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Did the grant of a floating charge result in the crystallisation of an earlier floating charge pursuant to the terms of a negative pledge? What is the impact on appointment of administrators appointed under the floating charge? Natalie Brown, barrister at Radcliffe Chambers, offers practical advice to lenders and administrators within the context of Property Edge Lettings Ltd’s application.
Re Property Edge Lettings Ltd Saw (SW) 2010 Ltd and another v Wilson and others  EWHC 4069 (Ch),  All ER (D) 118 (Mar)
The Chancery Division dismissed an application seeking a declaration that the Nationwide did not hold an enforceable and/or qualifying floating charge over the property of Property Edge Lettings Limited (PEL) for the purposes of paragraph 14 of Schedule B1 to the Insolvency Act 1986 (IA 1986) so it had no power to appoint the three respondents as joint administrators to PEL.
In 2007, Capital Home Loans Limited granted PEL a loan secured by way of six separate fixed charges on a residential properties owned by PEL (the CHL charges). Each deed of charge granted a legal mortgage over the properties and also charged:
‘By way of a floating charge the undertaking and all other property assets and rights of [PEL] not effectively charged above, both present and future.’
The CHL charges were registered at Companies House under PEL’s name and the particulars of mortgage or charge, in Companies Form Number 395, expressly stated the existence of the fixed charge and also the floating charge.
One of the provisions incorporated into the CHL charges from the Capital Home Loans Mortgage Conditions 2004 was:
‘If, without the prior written consent of the lender, the borrower encumbers howsoever the property subject to the floating charge or if any person levies or attempts to levy any distress, sequestration or other process against the said property the said floating charge shall, automatically without notice, operate and have effect as a fixed charge instantly such event occurs…’ (Clause 9.11)
In 2008, PEL and Derbyshire (as Nationwide’s predecessor in title) entered into a lending facility to purchase a property which was secured by registered charges over the property including a floating charge in favour of Derbyshire (the Nationwide charges).
It was pleaded that prior to the granting of the Nationwide charges, PEL drew Derbyshire’s attention to the existence of the CHL charges which, in any event, appeared on the public register. Notwithstanding this, Derbyshire failed to ask PEL to obtain, and PEL failed to seek, the written consent of CHL as prior charge holder.
In 2012, Nationwide purported to put PEL into administration by the making of an out-of-court appointment of the three respondents to the application as administrators. CHL expressly consented to the appointment of the joint administrators on the Form 2.15 which was filed at court in connection with the appointment.
The two applicants in the present application are the parent company of PEL and its advisor, both of whom were creditors of PEL.
The Nationwide charges were made up of:
It was pleaded by the applicants that at the instance at which the fixed charges were signed in the morning, the automatic crystallisation provisions of clause 9.11 of the CHL charges were engaged such that all assets of PEL became instantaneously subject to a fixed charge in favour of CHL. Accordingly, when the debenture was executed later the same day, the floating charge that PEL agreed and purported to grant to Nationwide, never came into existence. This was because there were no assets, and no undertaking, over which such a charge could float.
The judge concluded that the grant of the fixed charges was not a crystallisation event of the CHL charge. To reach this conclusion the judge relied on an argument not raised by the parties and rooted in Abbey National Building Society v Cann  1 AC 56,  1 All ER 1085. The judge reasoned that because the loans from Derbyshire were being used to acquire new property, the transactions of acquiring the legal estate and granting the charge are one indivisible transaction. The purchaser never acquires anything but an equity of redemption so there was (as in Cann) no moment in time when the property vested in PEL free of the charge in favour of Derbyshire/Nationwide (and therefore became subject to CHL’s floating charge). Accordingly, PEL did not encumber property subject to the CHL charge—it merely acquired property that was already encumbered and thereafter became subject to the CHL charge.
What is not clear is why the creation of the debenture (being over assets undoubtedly subject to the CHL charge) did not itself cause crystallisation of the CHL charge and so prevent the debenture taking effect as a floating charge. Perhaps it is simply that the provision for simultaneous crystallisation is not enough to prevent the new charge, for the moment when it is created being a floating charge.
The judge accordingly found that the CHL charge had not crystallised so as to prevent the floating charge in favour of Nationwide taking effect and it was, at its inception at least, a validly created floating charge. Since IA 1986, s 251 defines a floating charge as a charge which ‘as created’ was a floating charge, this was all that was required to validate the appointment (which was otherwise carried out within the rules and with the consent of CHL as first charge holder).
The reasoning in the case only assists lenders in relation to advances funding the purchase of property. It would not protect a lender who was taking security against property already owned by a company, whether by way of second charge or remortgage.
All monies floating charges of the type seen in this case are common in lending to corporate borrowers, especially special purpose vehicles. Automatic crystallisation provisions are likewise industry standard terms. Although in theory both the floating nature of the charge and the existence of a negative pledge clause should be recorded on the Companies House charges register—not uncommonly they are not because they are not apparent on the face of the charge deed but buried in the accompanying standard terms not filed with Companies House. They will nonetheless be binding over a subsequent lender’s floating charge.
Those acting for lenders advancing funds to corporate borrowers (although in principle the same might apply to an unincorporated business) need to be especially careful to ensure that any requirements in prior charges are satisfied.
Once the existence of any prior charge is noted, confirmation as to whether the charge includes a floating charge and whether lender consent to the proposed transaction is required should be sought.
Best practice would be for the lender’s solicitor to themselves inspect the earlier security documentation (including the standard terms and conditions) to satisfy themselves that all necessary consents have been obtained before releasing funds.
The challenge to the appointment of the administrator in this case came several years into the administration. In many ways Nationwide were fortunate that the prior fixed security attached to property being acquired by PEL and not existing assets. Had the contrary been true the loss of realisations made in the administration, the irrecoverable costs and, indeed, the bill for wrongful interference with the company’s trading could have been extremely painful.
It is therefore important that prior to appointment the valid creation of the charge is double checked. This should include as standard examining the terms of any prior charge to ensure that they do not prevent the appointing lender’s charge taking effect, at least initially, as a floating charge. Although the outcome may be that no appointment can be made, this is very much preferable to an appointment being later successfully challenged.
Lexis®PSL practical point: this case concerned security registered using the pre-6 April 2013 registration forms for Companies House. When registering security since 6 April 2013, the registration form (Form MR01) provides for tick boxes to confirm the existence of a floating charge and negative pledge, see Checklist: Completing a form MR01 (Particulars of a charge)—checklist. Provided the forms are correctly completed by the applicant, the existence of a floating charge or negative pledge should be clear from the charges register at Companies House. Where you have concerns about prior ranking security and intend to appoint an administrator, you should check the underlying security documentation in case these tick boxes have been incorrectly completed.
Natalie Brown has a broad litigation-focused practice with an emphasis on real property and consumer credit. She has acted in a full range of commercial and contractual matters and has experience of insolvency proceedings acting for petitioning creditors, debtors and receivers. Natalie also has extensive experience acting on behalf of mortgagees and landlords in claims, both in county courts and the High Court.
Interviewed by Kate Beaumont.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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First published on LexisPSL Restructuring and Insolvency
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