Auteur

Cheng Bray

Senior professional support lawyer

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Auteur

Cheng Bray

Senior professional support lawyer

Read More

9 mars 2021

Lending focus – March 2021 – 4 de 7 Publications

Creditors in the spotlight – court holds the line on priorities

  • Briefing

In Arlington v Woolrych, the failure by a junior creditor to gain the prior written consent of senior creditors pursuant to a Deed of Priority rendered the appointment of administrators invalid.

Facts 

Arlington Infrastructure Ltd (AIL) and its subsidiaries operated in the energy sector. Strategic Advantage SPC, a segregated portfolio company (the Junior Creditor) lent £39 million to AIL. The monies were secured by security given by AIL and its subsidiaries. The relevant debentures contained qualifying floating charges (QFCs). 

Another group of lenders (the Senior Creditors) subsequently lent approximately £5 million to AIL. This was secured by a qualifying floating charge over AIL.

On 20 September 2019, the Senior Creditors and the Junior Creditor entered into a Deed of Priority. 

In August 2020, the Senior Creditors appointed administrators over AIL; in September, the Junior Creditor purported to appoint administrators over AIL's subsidiaries. 

AIL and the Senior Creditors (the Applicants) submitted that the appointment of administrators by the Junior Creditor over the subsidiaries of AIL on 28 September 2020 was invalid due to the terms of the Deed of Priority. 

Deed of Priority 

This contained the following clauses:

"Except with the prior written consent of the Senior Creditors, the Junior Creditors shall not…

9.1.4. take any step to enforce any Junior Security Interest, whether by appointing a Receiver, exercising its power of sale or otherwise; or

9.1.5 present, or join in, an application for an administration order or a petition for a winding-up order to be made in relation to [AIL] or initiate, or support, or take, any step with a view to any voluntary arrangement or assignment for the benefit of creditors or similar proceeding involving [AIL] or issue a notice of intention to appoint an administrator or appoint an administrator of [AIL]."

Insolvency Act 1986 (the IA) 

This case referred in particular to: 

  • Paragraph 14 of Schedule B1, permitting qualifying floating charge-holders to appoint administrators out of court.
  • Paragraph 16 of Schedule B1, qualifying this right in requiring the floating charge to be enforceable.
  • Paragraph 18(2)(b) of Schedule B1, requiring a declaration to be made that the QFC was enforceable on the date of appointment. 

Enforceability 

As per the case of SAW (SW) 2010 v Wilson [2017] EWCA Civ 1001, the question of enforceability is critical. 

In SAW, the enforceability was determined upon two conditions being met:

  • that an Event of Default had occurred, and
  • the procurement of the prior written consent of the senior creditors pursuant to the Deed of Priority. 

The Applicants submitted that "the meaning and effect of clause 9.1.4 of the Deed of Priority could not be clearer". The purported appointment of administrators over the Group's subsidiaries amounted to the Junior Creditor taking a step to enforce its security, in breach of the terms of the Deed of Priority. Furthermore, a floating charge holder was not able to appoint an administrator at a time when it did not have the right to enforce its floating charge.

Junior Creditor's arguments

It is worth taking a closer look at the Junior Creditor's defences, as well as the Court's treatment of these arguments. They can be summarised as follows: 

  • The appointment of an administrator did not amount to "enforcement" of security. Administrators could also be appointed by the company itself or its directors.
  • Appointing administrators did not fall within the ambit of clause 9.1.4 of the Deed of Priority. Clause 9.1.5 contained an express prohibition on appointing administrators. If the preceding sub-clause was also meant to 'sweep in' appointments of administrators, this would make clause 9.1.5 redundant.
  • The subsidiaries of AIL were not party to the Deed of Priority, and clause 9.1.4 was a contractual promise made by the Junior Creditors to the Senior Creditors. The Group's subsidiaries were third parties and had no contractual right to set up a defence to the enforceability of the QFCs as against the Junior Creditor.
  • Clause 2.6 of the Deed of Priority meant that the senior creditors were estopped from challenging the enforceability of the Junior Creditor's QFCs over the subsidiaries.
  • Even if the Court were to determine the Junior Creditors' QFCs as being unenforceable, this should be considered a procedural irregularity, rather than a nullity of the appointment. The irregularity should be cured by allowing the administrators to remain as administrators to the subsidiaries while the administrators of AIL, appointed by the Senior Creditors, should also remain in post.

Judgment

The appointment by the junior creditors of administrators was held to be invalid. 

The Judge held that the appointment did indeed amount to an enforcement of the security. Otherwise, Paragraph 16 of Schedule B1 would not make any sense. 

The Applicants' submission concerning whether the QFC was or was not enforceable needed to be assessed objectively and within the context of all the circumstances. This included considering the terms of any security, any collateral contract or agreement and any statutory provision. The terms of the Deed of Priority were "part of the surrounding circumstances" and could not be "ignored".

Clause 9.1.5 dealt with AIL only, whereas 9.1.4 was much wider, and restrained "any step" to enforce the Junior Creditor's security.

Neither did Clause 2.6 preclude Senior Creditors from challenging the enforceability of the Junior Creditor's security. The former were not seeking to challenge whether the floating charge held by the Junior Creditor was enforceable but rather, whether it was enforceable because it was not subject to any condition precedent.

Finally, the Judge decided that the failure to obtain prior written consent, not least because it would not have been provided by the Applicants, went beyond a mere procedural irregularity and was deemed to be a fundamental defect.

Comment

Lenders can breathe a sigh of relief that in this judgment, contractual certainty and the terms of priority arrangements between senior and junior creditors prevailed. 

Obtaining capital from different lender groups is often a commercial necessity for borrowers. The postponement of junior creditors' enforcement rights will invariably be critical to getting senior creditors on board. 

As the Judge pointed out in this case, the Junior Creditor willingly chose to fetter its ability to enforce its security by entering into the Deed of Priority, presumably in order to make the deal palatable for senior lenders. 

Find out more

To discuss the issues raised in this article in more detail, please reach out to a member of our Banking & Finance team.

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