For a lender, it is imperative that any English security that is granted over a corporate borrower’s assets is registered at Companies House. Section 859H of the Companies Act 2006 (s.859H) provides that any security which has not been delivered to Companies House before the end of the relevant period allowed for delivery i.e. within 21 days of its creation becomes void, including as against an administrator or other insolvency office-holder.
Once any security has been discharged or released, a lender ordinarily has no problem with the borrower applying to remove the charge from the register at Companies House; either by filing form MR04 (where the secured debt has been satisfied in full or in part), or form MR05 (where the charged property has been released from the charge or no longer forms part of the borrower’s property or undertaking).
But what happens if a borrower files such a form in error, inadvertently removing a lender’s security from the register? Or worse, if that inadvertent removal occurs at a time when a borrower is insolvent and then enters, or is about to enter, insolvency proceedings?
Lenders, fear not! Whilst Companies House will not question the borrower’s application and will simply remove the charge from the register, the security itself remains valid and enforceable. A borrower remains subject to its contractual obligations under the relevant security document unless and until it has satisfied the secured debt and/or the parties have entered into a deed of release (freeing the borrower from its obligations).
That said, and for the reasons highlighted below, once a lender discovers that its security has been mistakenly removed from the register, it should consider rectifying the situation sooner rather than later. But how? There are two options:
- Enter into new security and ensure that it is registered (and stays registered) at Companies House. The advantage is that third parties, including other creditors, will be on notice of the lender’s secured position but the disadvantage is that a lender’s security ranking is not preserved, which is more than problematic if the security was first ranking and since then other security has been registered. Such priority issues are only cured by application for rectification of the register (see immediately below).
- Apply to the court for rectification of the register. Assuming the lender is successful and the court grants an order for rectification, it will need only send the order to the Registrar at Companies House, who will rectify the register accordingly.
The above of course also assumes that a lender has time on its side. This is not usually the case if the borrower is insolvent and enters, or is about to enter, insolvency. If the security was registered, but (in error) is no longer registered at Companies House, there is a risk that an administrator or other insolvency office-holder is simply unaware of the security, rendering potentially the security “void” in certain circumstances.
However, lenders are (arguably) saved, by the wording in s.859H which provides that security is (only) void as against an administrator (or other insolvency office-holder) where the relevant documents are not registered before the end of the 21 day period allowed for delivery – i.e. it has been registered late or not registered at all. Where the security has been registered prior, a lender is usually able to demonstrate (for example by a certificate of registration) that it was previously registered within the relevant 21-day period and hence argue that it does not fall foul of s.859H.
Lenders though need to act quickly. Although there might be time to try and agree the position with the administrators (or otherwise apply for rectification) in terms of the distribution of realised assets in accordance with the statutory priority, where the appointment of administrators might be proceeding by way of directors’ appointment, a lender could otherwise lose the opportunity to appoint its own administrators, if its qualifying floating charge has been compromised.
This therefore can be a tricky area, so whether you are a lender or an insolvency appointment-taker, if you are in a situation where any security has been erroneously removed from the register at Companies House, it is worth seeking urgent professional legal advice, especially as to whether any court application is necessary.