In Saw v Wilson, the Court of Appeal held that a second ranking floating charge would be valid and enforceable, even if at the time it was created there were no uncharged assets to which the floating charge could attach.
Facts of the case
Property Edge Lettings Limited (PELL), a subsidiary of SAW (SW) 2010 Limited, entered into a loan facility with Capital Home Loans Limited (CHLL) in 2007. This was secured by six fixed charges over flats in a residential apartment block, a fixed charge over the rental income and a floating charge over all the remaining undertaking, property and assets of PELL. Each of the charge documents contained a clause (the Crystallisation Clause) whereby if PELL, without CHLL's prior written consent, encumbered the property subject to the floating charge it would automatically crystallise into a fixed charge.
In 2008, PELL obtained finance from Derbyshire Building Society, which was secured by a legal charge and a debenture. In breach of the Crystallisation Clause in the CHLL security, no consent was obtained from CHLL to the new security and the new security was subsequently registered. Nationwide Building Society (Nationwide) later succeeded to the facility agreement and the security documents.
PELL went into administration and Nationwide appointed administrators on the basis of being qualifying floating charge holders and obtained the consent of CHLL to such appointment. SAW and Neil Wilson Accountancy Limited as creditors of PELL disputed the appointment by Nationwide of the administrators, launching a legal challenge in 2015 that reached the Court of Appeal in June 2017.
The appellants' core argument was that as PELL had breached the Crystallisation Clause within CHLL's security, CHLL's floating charge had crystallised such that there were no assets left for the Nationwide floating charge to attach to, and the directors had lost the power to acquire uncharged assets. They argued that this meant that:
- the floating charge had not been effectively created; and
- even if it had been, there was no security for Nationwide to enforce over and until there were uncharged assets the security was not enforceable.
The Court of Appeal dismissed the arguments above and held that Nationwide had fulfilled the criteria for a qualifying floating charge under paragraph 14 of Schedule B1 of the Insolvency Act 1986 thereby allowing them to appoint an administrator.
The Court held that the law did not require there to be unencumbered assets at the date of creation of the charge for the floating charge to be valid. LJ Briggs said that the Nationwide debenture was a qualifying floating charge at the time of its creation, because on its true construction it manifested the essential characteristics identified by Romer LJ in ReYorkshire Woolcombers Association Limited  and affirmed by the House of Lords in re Spectrum Plus Limited . Nothing in either case gave any support to the appellants' argument that the validity of the debenture depended on the existence of uncharged assets or a power to acquire uncharged assets.
Whether the charge was enforceable did not depend on whether there were free assets. LJ Briggs said a floating charge is, in his judgment, enforceable if any condition precedent to enforcement had been satisfied (such as an event of default) and there remains a debt for which the floating charge stands as security.
Lenders will be pleased with the outcome of this case as it provides comfort to them that if they take a floating charge, it will remain valid despite there not being any assets to which the floating charge can attach.
Below are some useful tips for lenders who are considering taking security from a company that may have granted prior security to other lenders:
- conduct a search of the mortgages register at Companies House to reveal any existing security over a company;
- establish, at the outset, whether any existing security is being released or will stay in place after completion;
- where existing security is to remain in place, obtain consent in writing from the existing security holder to the granting of the new security (and where appropriate confirmation that any existing floating charges have not crystallised);
- the existing and new security holder should consider entering into some form of priority arrangement to agree the priority of their debt, the priority of their security and their enforcement rights;
- where existing security is being released, it is advisable that contact is made with the outgoing security holder as early as possible in the transaction to agree redemption mechanics;
- for security being released it is advisable that the outgoing security holder provides a deed of release so as to ensure effective release of all of its security; and
- it is the company's responsibility to ensure discharge of any released security at Companies House and the Land Registry.