The Court of Appeal has recently determined that a floating charge will be valid even if, at the time when it is created, there are no unencumbered assets for it to attach to.
The relevant case can be read in full at the following link: http://www.bailii.org/ew/cases/EWCA/Civ/2017/1001.html
Here we briefly summarise the facts of the case and the main points arising from it.
1. Case background
The claimant shareholder, SAW (SW) 2010 Limited (“SAW”), acquired Property Edge Lettings Limited (“PELL”) in December 2007 and granted PELL a long lease of a residential apartment block in Exeter known as Bartholomew House.
PELL subsequently borrowed a £1.25m buy-to-let loan from Capital Home Loans Limited (“CHL”) in December 2007, secured by six charges over each of the flats within Bartholomew House (collectively, the “CHL Charge”). Under the terms of the CHL Charge, PELL charged the relevant apartment by way of legal mortgage, the rental income by way of fixed charge and the remainder of PELL’s undertaking, property and assets by way of floating charge. As is quite common, the CHL Charge benefited from a negative pledge and an automatic crystallisation provision (the latter providing that if, without CHL’s consent, PELL created any security over any assets subject to the floating charge, the floating charge would automatically be elevated without notice into a fixed charge).
As you might have guessed, PELL subsequently did precisely what it had undertaken not to do. So just one year after grating the CHL Charge, PELL borrowed new monies from the Derbyshire Building Society (“DBS”, as subsequently succeeded by Nationwide), on this occasion to acquire development land in Bude, Cornwall. The loans were secured by a first fixed charge over the development property (the “Nationwide Fixed Charge”) and a first ranking mortgage debenture (the “Nationwide Debenture”) each dated 9 May 2008. The Nationwide Debenture purported to be a qualifying floating charge for the purposes of paragraph 14 of Schedule B1 to the Insolvency Act 1986.
Not long thereafter, PELL suffered financial difficulties and Nationwide appointed the first respondents as administrators. SAW and one of PELL’s other creditors sought to challenge that appointment.
2. Outcome
The main argument raised by counsel to the appellants rested on the fact that the Nationwide Fixed Charge had been granted during the morning of 9 May 2008 and the Nationwide Debenture later that day. This was important, so the argument went, since it meant that the entry into of the Nationwide Fixed Charge earlier that day had triggered the automatic crystallisation provision in the CHL Charge. As such, by the time the Nationwide Debenture was entered into in the afternoon, all of the assets of PELL were already subject to fixed security, with the result that there were no longer any floating assets available to be secured by way of floating charge.
This argument was rejected by Briggs LJ in the Court of Appeal. He concluded that there was nothing in the relevant caselaw that “lends any support to [the] central submission that the validity of an instrument as a floating charge, at the time of its creation, depends 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
Briggs LJ went on to give two examples of where a floating charge might be created even where there are no assets to which it might attach at the time of creation. The first was where a newly-created company grants a floating charge to secure working capital, before it has any significant assets on which the floating charge might bite. The second was where a prior fixed charge exists over all or part of a company’s assets, but a second floating charge attaches to the company’s equity of redemption under the fixed charge.
The second argument raised by counsel to the appellants was that a second floating charge was unenforceable for as long as the assets to which it related were the subject of any prior security, whether fixed or floating. This argument was also rejected by the Court of Appeal.
3. Summary
This will be a welcome decision to players in the loan markets, since companies often grant multiple charges to different classes of creditor, often over the same pool of assets. What was interesting about this case is that neither PELL nor DBS obtained the consent of CHL to the granting of the subsequent Nationwide Fixed Charge or the Nationwide Debenture. Although CHL did not object to Nationwide’s appointment of administrators, the facts of the case were such so as to give the appellants reason to challenge that appointment.
Ordinarily, where subsequent floating charges are created, letters of non-crystallisation and consents are often obtained from prior-ranking security holders. If that had been the case here, it would seem to us that the appellants would have had little case to argue in the first place. That said, this case very helpfully confirms that taking such steps (whilst obviously helpful to avoid breaches of contractual obligations) are not necessarily essential in order to ensure the validity of a subsequent charge.
Head of Banking and Finance, Jonathan Porteous, commented: “This case provides welcome reassurance to lenders and borrowers alike, ensuring that it does that floating charges will remain a popular feature within the security toolkit for many secured lenders”.
Jonathan Porteous