Arlington Infrastructure Ltd & Anor v Woolrych & Ors

For the purposes of paragraph 16 of Schedule B1 to the Insolvency Act 1986, enforceability of a floating charge is assessed objectively. The court may consider the charge instrument, collateral agreements, promissory estoppel and statutory provisions. A contractual promise to a third party restricting enforcement may therefore operate as a condition precedent to enforcement. An appointment of administrators under paragraph 14 is itself a means of enforcing the charge. Where the charge is unenforceable because a fundamental condition precedent has not been satisfied, the purported appointment is a nullity rather than a curable procedural irregularity.

Arlington Infrastructure Ltd was the parent company of three subsidiaries. Junior creditors held qualifying floating charges over the subsidiaries, while senior creditors held a prior-ranking qualifying floating charge over the parent. A deed of priority prohibited the junior creditors from taking any step to enforce their security without the senior creditors’ prior written consent.

The junior creditors appointed administrators over the subsidiaries without obtaining that consent. The applicants sought declarations that the appointments were invalid under paragraphs 14 and 16 of Schedule B1 to the Insolvency Act 1986. An alternative application based on improper motive was left undecided.

The Paragraph 16 Application succeeded. The purported appointments of administrators over the subsidiaries were invalid, and it was unnecessary to determine the alternative application under paragraph 81 of Schedule B1.

1. An out-of-court appointment of an administrator under paragraph 14 of Schedule B1 is itself a means of enforcing the floating charge. The statutory purposes of administration and paragraph 43 do not alter that conclusion. The relevant question is whether the charge relied upon is enforceable.

2. Enforceability under paragraph 16 is assessed objectively by reference to all relevant circumstances. These may include the charge document, collateral agreements with third parties, promissory estoppel and statutory provisions. The court was entitled to consider the deed of priority even though the subsidiaries were not parties to it and could not enforce its promises.

3. Clause 9.1.4 of the deed of priority prohibited the junior creditors from taking any step to enforce their qualifying floating charges over the subsidiaries without prior written consent. The appointment of administrators was such a step. The clause created a condition precedent to enforcement. The absence of consent therefore meant that the charges were not capable of being enforced when the appointments were made.

4. Clause 9.1.5 was not rendered otiose. It served a separate purpose because it applied to steps concerning the parent company, whereas clause 9.1.4 applied to any step enforcing any junior security interest, including security over the subsidiaries. Clause 2.6 did not prevent the court from determining enforceability for the purposes of paragraph 16.

5. The defect was fundamental rather than procedural. The necessary consent had neither been sought nor obtained, and it would not have been given. The appointments therefore lacked the statutory basis required by paragraph 16 and were nullities incapable of being cured.