Strategic Advantage SPC v ARL O09 Ltd & Ors

An applicant seeking administration orders must establish creditor status, insolvency, and a real prospect that administration will achieve one or more statutory purposes. A covenant by a company to pay a parent company’s secured liabilities is a freestanding contractual obligation, not itself security, and is not released merely because security over the company’s assets is released. A permitted-disposal clause may require release of charges needed to complete a disposal, but does not necessarily release the underlying covenant to pay. The court may make administration orders retrospectively where an earlier appointment was void, but retrospective effect does not ratify the administrators’ acts.

Strategic Advantage SPC applied under paragraphs 10 to 13 of Schedule B1 to the Insolvency Act 1986 for administration orders concerning three companies within the Arlington group. The applicant claimed to be a creditor through covenants in company debentures securing liabilities owed by the parent company, which had entered administration.

The companies disputed creditor status, insolvency, and the likelihood that administration would achieve its statutory purpose. They relied principally on a permitted-disposal clause in the facility agreements, arguing that it required release of the debentures and the covenants to pay. The court also had to decide whether administration orders should be made, whom to appoint, and whether the orders should operate retrospectively.

1. The application was granted. The applicant was an actual creditor of each company. The covenant to pay in the company debentures was a separate contractual promise to discharge the parent’s liabilities. It was not a mortgage, charge, pledge, lien, security interest, or proprietary right over company assets. Accordingly, it was not “Security” or a “Security Asset” which clause 15.3.2 required the applicant to release: paragraphs [44]–[45].

2. If the permitted-disposal provisions applied, they would require release of charges over company assets to the extent necessary to aid, effect, or perfect a disposal. They would not require release of the companies’ continuing covenant to pay the parent’s debt. The court also considered it strongly arguable that the provisions were intended to operate only while the group remained actively trading, but expressed no final view because that issue was unnecessary: paragraph [44].

3. The companies were insolvent on a cash-flow basis. They were also balance-sheet insolvent, including by reason of their substantial obligation to discharge the parent’s approximately £39 million debt. The statutory requirements of creditor status and inability to pay debts were therefore satisfied: paragraphs [47]–[49].

4. There was a real prospect that the second or third statutory purposes of administration could be achieved, even though rescue as a going concern was not realistically available. Administration was therefore reasonably likely to achieve its purpose under paragraph 11(b) of Schedule B1: paragraphs [50]–[55].

5. It was appropriate to exercise the discretion to make administration orders. The proposed administrators were preferred because of their knowledge of the businesses, established relationships with creditors, and suitability to maximise asset value. The court considered that the competing interests of the parent’s administrators created a greater concern: paragraphs [56]–[64].

6. The orders were made retrospectively from 28 September 2020. Retrospective effect treated acts done during the intervening period as acts of court-appointed administrators, but did not ratify or validate those acts: paragraphs [65]–[71].

First-instance decision. The judgment records an earlier decision concerning the validity of the proposed administrators’ appointment, [2020] EWHC 3123 (Ch), but this application was determined on its own merits.