Arlington Infrastructure Ltd & Anor v Woolrych & Ors

The court considered whether qualifying floating charges relied upon for out-of-court appointments of administrators were "enforceable" for the purposes of paragraph 16 of Schedule B1 of the Insolvency Act 1986. The material question was assessed objectively, taking into account the debentures, related facility agreements and a deed of priority between the senior and junior creditors. The deed of priority (in particular clause 9.1.4) imposed a prior written-consent condition precedent on the junior creditors before they could take steps to enforce their security. Applying the tests in SAW (SW) 2010 Ltd v Wilson (Briggs LJ and Arden LJ), the court held that the prior-written-consent condition had not been satisfied and therefore the junior creditors' floating charges over the subsidiaries were not enforceable for the purposes of paragraph 16.

Because the charges were not enforceable, the purported out-of-court appointments of administrators by the junior creditors over the subsidiaries were void. The court rejected the submission that the appointments should be treated as merely irregular and hence capable of cure; the lack of consent was a fundamental defect amounting to nullity. The court therefore declared the purported appointments invalid.

Background and parties:

• The first applicant, Arlington Infrastructure Ltd (AIL), is parent and sole shareholder of three subsidiaries. The fourth and fifth respondents (segregated portfolios of the ninth respondent) are junior creditors (SASPC) holding debentures creating qualifying floating charges over AIL and the subsidiaries. A separate group of lenders (Senior Creditors) hold a qualifying floating charge over AIL only and, by a deed of priority dated 20 September 2019, the Senior Creditors agreed their charge would rank ahead of the Junior Creditors' charge over AIL.
• Senior creditors appointed administrators of AIL on 17 August 2020. On 28 September 2020 the Junior Creditors purported to appoint administrators of the subsidiaries without obtaining prior written consent from the Senior Creditors as required by clause 9.1.4 of the deed of priority.

Nature of the application and issues:

• The Applicants sought a declaration under paragraph 16 of Schedule B1 that the junior creditors' out-of-court appointments were invalid because the floating charges were not "enforceable". That is the primary (Paragraph 16) application. As an alternative, if the Paragraph 16 challenge failed, the Applicants sought relief under paragraph 81 of Schedule B1 on the basis of improper motive by the junior creditors (the Paragraph 81 Application). The court determined the Paragraph 16 Application first.
• The legal issues were: (i) the meaning of "enforceable" in paragraph 16 Schedule B1; (ii) whether the deed of priority and clause 9.1.4 constituted a condition precedent preventing enforcement by the junior creditors; (iii) whether a breach of paragraph 16 renders an appointment a nullity or merely an irregularity capable of cure.

Court’s reasoning:

• The court held that the question of enforceability under paragraph 16 is to be decided objectively and by reference to the full surrounding circumstances, including collateral contracts between the chargeholder and third parties. The court accepted and applied the guidance in SAW (SW) 2010 Ltd v Wilson that a floating charge is enforceable if conditions precedent (such as occurrence of an event of default and any contractual preconditions) have been satisfied.
• The deed of priority’s clause 9.1.4 plainly required prior written consent of the Senior Creditors before the Junior Creditors could take any step to enforce their junior security interests; that promise was a condition precedent to enforcement by the junior creditors. No such consent had been sought or given before the out-of-court appointments.
• Accordingly, on the facts and applying the SAW analysis, the charges were not enforceable at the relevant time and the junior creditors had no power under paragraph 14 to appoint administrators of the subsidiaries. The court rejected SASPC's arguments that appointment of an administrator is not enforcement, that the deed of priority could not affect enforceability, or that clause 2.6 prevented challenge. The court also rejected the submission that the appointments were merely procedural irregularities: the absence of consent was a fundamental defect such that the appointments were nullities.

Disposition and consequence:

• The court declared the purported appointments of administrators by the junior creditors over the subsidiaries invalid. Because of that conclusion, the court did not decide the Paragraph 81 Application.

This was a first-instance decision. The court declared that the purported out-of-court appointments of administrators by the junior creditors over the subsidiaries were invalid because the qualifying floating charges relied on were not "enforceable" for the purposes of paragraph 16 of Schedule B1. The deed of priority (clause 9.1.4) imposed a condition precedent (prior written consent of the senior creditors) to enforcement which had not been satisfied, so there was no power to appoint and the appointments were nullities rather than curable irregularities. The court therefore granted the Applicants' primary relief and did not decide the alternative paragraph 81 application.