A recent Court of Appeal judgment (Saw (SW) 2010 Ltd and another v Wilson and others [2017] EWCA Civ 1001) has ruled that a floating charge can be created even when the company had no unsecured assets available to be charged at the time it was created; and importantly from an insolvency law point of view, an administrator can be appointed under such a qualifying floating charge.

The factual background

The Company in question entered into a bank loan with a lender (the “First Lender”) which included the normal security package of fixed and floating charges.  The security also had negative pledge clauses which prevented the Company from giving security to any other party without the First Lender’s prior consent.  There was also a provision which stated that if any of the Company’s assets were encumbered without such consent then the floating charge would automatically crystallise, thereby becoming a fixed charge.

A year later, the Company entered into a further loan with another lender (the “Second Lender”) and granted more security over its assets.  The consent of the First Lender was not sought in contravention of the Company and First Lender’s agreement and so the original floating charge immediately crystallised.

Subsequently the Company ran into financial difficulties and the Second Lender wished to exercise its right as a qualifying floating charge holder under paragraph 14 Schedule B1 of the Insolvency Act 1986 to appoint an administrator, out of court, and with the First Lender’s prior knowledge.

The Company then challenged the validity of the appointment of the administrator on the basis that the creation of the security package for the Second Lender had breached the negative pledge conditions of the First Lender’s loan and so the floating charge had crystallised into a fixed charge over all current and future assets; therefore accordingly there was nothing on which the Second Lender’s floating charge could attach.  Secondly because the Second Lender’s security was subordinate to the First Lender’s security this again demonstrated that there were no assets for the floating charge to attach to and therefore an administrator could not be appointed on the basis the floating charge could not be a “qualifying floating charge”.

The Court of Appeal’s findings

The Court of Appeal held that an administrator could be appointed in circumstances such as these and the Second Lender’s floating charge did constitute a “qualifying floating charge” for the purposes of the Insolvency Act 1986.

The Court held that the validity of a floating charge did not depend on whether the company had unsecured assets at the time of its creation. Its validity was a question of construction on the security document in question and whether it fulfilled the statutory requirements to be a qualifying floating charge.

Similarly, the non-existence of assets on which the floating charge could attach did not invalidate the appointment of an administrator.  The criteria to appoint is satisfied when the floating charge is enforceable (paragraph 16 Schedule B1 Insolvency Act 1986), i.e. any conditions precedent for enforcement have been fulfilled and the debt is due and payable.

Implications of the ruling

Whilst the ruling itself does not introduce new law, it is helpful to clarify the position of multiple secured lenders, their priority and the validity of subsequent security.  In secured lending, these relationships are sometimes governed by intercreditor agreements.  However, where that is not the case, perhaps in smaller and medium sized businesses and their secured lending arrangements, it is helpful to know that the floating charge remains a valid method for (i) gaining security as a “catch-all” and (ii) the important right to appoint an administrator, even where there are no assets on which it can attach. It also helps clarify that the existence of a prior floating charge only speaks to the priority, not the validity, of subsequent security.

From an insolvency law point of view, whilst it is useful to have certainty that a qualifying floating charge holder where there are no assets over which to attach the charge and where their charge does not have priority, can validly appoint an administrator, the position of such a charge holder is not necessarily strengthened by exercising their right to appoint.  Any dividend or payment they may receive out of the administration depends on the size of the administration estate and whether there are any proceeds left for a junior security holder once all prior charge holders and administration costs and expenses have been paid.