by John Verrill
Since December 29 1986, when it became possible to obtain administration orders in relation to companies under the Insolvency Act 1986 (“the Act”), lenders, particularly to property companies, have resorted to various devices to ensure that, even though they had the benefit of traditional mortgages over property, no administrator could be appointed to frustrate the enforcement of their security.
The presentation of a petition seeking an administration order gives the company in respect of which the order is sought a moratorium which, among other things, prevents the holders of security from enforcing it (section 10 of the Act). If the order is made, the moratorium continues until the order is discharged. This prevents the appointment of a receiver under a charge. If a receiver of land only is appointed and an administration order is made subsequently, then, by section 11(2) of the Act, such a receiver can be required by the administrator to vacate office.
The presentation of a petition does not, however, prevent the appointment of an administrative receiver. Moreover, if an administrative receiver is already in office, the court may not make an administration order (unless the charge under which he was appointed is vulnerable as a transaction at an undervalue or preference, or an avoidable floating charge) unless the administrative receiver’s appointer consents: see section 9(3) of the Act.
It is now well understood that, by virtue of section 9 of the Act, any person who has the ability to appoint what the Act calls an “administrative receiver” is entitled to be served with a copy of an administration petition and is not subject to the moratorium imposed by section 10 of the Act. A debenture holder entitled to appoint an administrative receiver may appoint such a receiver on being served with an administration petition. The ability to appoint an administrative receiver is therefore an effective bar to making an administration order. So, what is an administrative receiver? By section 29 of the Act an administrative receiver is:
a receiver or manager of the whole (or substantially the whole) of a company’s property appointed by or on behalf of the holders of any debentures of the company secured by a charge which, as created, was a floating charge, or by such a charge and one or more other securities.
As a result of this definition and the frustrating effect that the appointment of an administrative receiver has upon the making of an administration order, there has been a tendency for property lenders to require that borrowers give floating charges over the whole of the company’s assets in addition to the mortgage. If that is not practicable, because of the security interests of other lenders to the company, then it is common to require the property to be secured to be purchased or transferred into a company established for the purpose. In the single-property vehicle the lender is then free to take a mortgage and to include a floating charge over the whole of the company’s other assets (even if there was none) without affecting the borrowing group’s other arrangements.
There has been much debate over whether these “featherweight” floating charges which catch no assets (because there are none) enabled the appointment of administrative receivers to frustrate the making of administration orders or whether they were merely devices and would be viewed as such by the courts and struck down.
This problem has in part been answered in Re Croftbell Ltd [0] BCLC 844. Vinelott J disposed of the arguments against such devices very swiftly. Croftbell argued that the floating charge in issue did not cover the whole of the company’s assets because it was not expressed to cover assets both present and future. Moreover, since the company’s purpose was only to hold shares which were specifically pledged, and it had no other assets, there was no class of assets caught by the floating charge, so an administrator could be appointed. Croftbell wanted to frustrate the lender’s realisation of the shares.
Croftbell, not surprisingly, also argued that the floating charge was a mere device to frustrate the making of administration orders and should therefore be ignored.
Vinelott J held that it was of the essence of a floating charge that it caught assets present and future, even if not expressed to do so. He found that the intention of the company that it should hold shares only was irrelevant to what it may do in the future and which may, therefore, bring assets in under the floating charge.
The argument that the charge was a device was kicked firmly into touch. The charge was described as a floating charge, an administrative receiver had been appointed, and that prevented the making of an administration order.
Having thus laid the featherweight charge doubts to rest, Vinelott J has raised a rather more terrifying spectre. Consider the chartered surveyor appointed to be receiver under a charge that incorporates a featherweight floating charge where the company is a single-property vehicle. If the Croftbell decision is right, and unless the surveyor’s appointment expressly excludes the exercise of powers under the floating charge, he becomes an administrative receiver (see section 29 of the Act).
So what? By section 388 of the Act, acting as an administrative receiver is acting as an insolvency practitioner. Unless such a surveyor has an insolvency practitioner’s license (some do, most do not) by acting as an administrative receiver he is committing an offence under section 389 of the Act and may be imprisoned or fined, or both.
Suppose a lender asks the surveyor to be receiver of a non-trading hotel, charged by mortgage. The furniture is still there, and it is charged to the lender by way of floating charge. The hotel is the only asset of the company. The surveyor finds a buyer for the hotel who does not want the chattels.
The receiver therefore sells the furniture and then the empty hotel. If he has no insolvency practitioner’s license, he has committed an offence because he has realised floating charge assets and they just happened to be the balance of the company’s assets over and above the hotel. He has acted as an administrative receiver.
It is worth noting that, in the hotel illustration above, if there were a floating charge but no assets caught by it, on the Croftbell principle, the surveyor would still need a license.
If there is, at the time of the sale of such furniture, any unpaid PAYE or National Insurance contributions going back for 12 months from the date of his appointment, or unpaid VAT going back for six months from such a date, or unpaid employee salaries of up to £800 per person, then the receiver is under a statutory duty by section 40 of the Act to pay those creditors out of the floating charge assets realised, even if he has parted with the money: see IRC v Goldblatt [2] Ch 498. Section 40 applies to any receiver realising floating charge assets, whether or not he is an administrative receiver. Are surveyors equipped to deal with preferential claims?
These are serious risks for the chartered surveyor. His advisers must be aware of these pitfalls, and try to avoid them.
The lender in these circumstances cannot go into possession of the floating charge assets, because a floating charge, being an equitable charge, does not entitle the chargee to possession.
If caught out, the solution is for the receiver to resign and hand over to a licensed practitioner, after first obtaining an indemnity in relation to liability to preferential creditors under section 40 of the Act. However, this will only mitigate, rather than avoid, criminal liability.
There is nothing to prevent a lender’s appointing an unlicensed surveyor, or indeed any other person, to be receiver under a legal mortgage or under such a mortgage which incorporates a floating charge over assets in the building where there are myriad other assets vested in the company. It will be apparent that, in these circumstances, the charge will not catch “the whole (or substantially the whole)” of the company’s property. Thus, it would be almost impossible for such a receiver to become an administrative receiver. The best advice must be for surveyors to examine critically the scope of any floating charge included in any proposed appointment before it is made.
John Verrill is a partner in solicitors Lawrence Graham. He is also a licensed insolvency practitioner.
