Company – Mortgage – Fixed charge – Floating charge – Lender having floating charge over company’s property – Company obtaining further finance and granting further floating charge to another lender without required prior consent of first lender – Original floating charge crystallising into fixed charge – Second lender appointing administrators – Appellants challenging appointment of administrators – Whether administrators being validly appointed – Appeal dismissed
The first appellant acquired a company (P) and granted it a long lease of a residential apartment block in Exeter known as Bartholomew House. It claimed to be a creditor of P in relation to unpaid ground rents and loans made to P which had not been repaid. The second appellant was an accountancy firm which claimed to be a creditor in respect of unpaid fees. P obtained a £1.25 million buy-to-let loan, secured by six fixed charges over each of the flats within the block and by a personal guarantee from a director of the first appellant. P charged the relevant apartment by way of fixed legal mortgage, the rental income by way of fixed charge and the remainder of P’s undertaking, property and assets by way of floating charge. The mortgage conditions provided that if without the prior written consent of the lender the borrower encumbered the property subject to the floating charge, that floating charge would automatically have effect as a fixed charge.
P subsequently obtained further finance from the second respondent’s predecessor without the first lender’s consent. A fixed charge and debenture were executed. The debenture provided for P to charge all assets, not otherwise mortgaged, charged or assigned, by way of floating charge to which paragraph 14 of Schedule B1 to the Insolvency Act 1986 applied. P later experienced financial difficulties and the second respondent bank appointed the first respondents as administrators.
The appellants applied for a declaration that the appointment of the administrators was invalid because the debenture had been granted without the prior written consent of the holder of the first floating charge causing that floating charge to crystallise into a fixed charge. That meant that the debenture could not itself constitute a floating charge because at the time of its grant there had been no property to which it could attach. The application was dismissed on the ground that the debenture was a qualifying floating charge for the purposes of paragraph 14 of Schedule B1 and was enforceable at the time of the appointment of the joint administrators. The appellants appealed.
Held: The appeal was dismissed.
The validity of an instrument as a floating charge, at the time of its creation, did not depend upon the existence of uncharged assets of the company creating it or upon a power in the company to acquire assets in the future, free from any fixed charge arising from the crystallisation of a prior floating charge. The question was not whether P was inhibited in some other way from dealing with its assets, but whether it was inhibited by the terms of the instrument itself. Although there was neither authority nor academic writing precisely on the point in relation to the effect of automatic crystallisation of an earlier floating charge upon a later floating charge, such as there was tended to affirm the view that the provisions in the earlier floating charge affected only the priority rather than the validity of the later floating charge. In all the circumstances, the judge was right to conclude that the debenture was a qualifying floating charge for the purposes of paragraph 14 of Schedule B1 and that it was enforceable at the time of the administrators’ appointment: Re Benjamin Cope & Sons Ltd [1914] 1 Ch 800, Re Automatic Bottle Makers Ltd [1926] 1 Ch 412, Re Yorkshire Woolcombers Association Ltd [1903] 2 Ch 284, Re Croftbell [1990] BCC 781 and Re Spectrum Plus Ltd [2005] 2 AC 680 considered.
Clive Wolman (instructed by Direct Access) appeared for the appellants; Lesley Anderson QC (instructed by Addleshaw Goddard LLP) appeared for the respondents.
Eileen O’Grady, barrister
Click here to read a transcript of Saw (SW) 2010 Ltd and another v Wilson and others
