SAW (SW) 2010 Ltd & Anor v Wilson & Ors

A qualifying floating charge may be created over the whole or substantially the whole of a company’s property even though no uncharged assets are then available. Its character depends principally on the terms of the creating instrument, assessed when the charge is created. Prior fixed security or the crystallisation of an earlier floating charge generally concerns priority, rather than the validity of the later charge.

For paragraph 16 of Schedule B1 to the Insolvency Act 1986, a floating charge is enforceable when the secured creditor has a present contractual right to enforce it. The creditor need not show that valuable assets are available for realisation. Appointment of an administrator is itself a means of enforcement.

The appellants were shareholders or creditors of Property Edge Lettings Ltd. They challenged Nationwide Building Society’s appointment of joint administrators under a debenture granted by the company. An earlier floating charge in favour of another lender contained an automatic crystallisation clause which was allegedly triggered before or upon the later debenture.

HHJ Hodge QC, sitting as a judge of the High Court in the Manchester District Registry, struck out the application under rule 3.4(2)(a) of the Civil Procedure Rules. He held that the debenture created an enforceable qualifying floating charge.

The appeal raised whether the later debenture created a qualifying floating charge under paragraph 14 of Schedule B1 to the Insolvency Act 1986 and, if it did, whether that charge was enforceable when the administrators were appointed.

1. Appeal dismissed. The debenture created a qualifying floating charge and the charge was enforceable when the joint administrators were appointed.

2. Per Briggs LJ, the classification of a security as fixed or floating depends principally on the construction of the instrument creating it. A floating charge does not require the company to possess uncharged assets when it is created, or to have an immediate power to acquire assets free of earlier security. The later charge can attach to an equity of redemption, while security over future assets can validly finance the commencement of a business.

3. The assumed crystallisation of the earlier floating charge did not invalidate the later floating charge. Provisions in earlier security ordinarily affect the priority of a later floating charge rather than its validity. On its true construction, the debenture manifested the essential characteristics identified in Re Yorkshire Woolcombers Association Ltd and affirmed in Re Spectrum Plus Ltd.

4. For paragraph 16 of Schedule B1 to the Insolvency Act 1986, “enforceable” concerns whether the chargee has a present right to enforce. The condition is satisfied where any contractual condition precedent, such as an event of default, has occurred and the secured debt remains outstanding. It does not depend on the existence of assets free from prior security or assets having sufficient value. Appointment of administrators is itself a means of enforcement.

5. Arden LJ reached the same outcome through a different interpretation of the automatic crystallisation clause. The clause was activated only when the company actually created a legally binding encumbrance. Crystallisation therefore occurred immediately after, rather than simultaneously with, creation of the later floating charge. She nevertheless agreed that subsequent crystallisation of the prior charge did not prevent enforcement of the later charge by appointing administrators.

6. Arden LJ left open whether a wholly “phantom” charge, created when a company had no property and nobody intended it to acquire property, could constitute a valid floating charge. She also explained that crystallisation may arise from events outside the terms of the charge.

7. The common-mistake argument also failed. A party which warranted the truth of the relevant shared assumption could not rely on its supposed falsity to escape the transaction.

1. Court of Appeal (Civil Division): The appeal was dismissed. The court upheld the striking out of the challenge to the administrators’ appointment.

2. High Court, Manchester District Registry: HHJ Hodge QC struck out the appellants’ application under rule 3.4(2)(a) of the Civil Procedure Rules, holding that the debenture created an enforceable qualifying floating charge.