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Author: Nigel Cook
In this case, the Court of Appeal considered a challenge to an Administrator’s appointment under paragraph 14 of Schedule B1 made by a floating charge holder.
This case concerned the power of a second ranking floating charge holder to appoint Administrators, despite the existence of a first charge containing a negative pledge. The negative pledge is a requirement not to grant further security on a company’s assets without the consent of the chargeholder and in this case it included a requirement that upon breach of the negative pledge the floating charge contained in the first charge would automatically be changed to a fixed charge i.e. had crystallised the floating charge. According to the argument of the challenger, this would be an ineffective charge because there would be no unencumbered assets upon which the second ranking charge could attach. The Court of Appeal rejected this argument and confirmed the validity of the second charge as a floating charge capable of being used to appoint Administrators. The Court pointed out that it would not be fatal if there were no unencumbered assets but there was, in fact, an equity of redemption on which the charge could attach.
It followed that the requirements of paragraph 14 were satisfied and that the subsequent chargees did not need to enquire about the company’s available unencumbered assets. The Court also confirmed that the second floating charge was enforceable and that therefore the appointment was valid.
It should be noted that in all cases where a lower ranking chargeholder wishes to appoint Administrators, it must give written notice to all prior chargeholders so that those chargeholders have the opportunity to elect to appoint Administrators of their own choice or, alternatively, allow a subsequent chargee to continue. This power to elect gives an element of control to the prior ranking chargeholders.