Administrative receivership – Secured creditors — Priority – Company going into receivership with two principal secured creditors – Administrators seeking directions as to priority for payment – Whether fixed charge on future-acquired property constituting floating charge – Whether amended inter-creditor agreement limiting first defendant bank’s priority as secured creditor — Ruling in favour of first defendant
Company R was incorporated with the second defendant trust company as its major shareholder. Its principal activity was investment in and management of freehold and leasehold properties. The finance for R’s business was provided by the first defendant bank and the second defendant. The first defendant provided a revolving credit facility with security provided by a first charge on properties purchased and a floating debenture over R’s assets. The principal security documents comprised debentures in favour of both defendants and an inter-creditor agreement (ICA) to which the defendants and R were parties.
The debenture in favour of the second defendant created no mortgage or fixed charge over properties but only a floating charge. Any fixed charge over property that had been created before the crystallisation of the second defendant’s floating charge would, therefore, in the absence of agreement, take priorty.
In June 1999, the first defendant’s facility was increased to £4m and that figure was inserted in signed copies of the ICA in the “bank priority” clause (clause 2.1) where previously it had been blank. Another increase in November 2005 to £27.5m was acknowledged by the second defendant in writing but no acknowledgement was made of a further increase to £45m in June 2007.
R went into receivership. When the applicant administrative receivers were appointed, R’s portfolio comprised properties estimated at approximately £39m. The principal liabilities were to the first and second defendants as secured creditors for £40.86m and £2.25m respectively. The applicants applied for directions as to the priority between the first and second defendants but adopted a neutral stance. The second defendant argued, inter alia, that the first defendant’s fixed charge of future-acquired property was subject to only a floating charge. Further, on the proper construction of the ICA, the manuscript addition of £4m restricted the first defendant’s priority, with regard to the proceeds of realisation of property over which the first defendant had a fixed charge, to £27.5m, as acknowledged by the second defendant.
Held: The court ruled in favour of the first defendant.
(1) The fixed charge on future-acquired property in the first defendant’s debenture and legal charges were effective as fixed charges securing all moneys due to it from R. The latter could not realise any property without a release by the first defendant of its legal charge and the fixed charge in the debenture. Assuming that the charges were registered at the Land Registry against the title to each property, R could not make good title on an unencumbered transfer without the first defendant’s release of its security. By the terms of the debenture and the legal charges, the charges stood as security for all moneys due to the bank. The provisions of the facility letter did not conflict with the debenture and legal charges. The advances referable to a particular property had to be repaid on a sale of that property and the extent of the bank’s security would not be affected. It was always open to the holder of a fixed charge over property to release the charge on payment of less than was secured by the charge. The fact that the company was free to use the surplus proceeds as it wanted did not affect the status of the charge as a fixed charge: Re Spectrum Plus Ltd (in liquidation) [2005] UKHL 41; [2005] 2 AC 680 distinguished.
(2) There was no commercially sensible construction of the ICA. Given that the second defendant trustee was a shareholder of R with the directors as beneficiaries, the risk to its position as second chargee from an unlimited priority for the bank was not significant. It was plausible that the parties had agreed a limit to the priority for the first defendant; this was a case in which commercial plausibility was of no assistance in construing the parties’ agreements. There was no point to the insertion of £4m in the definition of bank priority if it was not intended to limit the first defendant’s priority, which was otherwise absolute. The insertion suggested that the purpose was to impose a limit. It followed that a mistake had been made by inserting the figure of £4m but not including the defined term in the body of the ICA.
(3) To correct the mistake it should be clear that something had gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant. In deciding whether there was a clear mistake, the court was not confined to reading the document without regard to its background or context. Since the exercise was part of the task of interpretation, the background and context had to be taken into consideration. In the instant case, the ICA had to be read and given effect to as though the words “to the extent of the bank’s priority” were added at the end of clause 2.1: Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 3 EGLR 119 followed. East v Pantiles (Plant Hire) Ltd [1982] 2 EGLR 111; (1981) 263 EG 61 and KPMG v Network Rail Infrastructure Ltd [2007] EWCA Civ 363; [2007] P&CR 11 considered.
(4) However, the second defendant’s own debenture supported the conclusion that the ICA, as amended, did not limit the priority that the first defendant’s security would otherwise enjoy. The definition of “the prior charges” in the second defendant’s debenture as meaning “any charges created from time to time by the company which it is expressly agreed shall rank in priority to this debenture whenever created” constituted an acknowledgement that any charges in favour of the first defendant, whenever created, should rank in priority to the second defendant’s debenture. That was the natural reading of the words “which it is agreed shall rank in priority…”. Accordingly, the ICA did not limit the priority enjoyed by the first defendant on its fixed charge as contained in its debenture on freehold and leasehold property, or on its legal mortgages of such properties, to £27.5m.
Marcus Haywood (instructed by Dundas & Wilson LLP) appeared for the claimants; Nicholas Peacock QC and Matthew Smith (instructed by TLT LLP) appeared for the first defendant; Adrian Beltrami QC (instructed by Quinn Emanuel Urquhart & Sullivan UK LLP) appeared for the second defendant.
Eileen O’Grady, barrister
