CHL’s consent. They also provided that the floating charge would crystallise automatically if PEL encumbered any of its assets without the consent of CHL.
Despite the existence of the negative pledge, in 2008 PEL entered into new facility agreements with Derbyshire Building Society (“DBS“) and granted fixed and floating security to DBS without the consent of CHL (the “DBS Debenture“).
PEL then experienced financial difficulties. With the consent of CHL as holder of the prior ranking floating charge, Nationwide (as successor in title to DBS) appointed administrators on 27 January 2012. In June 2015, two other creditors of PEL argued that the appointment was invalid for the following reasons:
(a) As no consent to the creation of the security had been obtained from CHL, the CHL Floating Charge had crystallised automatically upon the creation of the DBS Debenture. The crystallisation meant that the DBS Debenture could not constitute a qualifying floating charge because at the time it was granted PEL had no assets that were not already encumbered by the crystallised CHL Floating Charge;
(b) Even if the DBS Debenture had created a qualifying floating charge, that floating charge was not enforceable because at the time the administrators were appointed there were no assets which could be realised under the DBS Debenture for the benefit of Nationwide, as all of PEL’s assets were charged under the crystallised CHL Floating Charge.
Agreeing with the judge at first instance, the Court of Appeal held that the appointment of the administrators was valid. On whether the DBS Debenture created a qualifying floating charge, Lord Justice Briggs concluded that:
- in accordance with the decisions in Re Yorkshire Woolcombers Association Limited  2 Ch 284 and Re Spectrum Plus Limited  2 AC 680, whether a security interest is fixed or floating depends on the construction of the instrument creating the charge. It does not depend on whether the company creating the security held unencumbered assets at the time the security was created or had the power to acquire unencumbered assets in the future;
- even where there is prior fixed security over all of a company’s assets, the subsequent floating charge can attach to the company’s equity of redemption under the prior security;
- although there is no authority precisely on the point, the general view is that automatic crystallisation of an earlier floating charge affects the priority rather than the validity of a later floating charge;
- the DBS Floating Charge was expressed to be over all of PEL’s assets and undertaking and stated that paragraph 14 of Schedule B1 of the Insolvency Act 1986 applied to the floating charge;
- accordingly, even though all of PEL’s assets were subject to the crystallised CHL Floating Charge when the DBS Debenture was created, the DBS Debenture created a qualifying floating charge for the purposes of paragraph 14 of Schedule B1 of the Insolvency Act 1986.
Where the holder of a qualifying floating charge wants to appoint administrators using the out of court process, the floating charge has to be “enforceable” (paragraph 16 of Schedule B1 Insolvency Act 1986). The applicants argued that the DBS Floating Charge was not enforceable because at the time the administrators were appointed all of PEL’s assets were subject to the prior ranking crystallised CHL Floating Charge.
Lord Justice Briggs disagreed:
- Paragraph 15 of Schedule B1 of the Insolvency Act 1986 expressly allows the holder of a second-ranking qualifying floating charge to appoint administrators. It was not relevant whether the prior-ranking floating charge had crystallised or not (and indeed it was likely that most floating charges would have crystallised by the time of the appointment);
- Paragraph 16 simply requires that the charge has become enforceable in accordance with its terms. It doesn’t require that there be otherwise unencumbered assets to which the holder of the floating charge can have recourse. Provided all conditions precedent to enforcement (such as the occurrence of an event of default) had occurred and a debt remained owing, the floating charge was enforceable. The crystallisation of the CHL Floating Charge did not prevent the DBS Debenture from being enforceable.
Although the decision may not be surprising, it does provide helpful confirmation that a floating charge can still constitute a qualifying floating charge even if there are no assets available within the floating charge at the point it is created, and that crystallisation of a prior-ranking floating charge does not deprive the holder of an enforceable qualifying floating charge from following the process set out in paragraph 15 of Schedule B1 Insolvency Act 1986 to appoint administrators using the out of court route.