Lending focus – March 2021 – 4 / 7 观点
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.
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.
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]."
This case referred in particular to:
As per the case of SAW (SW) 2010 v Wilson  EWCA Civ 1001, the question of enforceability is critical.
In SAW, the enforceability was determined upon two conditions being met:
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.
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 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.
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.
To discuss the issues raised in this article in more detail, please reach out to a member of our Banking & Finance team.
作者 Cheng Bray