Court holds that defects in security documents and administrator appointment documents are not fatal: why we won't alter our approach

The recent case of Sophie Rebecca Perhar v Louise Freestone Paul Mallatratt Synergy In Trade Ltd [2023] EWHC 2065 (Ch), [2023] All ER (D) 60 (Aug) has been heralded as a triumph for the prioritisation of creditors’ interests over those of debtors when it comes to the enforcement of security and the appointment of administrators. Frankly, it gives this knowledge lawyer and her head of department the heebie-jeebies.

To explain: the art of drafting a security document and enforcing the security created by it is scientific in its approach. Junior lawyers are taught the key provisions to include and to double (and triple) check they have been included, and to always, always, follow the terms of any notice provisions to the letter. We teach that security is generally construed against the creditor that seeks to rely on it, remembering that they will likely be enforcing at a time of dubious solvency for their debtor. In a liquidation, the liquidator’s objective is to maximise the assets available for distribution to the general body of creditors and so they will assess the validity of all purported security interests. Our documents and processes must therefore be watertight and survive scrutiny, for without security, our client is merely an unsecured creditor, ranking equally with all others. Every “i” must be dotted, and every “t” crossed.

That is still the approach that we will continue to advocate, despite the more relaxed (others might describe it as “commercial”) approach of the court in this case. Briefly:

• Mrs Perhar’s company, TSBC, had an agreement with Aldi for the supply of electric bamboo toothbrushes, which TSBC was to source from China, funded by a form of invoice financing facility provided by Synergy.
• Synergy would use the facility proceeds to pay the Chinese suppliers, and in return take a 30% share of the “profits” (presumably being the difference between the price paid by TSBC for the goods and the price it received from Aldi, although the judgment isn’t clear on the mechanism).
• The facility was expressed to be on demand and Mrs Perhar and her husband gave personal guarantees.
• TSBC also entered into a debenture in favour of Synergy, which presumably (again the judgment is scant on details) gave Synergy security over all, or substantially all, of TSBC’s assets and undertakings such that it was, for the purposes of insolvency legislation, a “qualifying floating charge”. This would, if certain conditions were met, entitle Synergy to appoint administrators to TSBC.
• A designated bank account was set up for the payments from Aldi, where they would be held until Synergy was paid. Unfortunately the invoices sent to Aldi provided different account details and so the payments ended up in the wrong account.
• This contributed to a breakdown in trust between Synergy and TSBC. Synergy made demand for repayment under the facility and, on the same day, enforced the security created by the debenture by appointing administrators to TSBC.

Mrs Perhar challenged the appointment of administrators on the basis:

• The floating charge was not enforceable at the time of the appointment of the administrators because:
  • The debenture failed to provide the circumstances in which it became enforceable, and
  • Demand had not been properly served (it being sent by email whilst the debenture provided for post or by hand), and
• The documents appointing the administrators did not comply with the requirements of the Insolvency Act and so were defective and incapable of cure.

Deciding that the facility agreement and debenture were to be read together and were intended to form a coherent contractual arrangement, the court held that it was clear that the debenture was incomplete without a provision setting out when it was enforceable. It held that this must have been the result of inadvertence, and that had the parties been aware of the omission, they would have agreed what should have been included. The judge was therefore prepared to imply an enforceability term into the debenture.

Although “not without misgivings”, the judge held that although the notice provisions in the debenture were expressed to be “mandatory”, they were not the only means of giving notice. He relied on the fact that TSBC had actually received the notice and that there was no indication that TSBC had the funds to repay the loan.

The appointment of the administrators was also riddled with a series of errors. Unfortunately for Mrs Pehar, the judge determined that these were procedural, were not fundamental and did not cause substantial injustice to TSBC, and so could be cured.

All in all, despite the court’s decision, this must have been an uncomfortable time for Synergy. Even if ultimately the court is prepared to take a commercial view of the financing and security arrangements, there is substantial sweat and tears (not to mention cost) in needing to litigate to determine this. Much better to ensure at the outset that your documents do what they need to do. Lawyers, check and check again.