The case of Re NMUL Realisations Limited (in administration)  EWHC 94 (Ch) follows in the footsteps of the case of Re Tokenhouse VB Limited  EWHC 3171 (Ch),where the Court considered whether a charge-holder’s failure to give notice of their intention to appoint administrators invalidates the appointment (see our previous blog here).
The issue in this case was whether failure to give notice to a prior floating charge-holder, whose security had been incorrectly marked as satisfied at Companies House, was a fundamental defect, such that it rendered the appointment void, or whether the defect could be remedied by an order of the Court.
NMUL Realisations Limited (the “Company”), entered into a loan agreement with Tudor Capital Management Limited (“Tudor”), a corporate trustee of a pension scheme, for £1 million which was secured by way of a qualifying floating charge (the “Tudor QFC”). Tudor was dissolved in 2016, following the directors being convicted of fraud and imprisoned. The Company had not heard from Tudor or its directors for some time and wrongfully concluded that the Tudor QFC was satisfied and gave notice to the Registrar of Companies to this effect. The Tudor QFC was accordingly marked as satisfied at Companies House. In fact, the Company still owed approximately £1.5 million (including interest) to Tudor under the Tudor QFC.
The Company later obtained a loan from a bank (“Bank”) which was secured by way of another qualifying floating charge (the “Bank QFC”). The Bank demanded repayment of the loan from the Company, and subsequently appointed administrators using the out-of-court appointment process pursuant to its powers under the Bank QFC. At the time of appointing the administrators the only unsatisfied qualifying floating charge recorded on the Register was the Bank QFC. However, the Register did not reflect the true position of the Company’s outstanding debt under the Tudor QFC, which ranked ahead of the Bank QFC. Consequently, the Bank had failed to give notice of its intention to appoint an administrator on Tudor as prior outstanding charge holder. The Bank only became aware of the Tudor QFC the day after the appointment of the administrators when it was discovered that an enforcement receiver was appointed over the realisable assets of the directors, for the purpose of enforcing orders against them
The Court considered the facts of the case and noted the following:
- The Registrar of Companies must include a statement of satisfaction on a company’s filing history following the filing of a certificate of satisfaction. The Registrar had no discretion in that regard.
- The filing of particulars and statements by the Registrar is not conclusive as to the true factual position. A charge-holder therefore cannot solely rely on the Register but must satisfy themselves from their own enquiries that previously registered charges have been properly discharged, even if marked as satisfied on the Register.
- Where a statement of satisfaction is wrongly registered by the chargor, the chargee cannot lose the benefit of its security as a result.
The Court took a pragmatic approach and was satisfied that at the time that the Bank appointed the administrators, it was not aware that the Tudor QFC remained outstanding but was still required to give notice of the intended appointment to Tudor.
The Court considered the consequences of failing to give that notice and applied the same approach and reasoning that was taken in Re Tokenhouse, that Tudor would only have a right to make an application to cure the defect, or for an order that its own nominated administrators be appointed in place of the administrators appointed by the Bank. Therefore, Tudor would not be able to prevent administrators being appointed; they would simply have had a right to choose their own preferred administrators. The Court also referred to the decision of ICC Judge Jones in Re Tokenhouse where he held that the loss of a secured creditor’s right to appoint their nominated administrator or agree to the appointment within the notice period must be considered in light of the role of the administrator, who is an independent insolvency practitioner and officer of the Court required to act in the interests of the creditors as a whole.
The Court applied the decision in Re Tokenhouse and found that a failure to comply with the obligation to give notice to Tudor was not a fundamental defect but rather an irregularity giving rise to a defect that can be remedied by an order of the Court. It was therefore not a fundamental breach that would render the appointment void.
Whilst the case is very fact-specific, it is a reminder that when determining whether prior-ranking charges have satisfied, practitioners must not solely rely on the charges register at Companies House It also demonstrates that the Court is willing to take a pragmatic approach, in circumstances where the Bank genuinely considered that the Tudor QFC had been satisfied.
However, the out-of-court appointment process is designed to be reasonably efficient both in terms of time and cost, and no-one using that process ultimately wants to find themselves incurring the time and expense in making a Court application to validate that appointment.
This decision therefore highlights that lenders should wherever possible undertake due diligence regarding any prior charges marked as satisfied (e.g. by asking the borrower to evidence either that the charge-holder consented to that satisfaction, or for evidence that the relevant facilities have been fully repaid) both on origination of a loan and when considering the appointment of an administrator, in an effort to avoid the issues that arose in this case.