(UK) How Qualifying Is Your Floating Charge?
by: Rachael Markham , Charlotte Møller of Squire Patton Boggs (US) LLP  -   Restructuring GlobalView
Monday, July 17, 2023

A floating charge debenture holder has the advantage that they can enforce their security by appointing their choice of administrators.  This is a powerful and useful tool for lenders but is subject to the caveat that the debenture has to be “qualifying”.

What does this mean? In short, the charge must give the lender the power to appoint administrators and be over the whole or substantially the whole of the company’s property.  In addition, the charge must be enforceable i.e. there has been default, before a lender can appoint.  Other than determining what “substantially the whole” means – for which there is no definition – it is usually relatively straightforward to determine whether a lender has a qualifying floating charge.

However, if the floating charge has not yet hardened and could (if the company were to enter insolvency) be invalid, does that mean that a charge holder can’t appoint, or that administrators appointed by such a charge holder are invalidly appointed?  In other words, what is the effect of s245 of the Insolvency Act 1986 which invalidates a floating charge that:

  • was created in the 12 months before administration (or 2 years if the charge holder is connected),
  • where no new consideration was provided, and
  • the company was insolvent at the time the charge was created (which is assumed if the charge holder is connected).

This was a point that was recently touched on in the case of Re Wilton UK (Group) Limited where the judge was asked to regularise a potentially invalid appointment where administrators had been appointed by a qualifying floating charge holder.

Can you appoint on a non-hardened floating charge?

You could take the view that a debenture holder can appoint on a non-hardened floating charge because the charge is valid at the time of the appointment, after all s245 only comes into play once the administrators are appointed.  But if it later transpires that the floating charge pursuant to which the administrators were appointed is invalid, does that then unwind the validity of the previous appointment?

There is nothing in the legislation to suggest that the effect of s245 should be taken into account at the time of appointment, but Re Wilton suggests that an appointment could be invalid if the floating charge is invalid under s245.

The judge in Re Wilton was not asked to, nor did he determine that the debenture in this case was invalid pursuant to s245.  However, the parties to the application agreed that it was, and the judge said: “I am satisfied that there are strong grounds for saying that the floating charge under which the Administrators were appointed is invalid and that therefore their appointment on 3 April 2023 is invalid”

Re Wilton suggests the effect of s245 should be taken into account at the point of appointment.  However, there was no adversarial argument on the point, even though there were strong grounds for saying the charge was invalid the judge made no finding to that effect and he also said that he had been asked to determine the question of validly he would have had more questions. The position is far from conclusive.

If an appointment could be invalid as a consequence of s245 it raises a number of other questions:

  • Whether and to what extent do you assess whether the debenture is vulnerable to attack before appointment?  Do you address any uncertainty post appointment?
  • If the debenture is to a non-connected party does the administrator also, as part of the appointment, have to assess the solvency of the company at the time the debenture was created?
  • If you should consider whether s245 applies, and whether consideration was provided, how much consideration is sufficient?  Is £1 enough?
  • Given that s245 will only invalidate a floating charge to the extent that no “new consideration” was given and therefore it could be valid in part – can a little be just enough in this case??

The answers to the above rest largely on whether s245 considerations do come into play – Re Wilton suggests they might do.

Logically, any risk here must also be  greater where the charge holders are connected persons, because in that case the hardening period is two years and there is no requirement that the company was insolvent at the time the floating charge was created for it to be invalid.

Solutions?

Any concerns could of course be addressed by the directors appointing administrators but that assumes (a) that the directors are co-operating and (b) there is no outstanding winding up petition (as there was in Re Wilton). 

Alternatively, if there is time a charge holder can apply to court for the court to appoint.  This would remove any doubt.

In cases where time is of the essence one might take the view that the appointment should go ahead on the basis that at the time of appointment the charge is valid.  It is unlikely that a court would not support an appointment if it was later challenged or if the office holder applied to court post appointment to ratify the position, particularly if an immediate appointment was in the interests of the company’s creditors to preserve the value of the business.

Any doubt about the validly of an appointment understandably makes insolvency practitioners nervous and unfortunately Re Wilton doesn’t do anything to calm that nervousness, but it does remind practitioners to think about whether the charge is “qualifying” before proceeding with the appointment. 

If this issue were to be addressed in a future case, it would be helpful to practitioners if the position were determined conclusively because there are different schools of thought about whether you can appoint on a non-hardened floating charge or not.  

In Re Wilton the judge neatly side stepped the point and granted relief based on a “worst case” scenario (that the charge was invalid) going on to make a retrospective administration appointment.   

Further reading

See our previous blog:  Is Your Appointor Entitled to Appoint? The Importance of Checking Whether There is Power to Appoint UK Administrators

 

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