[Case Study] Client Successfully Has Bank Appointment of an Administrator Declared Invalid

Case Study - invalid appointment of administrator
Here at Franklins Solicitors, we have a long history of advising on insolvency law issues and assisting those involved in, or affected by, insolvency issues.

Recently we successfully assisted a client who felt that his company had invalidly been placed into Administration by its bank.

The bank’s power to appoint Administrators in this case arose by virtue of a debenture which it had over the company’s assets. A debenture can be a qualifying floating charge and paragraph 14(1) of Schedule B1 to the Insolvency Act 1986 reads as follows:

The holder of a qualifying floating charge in respect of a company’s property may appoint an Administrator of the company.

Paragraph 14 of Schedule B1 is, however, subject to paragraph 16, which reads as follows:

An Administrator may not be appointed under paragraph 14 while a floating charge on which the appointment relies is not enforceable.

The debenture in this case stated that:

“This security shall become immediately enforceable … at any time after a notice by the Bank demanding payment of and/or discharge of any of the Secured Obligations shall have been served…”

The enforceability of the debenture was thus dependent on the prior service of a compliant notice. A notice would be compliant if it demanded the payment of and/or discharge of a “Secured Obligation”. The “Secured Obligations” were defined as:

“monies due, owing by or other liabilities of the Company to the Bank the payment and discharge of which are the subject of covenants, undertakings and agreements contained in this Mortgage Debenture…” (emphasis added)

The bank in question relied upon a demand notice which demanded that the company do two things:

  1. Firstly, to pay commission due and owing to the bank.
  2. Secondly, to release the bank from a guarantee it had provided to third parties as security for the company’s obligations to those third parties.

On our client’s behalf, we made an application to the High Court in London to have the appointment of Administrators by the bank declared invalid on the basis that the bank’s demand was not a compliant notice for the purposes of the debenture, thereby making the debenture unenforceable and the appointment of Administrators invalid.

One of the questions which the Court had to decide was whether the bank’s demand constituted a demand for payment of and/or discharge of monies due or other liabilities incurred, the payment or discharge of which was the subject of some agreement or undertaking contained in the debenture.

Our argument was that whilst there was an agreement or undertaking on the part of the company in the debenture and elsewhere that it would on demand pay the commission which the bank had requested, the same was not true in respect of releasing the bank from the guarantee.

We also argued that the bank’s demand notice required the company to do two things; pay the commission claimed and release the guarantee. It said:

The Bank now demands the immediate release of the Guarantee plus payment of the Commission…”

and it continued with the following warning:

If the company is unable to release the Guarantee and pay the Commission the Bank will be taking whatever action it considers appropriate…”

In consequence of the demand notice requiring the company to do these two things, we submitted it was confusing and was not a compliant notice for the purposes of the debenture. We submitted that it conveyed the impression that both actions were inseparably connected and had to be undertaken in order to avoid further action from the bank. As the company reasonably understood the demand for the payment of the commission to be inextricably linked with the release of the guarantee, the release of the guarantee not being an action required of the company under the debenture or any other document, we submitted that it was not a valid demand for the commission and thus the debenture was not enforceable.

 What was the final decision of the Court?

The Court held that, considering the demand notice objectively, it was a demand for payment of the commission and the release of the bank from the guarantee. The Court concluded that it was not for the bank to now seek to divide the commission and the guarantee. Ultimately the Court declared that the appointment of the Administrators by the bank was invalid.

A great result for our client

This case raised complex insolvency law issues, and it was a great relief for our client that we were successful in our argument on this case. We are fortunate in that we have a lot of expertise in this area and could competently support our client in defending this case.

If you require any legal guidance on an insolvency law issue, feel free to contact me on 01908 660966 or by e-mail at Christopher.Buck@franklins-sols.co.uk

Image courtesy of: serezniy / 123RF Stock Photo 

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About Christopher Buck

Chris is a Commercial Services Solicitor at Franklins, specialising in contracts; dispute resolution; insolvency; intellectual property and business structures. You can connect with him on LinkedIn
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