It is important to remember that, regardless of the terms of the floating charge, other documents might be relevant and require consideration ahead of any floating charge holder enforcing its rights under that charge - for example, other transaction documents including ranking or intercreditor agreements entered into with other creditors. The recent case of Arlington Infrastructure Ltd and another v Woolrych and others [2020] EWHC 3123 (Ch) is a good example as to why all transaction documents should be considered ahead of any appointment being made under a floating charge.
Arlington is a recent English High Court case so is not binding on Scottish courts but it is nevertheless worth consideration by Scottish lawyers and creditors alike if only to act as a reminder of the relationship between transaction documents and the importance of following contractually agreed procedures before taking any formal statutory steps to enforce creditors' rights. The facts of the case can be summarised as follows:
- Arlington Infrastructure Ltd ("AIL") is the sole shareholder and parent company of each of ARL 009 Limited (purportedly in administration), ARL 011 Limited (purportedly in administration) and BRK 001 Limited (purportedly in administration). As parent company AIL raises finance for the benefit of the group and typically on-lends funds to those and other companies within its group;
- Strategic Advantage SPC Arlington 1 SP, Strategic Advantage SPC Arlington 3 SP and Strategic Advantage SPC (the "Junior Creditors") provided approximately £39,000,000 by way of loan to AIL secured by debentures which included qualifying floating charges over AIL and its subsidiaries together with first fixed charges over the shares owned by AIL in its subsidiary companies;
- a group of senior creditors (the "Senior Creditors") subsequently made roughly £5,000,000 available to AIL by way of loan secured by a qualifying floating charge over AIL's assets only. The only chargeholders over the subsidiary companies' assets and their shares are the Junior Creditors;
- by a deed of priority dated 20 September 2019 (the "Deed of Priority"), the Senior Creditors and the Junior Creditors agreed that the Senior Creditors' qualifying floating charge over AIL's assets would rank ahead of the Junior Creditors' qualifying floating charge over AIL's assets;
- clause 9.7.1 of each of the Junior Creditors' qualifying floating charges provided the Junior Creditors with a power to appoint an administrator to each chargor without prior notice "if the security constituted by this deed becomes enforceable". Clause 10.1 of each charge provided that the charge became immediately enforceable if an event of default occurs (being an event of default described and set out in the underlying facility agreement which was secured by the charge);
- AIL had failed to pay interest to the Junior Creditors in the sum of £470,748.30 and on 17 August 2020 the Senior Creditors appointed administrators of AIL out of court pursuant to Paragraph 14 of Schedule B1 of the Insolvency Act 1986. Each of these events constituted an event of default for the purpose of the Junior Creditors' facility and security documents, rendering the Junior Creditors' floating charges enforceable in the opinion of the Junior Creditors;
- clause 9.1.4 of the Deed of Priority provided that "except with the prior written consent of the Senior Creditors, the Junior Creditors shall not….take any step to enforce any Junior Security Interest, whether by appointing a Receiver, exercising its power of sale or otherwise…"; and
- on 28 September 2020 the Junior Creditors appointed administrators over certain subsidiary companies. Notwithstanding the terms of the Deed of Priority, the Junior Creditors did not obtain (nor seek) the prior consent of the Senior Creditors pursuant to clause 9.1.4 of the Deed of Priority to those appointments.
The question for the Court was whether the failure to obtain prior consent from the Senior Creditors in accordance with the terms of the Deed of Priority rendered the floating charges "unenforceable" at the point of attempted enforcement. The Court was not being asked to consider injunctive relief against the Junior Creditors' action but only to consider the question of enforceability of the floating charges.
The Junior Creditors argued, for various reasons, that the appointment of an administrator did not constitute the enforcement of a security interest and therefore did not fall foul of clause 9.1.4 of the Deed of Priority. Clause 9.1.5 expressly prohibited the appointment of an administrator but only in relation to AIL and the Junior Creditors argued that, as such, clause 9.1.4 should be interpreted as not including any steps to appoint administrators to any of the subsidiary companies. The Junior Creditors also sought to have the documentation interpreted narrowly such that the question of enforceability of the floating charges would be determined only on the basis of (i) the terms of the floating charges and (ii) whether or not any trigger event specified in those charges had occurred.
The Senior Creditors argued that there were two steps to any enforcement of the floating charges by the Junior Creditor: (i) the triggers set out in each of them having occurred (i.e. the occurrence of an event of default) and (ii) prior consent of the Senior Creditors to any enforcement pursuant to the terms of the Deed of Priority. The Senior Creditors argued that the failure to satisfy (ii) meant the Junior Creditors' floating charges had not become "enforceable" at the point of purported enforcement by the Junior Creditors.
The Court decided that the question of whether the floating charge is or is not enforceable within the meaning of Paragraph 16 of Schedule B1 to the Insolvency Act 1986 (a pre-requisite for any out of court appointment under Paragraph 14) is to be assessed objectively and that such assessment involves consideration of all the circumstances including the terms of the debenture or other security document between the parties, any collateral contract or agreement, whether between the parties or between the floating chargeholder and a third party, any promise against enforcement, and any statutory provision.
Mr Andrew Sutcliffe QC sitting as a Judge of the High Court said "…the Deed of Priority is part of the surrounding circumstances in which the question of enforceability for the purposes of paragraph 16 has to be determined. It cannot be ignored. It is one of the matters which needs to be considered in deciding whether at the relevant time the floating charges on which the Junior Creditors relied in appointing their administrators were enforceable. I see no reason to limit the determination of that question…to a consideration of the charge itself".
He went on to say "what matters is that the Junior Creditors, by entering into the Deed of Priority in terms which included clause 9.1.4, willingly chose to fetter their ability to enforce their security" and that use of "any step" in clause 9.1.4 had to include the appointment of administrators and by failing to obtain the prior written consent of the Senior Creditors to such action, the Junior Creditors' floating charges were not capable of being enforced at the relevant time. He concluded that such a failure was not capable of being cured and the appointments were therefore invalid.
I have to agree with the view reached by the Court - any other view could give junior creditors free rein to ignore any contractual arrangements they have made with senior creditors which would defeat the purpose of negotiating the provisions of intercreditor agreements at length to protect the position of the senior ranking creditor.
Whilst not an appellate case, the case is a welcome reminder that (particularly at the point of enforcement) transaction documentation should not be reviewed in isolation - all transaction documents should be considered ahead of any enforcement, particularly if other creditors are involved and intercreditor agreements exist because they do often set out the negotiated position agreed between creditors as to their respective enforcement rights and will often prohibit action by the junior ranking creditor without first obtaining senior creditor consent or consulting with the senior creditor before any action is taken. The case also highlights the need to ensure the enforcement clause in any ranking or intercreditor agreement properly reflects the requirements of each creditor before the agreement is entered into.
