2020年12月8日

Lending focus – December 2020 – 8 / 8 观点

Appointing administrators: victory for secured lender

Briefing

High Street Rooftop Holdings Limited (the Company) was part of a group of companies known as the High Street Group, which carried on real estate activities such as the development of residential apartments and construction, and the ownership of hotels, bars and restaurants.

On 13 June 2018, the Company entered into a secured term loan facility agreement with Strategic Advantage SPC as lender (the Lender) (the Facility Agreement). Under the Facility Agreement, the Applicant made funding of approximately £100 million available to the Company in tranches.

The outstanding amounts were repayable 18 months from the drawdown date of the relevant tranche and interest accrued at a fixed rate of 16.5%.The first tranche of £17,885,000 was repayable by 12 December 2019 and the second tranche of £9,033,909.36 was repayable by 13 January 2020. The Facility Agreement was secured by fixed and floating charges created by a debenture dated 13 June 2018 (the Debenture).

The Company failed to make the capital repayments on the due dates, which resulted in several events of defaults.
The Lender applied to the Court for an administration order to be granted in relation to the Company on the basis that:

it was a debenture holder
events of default had occurred under the Facility Agreement
this made the Debenture enforceable, and therefore
it was entitled to appoint an administrator under paragraph 14 of Schedule B1 of the Insolvency Act 1986.

In Strategic Advantage SPC v High Street Rooftop Holdings Limited [2020] EWHC 2572 (Ch), the Company submitted that the Court should refuse the application.

Firstly, it contended that no event of default had occurred because the parties had agreed to an oral variation of the Facility Agreement and/or the Lender was estopped from relying on its terms.

Secondly, it argued that the Court should refuse to exercise its discretion on the basis that repayment in full would be made to the Lender, in due course. The insolvency requirements under the Insolvency Act had therefore not been met.

Here, we address the Company's second line of defence.

Schedule B1 – relevant provisions

Qualifying floating charge – paragraph 14

Under paragraph 14(2):

"…a floating charge qualifies if created by an instrument which -

(a) states that this paragraph applies to the floating charge,

(b) purports to empower the holder of the floating charge to appoint an administrator of the company…"

Under paragraph 14(3):

"…a person is the holder of a qualifying floating charge in respect of the company's property if he holds one or more of the company's debentures of the company secured -

(a) by a qualifying floating charge which relates to the whole or substantially the whole of the company's property…"

Out-of-court appointment – paragraphs 14 and 18

Under paragraph 14(1):

"The holder of a qualifying floating charge in respect of a company's property may appoint an administrator of the company"

Under paragraph 18(1):

"A person who appoints an administrator of a company under paragraph 14 shall file with the court -

(a) a notice of appointment…"

Under paragraph 18(3):

"The notice of appointment must…be accompanied by a statement by an administrator -…

(b) that in his opinion the purpose of administration is reasonably likely to be achieved…"

Purpose of administration – paragraph 3

Under paragraph 3(1):

"The administrator of a company must perform his functions with the objective of -

(a) rescuing the company as a going concern, or

(b) achieving a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being in administration), or

(c) realising property in order to make a distribution to one or more secured or preferential creditors.

Application to the Court for administration under paragraph 35..."

Under paragraph 35(2):

"The court may make an administration order -

(a) whether or not satisfied that the company is or is likely to become unable to pay its debts, but

(b) only if satisfied that the applicant could appoint an administrator under paragraph 14."

Judgment

Qualifying floating charge and enforceability issues

The Debenture satisfied paragraph 14(2) because under its terms, the parties had agreed that paragraph 14(1) applied to the floating charge created by the document, and the Lender was entitled to appoint an administrator. There was "no doubt" in the Judge's mind that the Debenture was a qualifying floating charge.

The Debenture was enforceable because the Company had failed to make repayment on the due dates, which was an event of default. This was subject to the Company's arguments relating to variation and estoppel, but these were unsuccessful.

Could the statutory purposes be ignored?

The Lender made its application to the Court under paragraph 35 rather than paragraph 11 presumably because there was some doubt over the Company's insolvency. Under paragraph 11, the Lender would have needed to satisfy the Court that the Company was or was likely to become unable to pay its debts (ie insolvent).

The Lender contended that on an application for the appointment of an administrator under paragraph 35, it did not need to satisfy the Court that there was a real prospect of the statutory purpose of administration being achieved. Such an administrator was "in a special position by reason of being [appointed on the application of] a qualifying charge holder".

The Court did not accept the Lender's argument.

Paragraph 35 stipulated that:

The Court needed to be satisfied that an administrator could be appointed under paragraph 14.
Paragraph 18, which sets out the requirements for an out-of-court appointment to be made under paragraph 14, provided that the administrator needed to make a statement that in his opinion, the purpose of administration was reasonably likely to be achieved. This statement would need to accompany the notice of appointment.

This meant that the statutory purposes in paragraph 3 could not be ignored. There needed to be a real prospect of the statutory purpose being achieved irrespective of the paragraph under which the administration order was sought; the administrator would need to perform his functions with the three objectives set out in paragraph 3 of Schedule B1 in mind.

The Court saw no reason why the requirements for a court-appointed administrator under paragraph 35 would differ from the appointment of an out-of-court administrator under paragraph 14.

Was there a real prospect of achieving the statutory purpose?

The Court then looked to whether the objectives of administration would be achieved.

The administrator should, in fulfilling his duties, first seek to achieve (a) then (b) and then (c), subject to the provisions of paragraph 3 (see above). The Court held that it was satisfied that at least one of the statutory purposes would be met and was satisfied that if neither (a) nor (b) were met, there was "at the very least" a real prospect of the administration achieving (c) and providing a return to secured creditors.

But wait, there's more…

Even though all the requirements of paragraph 14 were met, the Lender still needed to establish that the making of the order would be an appropriate exercise of the Court's discretion.

The Company made representations that:

An administration order would severely impact its chances of completing ongoing development projects.
Cross-defaults would surely result on other secured creditor action, triggering the appointment of LPA receivers over PRS projects in Salford and Newcastle. This in turn would mean increased costs, impacting on administrators' realisations and less influence for the administrators over those developments.
If the Company were permitted to carry on and finish its PRS developments, it could repay the Applicant in full, with a surplus. It drew the Judge's attention to Re Imperial Motors UK Ltd (1989) 5 BCC 214, where the Court declined to use its discretion to make an administration order where the creditor was "sufficiently secured" to the extent that it could, by realising its security, achieve payment in full without a court-appointed administrator.
300 full-time employees and around 1,000 sub-contractors would potentially lose their jobs.
The construction of thousands of new homes, commercial properties and hotels would cease.

The Court decided in favour of the Lender, taking the view that Imperial Motors could easily be distinguished on its facts. The Company had not filed audited accounts since December 2018; its predictions of being able to repay in full were based on management accounts. It could not demonstrate to the Court's satisfaction that it could meet either interest or capital repayments.

It was "wrong to deny the [Lender] the right to enforce the terms of the Debenture" when the Company's debt was "far from sufficiently secured". A return to secured creditors would be more likely achieved if licensed insolvency practitioners, rather than if the Company's existing management, were in control of the Company.

However, as the Court mentioned that the Lender was "far from sufficiently secured" in its reasoning, it's unclear if a different conclusion would have been reached if that had been the case.

Comment

If the UK economy heads into recession, this is a scenario that could become a road well-travelled. The Court's views on the borrower's representations are therefore very relevant and noteworthy. Lenders may derive some comfort from the Court's robust defence of secured creditor rights and the successful outcome for Strategic Advantage.