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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Arlington Infrastructure Ltd & Anor v Woolrych & Ors [2020] EWHC 3123 (Ch) (19 November 2020) URL: https://www.bailii.org/ew/cases/EWHC/Ch/2020/3123.html Cite as: [2020] EWHC 3123 (Ch) |
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BUSINESS AND PROPERTY COURTS IN LEEDS
INSOLVENCY AND COMPANIES LIST (CH D)
IN THE MATTER OF ARL O09 LIMITED (Co. No. 11113979)
AND IN THE MATTER OF ARL 011 LIMITED (Co. No. 11121147)
AND IN THE MATTER OF BRK 001 LIMITED (Co. No. 11243276)
ND IN THE MATTER OF THE INSOLVENCY ACT 1986
B e f o r e :
(sitting as a Judge of the High Court)
____________________
(1) ARLINGTON INFRASTRUCTURE LIMITED (in administration) (2) MARK AGRASUT |
Applicants |
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- and |
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(1) BEN WOOLRYCH (2) PAUL ALLEN (3) JASON BAKER (as purported administrators of ARL O09 Limited, ARL 011 Limited and BRK 001 Limited) (4) STRATEGIC ADVANTAGE SPC ARLINGTON 1 SP (5) STRATEGIC ADVANTAGE SPC ARLINGTON 3 SP (6) ARL O09 LIMITED (purportedly in administration) (7) ARL 011 LIMITED (purportedly in administration) (8) BRK 001 LIMITED (purportedly in administration) (9) STRATEGIC ADVANTAGE SPC |
Respondents |
____________________
Mr Hugo Groves and Mr Matthew Maddison (instructed by Walker Morris LLP) for the Fourth, Fifth and Ninth Respondents
The First to Third and Sixth to Eighth Respondents did not appear and were not represented
Hearing date: 13 November 2020
____________________
Crown Copyright ©
Covid-19 Protocol: This judgment was handed down by the judge remotely by circulation to the parties' representatives by email and release to BAILII. The date and time for hand- down is deemed to be 10:00 a.m. on Thursday, 19 November 2020
MR ANDREW SUTCLIFFE QC:
Introduction
Statutory framework
Contract documents
"Except with the prior written consent of the Senior Creditors, the Junior Creditors shall not:
9.1.4 take any step to enforce any Junior Security Interest, whether by appointing a Receiver, exercising its power of sale or otherwise; or9.1.5 present, or join in, an application for an administration order or a petition for a winding-up order to be made in relation to [AIL] or initiate, or support or take, any step with a view to any voluntary arrangement or assignment for the benefit of creditors or similar proceeding involving [AIL] or issue a notice of intention to appoint an administrator or appoint an administrator of [AIL]."
Outline of the Applicants' main submissions
The meaning of "enforceable"
The significance of the Deed of Priority
The consequence of a floating charge being unenforceable
"[44] In short, , where a certain procedure or requirement is laid down by Parliament, then that requirement or procedure is mandatory and must be followed. If it is not followed, it will be a matter of statutory construction whether the result is automatic invalidity or whether there can be circumstances in which the irregularity will not result in a nullity. There is then a factual question as to whether, in the particular circumstances, the validity of the relevant steps should be upheld.
[47] a point comes at which it may be said that a defect has moved from being one of procedure to being one of a more fundamental nature, and, in my view "capacity" or provisions laying down the circumstances in which a power to appoint arises are likely to be such an area. In that area it seems to me that it is more likely that a relevant "breach" will result in the relevant actions taken being a nullity rather than a mere irregularity."
" Schedule B1 contains a mixture of provisions, some of which are naturally read as defining the circumstances in which the power to appoint arises and some of which are naturally read as prescribing procedural requirements that must be fulfilled before the appointment is properly made. If an appointment is made in circumstances where there is no power to appoint then the purported appointment would naturally fall to be treated as a nullity. I will give two examples. In Re Minmar (929) Ltd [2011] EWHC 1159 (Ch) the appointment was a nullity because there was no quorate meeting of the directors, the board had never properly resolved to do anything and those who attended the meeting had no power to appoint. In Re Blights Builders [2006] EWHC 3459 the appointment was a nullity because the company had no power to appoint administrators by reason of the existence of an undisposed of winding up petition."
"In my judgment, that premature appointment is properly characterised as a defective exercise of an undoubted power of appointment, which is procedural in nature but not fundamental to the existence of the power. I do not consider that the requirement of paragraph 16 is of such fundamental importance as to render the appointment a nullity. It is undoubtedly a factor I should have very much in mind when considering whether or not to set the appointment aside, along with the Rule 7.55 criteria of substantial irremediable injustice."
"[77] I have my doubts about the correctness of the reasoning in Re Care People Limited. In my assessment, this was not an example of the defective exercise of an undoubted power of appointment. The power of appointment had not arisen. If characterised as a defective exercise of an undoubted power of appointment in Care People, it is difficult to see why the same could not have been said of the position in Minmar. The directors undoubtedly had a power to appoint but, the argument would run, they exercised it defectively.
[117] I should also add that I consider that the decision in Care People is questionable. It is difficult to see why the charge not being enforceable (if that was the case) was not as much a substantive fundamental failing leading to nullity as the board not having authorised the appointment in Minmar. True in both cases there was a failure of procedure, but the result was that a substantive condition for the making of an appointment (action by the board/company in Minmar and the charge being enforceable in the case of Care People) was not met."
Outline of SASPC's main submissions
(1) The effect of appointment of administrators
"[17] The scheme as a whole is for administrations to be a potential rescue route for companies who are unable or likely to become unable to pay their debts and to avoid, for the ultimate benefit of creditors and the company, the all too frequent consequence of a liquidation resulting in a "fire-sale" before dissolution. The purpose and aim of an administration is to act with speed to enable an independent insolvency practitioner as administrator to present proposals to be approved or rejected by creditors to achieve: (i) the rescue of a company which is or is likely to become unable to pay its debts as a going concern; or (ii) a better result for such a company's creditors as a whole than will be likely if the company is wound up; or (iii) to realise its property to make a distribution to one or more secured or preferential creditors (see paragraphs 3, 11, 49 and 53(1) of Schedule B1).
[18] The [Enterprise Act 2002] when introducing out of court appointments into the [1986 Act] also applied significant changes to the rights of qualifying floating chargeholders otherwise entitled to appoint administrative receivers under a floating charge. Section 72A of the [1986 Act] prohibits such an appointment subject to the exceptions within sections 72B-72H of the [1986 Act]. Although qualifying floating chargeholders were conferred the right to appoint administrators, there are differences less favourable for them:
a) An administrative receiver would be appointed (normally as an agent of the company) with the function of achieving the realisation of the secured assets now the subject of a crystallised floating charge for the benefit of the floating chargeholder. This process would start upon appointment rather than require a proposal and vote of creditors in accordance with the procedure for all administrations, albeit that a "pre-pack" sale may be an option.b) In contrast, all administrations have the purpose and aim summarised in paragraph 17 above, even if the qualifying floating chargeholder makes the appointment. An administrator must act in the interests of the creditors as a whole, subject to the administrator's function being to make a distribution to one or more secured or preferential creditors. That function will only arise if the administrator thinks it is not reasonably practical to achieve either of the other two objectives and if it will not unnecessarily harm the interests of the creditors as a whole (see paragraphs 3(2) and 3(4) of Schedule B1).
c) Whilst a receiver may still be appointed over less than a substantial part of the company's secured assets, that may well be unattractive commercially and the appointee would be required to vacate office if an administrator is appointed (see paragraph 41(2) of Schedule B1)."
(2) Construction of the Deed of Priority
(3) If the Junior Creditors' appointment of administrators over the Subsidiaries constituted a breach of clause 9.1.4 of the Deed of Priority, did that render their QFCs unenforceable for the purpose of paragraph 16 of Schedule B1?
"The holders of successive security interests are free to vary the priority of their interests inter se without the consent of the debtor, who has no right to insist on the order in which successive secured debts are satisfied. This does not result in an exchange of the security interests, which could affect the ranking of the subordinated interest in relation to an intermediate security interest in favour of a third party. All that happens is that the priorities are reversed - so that if the subordinated creditor enforces his security he holds what he receives on trust for the senior creditor up to the amount due to the latter or any lower sum fixed by the subordination agreement - but that in other respects each of the two mortgagees retains exactly the same interest as he had before. No exchange of security interest is intended to result from the subordination and none is effected."
"Mr Randall QC., appearing for the liquidators of Group, identified three distinct types of transaction, which he said could have different consequences. The true subordinated debt, he submitted, is one where the terms on which the debt is incurred, by agreement between the creditor and the debtor, provide for repayment to be subordinated to other payments to be made by the debtor, as in the two cases before Vinelott J. He contrasted this with a priorities agreement, namely a contract between two or more creditors of the same debtor by which they agree to alter the priority in which they would otherwise receive payment as between themselves. He submitted that in the case of a priorities agreement, persons who are not parties to the contract and have not agreed to its terms should not be prejudiced by it, especially as creditors in a later insolvency. He characterised this as no more than a contractual obligation binding on the particular parties to the contract. Subject to the question whether any security or other proprietary right is conferred over a particular asset of the debtor, this is a fair comment, but it does not seem to me that it leads to any particular consequence or conclusion relevant to the debate. He identified a third type of transaction, a trust arrangement, whereby one creditor, A, agrees to hold on trust moneys received from a common debtor for the purpose of paying or securing payment of another creditor, B. He said that there was nothing inherently wrong with such a transaction, which does confer proprietary rights, but that if A later became insolvent, the arrangement was likely to be a charge over its book debts, and accordingly void against other creditors unless registered."
(4) Senior Creditors estopped from challenging the enforceability of the QFCs
"2.6. Neither Creditor shall challenge or question:
2.6.1 the validity or enforceability of any Security constituted by a Security Document;
2.6.2 the nature of any Security constituted by a Security Document;
2.6.3 without prejudice to the generality of the foregoing, whether any Security constituted by a Security Document is fixed or floating."
(5) If the Junior Creditors' QFCs are "unenforceable" for the purpose of paragraph 16 by reason of their failure to comply with clause 9.1.4 of the Deed of Priority, an appointment made in breach of paragraph 16 is merely an irregularity and not of such fundamental importance as to render the appointment a nullity.
[40] e) Mr Justice Marcus Smith in Re Skeggs Beef Ltd [2019] EWHC 2607 (Ch), [2020] BCC 43 has identified three categories of case to be applied when deciding the consequences of a breach of the requirements for an out-of-court appointment. Namely, cases where (i) the breach is fundamental, (ii) not fundamental but have caused no injustice, and (iii) not fundamental but have caused substantial injustice.
f) When answering the question of Parliamentary intention and for the purpose of categorising the breach, the provisions concerning the appointment of administrators out of court are to be interpreted within the context of the statutory scheme for administrations "as a whole" (Re Virtual Purple Professional Services Ltd (above)).
[46] Nor should the loss of the right to appoint or agree the appointment during the 5 business days be considered a consequence of such significance in the light of the role of administrators, the requirement that they are licensed insolvency practitioners and the role of the court (see paragraphs 18-21 above). It is relevant to consider those matters when addressing the scheme as a whole for the purpose of construing the provisions of Schedule B1 . In particular, whoever appointed the administrators: they will be independent insolvency practitioners; they will be officers of the court; they will be required to act in the interests of the creditors as a whole if they can; they will need to prepare a proposal bearing in mind that the first two purposes of paragraph 3(1) of Schedule B1 will have priority over the third.
[47] In addition, the Chargeholder can seek the directions of the court to cure the breach immediately it is discovered. Further, if the appointment is not automatically void or ineffective, no such application to "cure" will need to be made if the Chargeholder is content.
[48] The resulting, limited prejudice is to be contrasted with the potential danger that the main purposes of the administration may no longer be capable of being achieved at the time the breach is identified if the appointment is found to be automatically void. It cannot have been intended that breach of the requirement to give notice to enable the Chargeholder to agree the appointee or to appoint their own administrator would mean the administration was invalid and incurable. It must have been intended that the breach should be treated as an irregularity allowing the Chargeholder to apply to the court for appropriate, discretionary relief. For example, to apply to terminate the administration and/or replace the administrators appointed under paragraph 22 of Schedule B1 . The consequence of automatic invalidity would not fit the purpose of the requirement to give notice. It would be at odds with the need for there to be an administration and the intention of the Chargeholder to appoint an administrator, whether by agreement or through their own appointment. The purpose of paragraph 26(1) of Schedule B1 and the consequence of breach do not lead to the answer that Parliament intended automatic invalidity. They lead to the conclusion of irregularity, consistent with the existence and breach of a procedural requirement. The requirement to give notice is not linked to the issue of validity.
[49] That conclusion is entirely consistent with the reasoning of Mr Justice Norris in Re Euromaster Ltd (above). Namely, that paragraphs 26-32 of Schedule B1 are procedural and "naturally fall to be treated as irregular" . It is also consistent with the fact that the purpose of out of court appointments was to "streamline the process" (see paragraphs 15-16 above), not to add a new layer of formality which invalidates proceedings for want of compliance in a multiplicity of circumstances (adopting the words of Mr Justice Norris in Re Euromaster Ltd at paragraph (26) of the Appendix). It is also consistent with the speech of Lord Bingham in Seal v Chief Constable of South Wales [2007] UKHL 31, [2007] 1 WLR 1910 at [7], referred to by HH Judge Davis-White Q.C. in Gregory v A.R.G. (Mansfield) Limited above (see paragraph (33) of the Appendix). Equally, it produces a result consistent with the consequences for a court appointment (see paragraph 28(b) above).
[50] Reference can also be made to the fact that the general intention of Parliament is for defects in appointment not to affect the validity of actions taken. This intention can be found in section 232 of the Act , paragraph 104 of Schedule B1, Rule 12.64 of the Insolvency Rules 2016 (formerly Rule 7.55 of the Insolvency Rules 1986 ) and the general power to rectify errors of procedure conferred by CPR Rule 3.10. Whilst their specific application to the First Issue depends upon its outcome, on current authority, account should be taken of this general approach when determining that outcome.
[52] However, in my judgment the most important feature establishing Parliament's intention is that a statutory construction which concludes that a breach means automatic invalidity may have a disproportionate result when compared with the prejudice caused by breach, would not reflect the purpose of the requirement for notice and, most importantly, may adversely affect a company's ability to achieve the purposes it would have been likely to achieve had the appointment been valid. This is particularly the case when administration is a remedy to be implemented quickly and the breach may not be appreciated even, albeit as the extreme end of the spectrum, until after the company is in liquidation (see paragraphs 32-33 above). The consequence of invalidity, as opposed to irregularity, would be at odds with the Chargeholder's protected right to agree the appointee or to make their own appointment."
Discussion
Conclusion