Mistakes in security documents registered at Companies House - is rectification needed?

Mistakes in security documents registered at Companies House - is rectification needed?

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The recent High Court case of Pathway Finance S.À.R.L v London Hanger Lane Centre Ltd [2020] EWHC 1191 (Ch) has been welcomed by practitioners as it confirmed that security documents registered at Companies House containing incorrect cross-references should be construed as providing the correct cross-reference, without the need for rectification by supplemental documents or additional filings.

What happened?

Between February 2017 and April 2019, 87 intra-group companies acceded to an existing facility agreement with Pathway Finance S.À.R.L (“Pathway”) originally dated 16 September 2011, as amended on 17 November 2016, in order to gain access to borrowing from Pathway. They also acceded to an existing security agreement dated 16 September 2011, granting first ranking floating charges over all or substantially all of their assets. Crucially, unlike the facility agreement, the security agreement was not amended on 17 November 2016, nor any other date.

It was later discovered that the 87 accession deeds that had been executed, and subsequently registered at Companies House, referred to the security agreement dated 17 November 2016, which, of course, was incorrect. Pathway sought a declaration from the High Court that the deeds should each be construed as referring to the correct date (i.e. 16 September 2011), or an order for rectification of the deeds to correct the error.

What did the Court consider?

The Court considered the approach taken to the correction of mistakes in documents in Chartbrook v Persimmon Homes [2009] UKHL 38.  Under Chartbrook, it was held that in correcting drafting errors “the background and context must always be taken into consideration” alongside “what a reasonable person would have understood the parties to have meant”. Applied to Pathway, both parties knew about the mistake relating to the date of the security agreement and had clearly intended the date in the accession deeds to be 16 September 2011.

However, since the accession deeds appeared on the public register at Companies House, the Court needed to consider whether the public nature of the deeds “alter[ed] the availability or weight” to be attached to the surrounding facts of the case. In doing so, the Court referred to Homburg Houtimport BV v Agrosin Private Ltd: The Starsin [2003] UKHL 12, where it was noted that when interpreting a document, one needs to consider the background knowledge “reasonably available to the person or class of persons to whom the document is addressed”.

Despite Companies House being a public register, the Court did not consider the security document to be addressed to the public at large, rather that it was only addressed to the parties to the document and third parties which might extend credit to/take security from each company. Further, if anyone had inspected the deeds of accession and asked for a copy of the security document, it would have become apparent that the security document was, in fact, dated 16 September 2011.

What was decided?

To this end, “full weight” was given to the background facts of the case, and the Court held that the true construction of the accession deeds referred to the security agreement dated 16 September 2011. Interestingly, the Court admitted that, had it not been prepared to declare the above, it would have granted relief by rectification in any case.

Comment

The outcome of the Pathway case serves as a reminder that mistakes in security documents, however small, can be expensive to remedy given the time and costs incurred in considering how to correct this error.

Thankfully, this sensible and pragmatic decision demonstrates that the courts will weigh up the alternative methods of construction and rectification when considering the means of correction, and that in deciding to use construction to remedy a mistake, the background facts of the case will always be considered and whether the “public” nature of a document affects those background facts.

Andrew Dodds, partner in the banking and finance team at Stevens & Bolton comments:

“Funders who hold, and companies who grant, security should take some comfort in this decision as it indicates that lengthy and expensive rectification action by way of additional filings or supplemental documents is not always necessary where a registered security document contains a mistake. That said, whether or not the construction approach in Pathway will be followed in other situations will, of course, depend very much on the nature and significance of the mistake in question.”

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