Osborne Clarke recently advised the administrators in two reported High Court cases which have confirmed that a "secured creditor" under section 248 of the Insolvency Act 1986 should be construed in the present tense, retaining the status of secured creditor only if it is still owed a debt by the company in administration.
The decisions in Pindar Scarborough [2024] and Boughey v Toogood [2024], provide welcome clarification following the uncertainty caused by the Insolvency Service's First Review of the Insolvency (England and Wales) Rules 2016.
Requirements for consent to extend an administration
When a company enters administration, the administration procedure automatically comes to an end after 12 months, unless extended by either creditor consent or by order of the court.
Creditor consent, which can only be used for the first extension of the administration of no more than one year, requires the consent of each secured creditor of the company (this must be the actual consent of each one), and, depending on whether a paragraph 52(1)(b) statement is made, and usually by way of a deemed consent procedure, either:
- the company's unsecured (including preferential) creditors, where no paragraph 52(1)(b) statement is made; or
- the company's preferential creditors only, where a paragraph 52(1)(b) statement is made and the administrators think that a distribution may be made to such creditors.
Economic interest
A paragraph 52(1)(b) statement will (if made) be set out in the administrators' proposals and states that the administrators think that the company has insufficient property to enable a distribution to made to unsecured creditors other than by virtue of the prescribed part.
The flexibility in the consent requirement is designed to reflect the economic interest (or otherwise) of the company's creditor pool, such that only the creditors with an economic interest are required to participate in administration decision-making (including the extension of administration).
Common practice among insolvency practitioners has, therefore, been to seek only the consent of secured creditors who have not been paid in full. This approach is logical, as where they have been repaid, they cease to be a creditor and have no economic interest in decision-making.
There is no obligation upon a repaid secured creditor to provide consent and it may take the position (as in Pindar) that they are unable to consent to decision-making processes in any event.
Uncertainty caused by first review
Regarding the consent of secured and preferential creditors to administration extensions, the first review cast doubt on whether the common practice adopted was correct. The Insolvency Service stated:
"It has been the Government's position for some time that the classification of a creditor is set at the point of entry to the procedure and that this remains, even if payment in full is subsequently made.
"We believe that to legislate away from this position could cause more problems than it would seek to solve. Accordingly, the Government has no plan to change its long-standing view on this matter. We will amend rule 15.11(1) to be clearer that where the Insolvency Act 1986 or the Rules require a decision from creditors who have been paid in full, notices of decision procedures must still be delivered to those creditor".
For completeness, rule 15.11(1) of the Insolvency (England and Wales) Rules 2016 only concerns notices of decision procedures and notices seeking deemed consent, providing that these must be delivered to: "the creditors who had claims against the company at the date when the company entered administration (except for those who have subsequently been paid in full)".
The position in the first review also appears at odds with other provisions and case law, including:
- The definition of "secured creditor" set out in section 248 of the Insolvency Act 1986, which is defined as "in relation to a company a creditor of the company who holds in respect of his debt a security over property of the company, and "unsecured creditor" is to be read accordingly".
- The manner in which preferential creditor votes are calculated under rules 15.11 and 15.31 of the 2016 rules. The votes do not count if they have been paid and, therefore, it is unclear why secured creditors should be treated differently.
- In Re Biomethane (Castle Eaton) Ltd [2020] at [25], Mr Justice Norris noted that the secured creditors, who were "the only persons with an economic interest" in the administration, had consented to the extension sought;
- Philip Marshall QC in Burningnight Ltd (in administration) [2021] BCC 133 at [35] to [36] referred to the consent of the creditor with the "real interest" in the estate;
- In relation to discharges in Re Lehman Brothers Europe Ltd (in administration) [2020], the former administrators applied for their discharge because the matter had not been put to the creditors' committee before the end of the administration. At [3] the judge said that "...there is no longer any creditors' committee nor (since all creditors have now been paid) is there any body of creditors who might resolve to determine the matter. This, the Administrators, can only obtain an effective discharge as and from the date specified by order of the Court under 98(2)(c) of Schedule B1 to the Act".
The decisions in Pindar and Boughey
In Pindar, the administrators had been appointed on 31 March 2022 and had sought and obtained the consent of the company's remaining secured creditor (by actual consent) and the preferential creditors (by deemed consent) prior to 31 March 2023.
At the date of entry into administration, Barclays had also been a secured creditor. In light of the position adopted by the Insolvency Service in its first review, it was uncertain whether Barclays' consent was also required to the initial creditor extension. This was despite Barclays having been repaid in full during the first six months of the administration, its security being marked as "satisfied" at Companies House, and Barclays explicitly confirming that it "no longer [had] a secured interest in the group and as such, [were] not in a position to consent" when asked to consent to the administrators' fee proposals.
In Boughey, each of HSBC Bank, HSBC UK Bank and HSBC Invoice Finance (UK) had been granted security by the company. Only the security held by HSBC UK Bank secured any debt at the date of the consent to the administration extension was sought. Accordingly, the administrators only obtained the consent to an initial extension from HSBC UK Bank. Again, the first review cast doubt on this approach, and whether the consent of HSBC Bank or HSBC Invoice Finance or both should have been sought despite having no economic interest.
In both cases, the judges considered that section 248 of the Insolvency Act 1986 was clear, and the definition of "secured creditor" should be construed (as drafted) in the present tense, such that a person would only be a secured creditor for decision-making purposes where that person actually holds security in relation to a debt owed. If that debt has been repaid, that person is no longer a creditor and, therefore, has no economic interest in decision-making.
In Boughey, His Honour Judge Matthews considered (at [27] and [28]) that: "There is no reason why a commercial organisation such as a bank that has been repaid in full should have to be bothered thereafter with making administration decisions that do not affect it. Why should it spend its time, unremunerated, in doing so?... If the Government wishes there to be a different result, then it must legislate more clearly than it has done, and moreover explain why those with no economic interest in the outcome of an administration should nevertheless determine what happens."
Osborne Clarke comment
Both Pindar and Boughey concerned creditor extensions to an administration procedure, the decisions potentially have wider effect, as the provisions impact other administration decision-making, including approval of administration proposals and administrators' remuneration.
In Adjei v Law for All [2011] EWHC 2672 (Ch), the failure by the directors to give notice of intention to appoint administrators to a qualifying floating-charge holder rendered the appointment invalid where the continued registration of the security had been overlooked, notwithstanding that the debt had been discharged in full. In the light of His Honour Judge Matthew's judgment that a secured creditor ceases to be a secured creditor for the purposes of Schedule B1, would Adjei (also at first instance) now be decided differently?
Some commentators have queried whether the same conclusion would have been made if, unlike in both Pindar and Boughey, all secured creditors had been paid in full, leaving no remaining secured creditor to extend the administration by creditor consent. While this point was not tested, where there is no outstanding secured creditor in an administration process, the administrators of a company can instead seek an initial extension to the administration by court order.
It should be recognised that Pindar and Boughey are first instance decisions, but these decisions will be welcomed by insolvency practitioners as they demonstrate that the courts are willing to take a common-sense approach when assessing the validity of an administration extension.
We await to see whether the Insolvency Service responds to these judgments and whether further legislative changes are made to alter or support this position.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.