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(UK) The Court Considers the Question of Whether Secured Creditor Consent is Required to an Administration Extension Again. “Too Good” to be True?
by: Rachael Markham of Squire Patton Boggs (US) LLP  -   Restructuring GlobalView
Monday, June 17, 2024

No, it isn’t. We now have two cases where the Court has confirmed that insolvency practitioners do not need the consent of paid secured creditors when extending an administration under para. 78 of Schedule B1 of the Insolvency Act 1986 (the “Act”).

In Boughey & Anor v Toogood International Transport and Agricultural Services Ltd [2024] EWHC 1425 (Ch) (“Toogood”)the judge agreed with the conclusions reached in the recent Pindar case – see our blog on this – concerning the interpretation of s248 of the Act. Agreeing that is it clear that a secured creditor as defined in s248, is a creditor who “holds” (in other words still has) a security. The judge in Toogood elaborated on this further saying that even if it was possible to construe “security” in s248 as referencing security for a debt of zero, s248 still refers to “creditor”, saying that a creditor who has been repaid is no longer such.

The judges in both cases were referred to the Insolvency Service’s view that a creditor is defined at the point of entry into a process – see the First Review of the Insolvency Rules. But neither found favour with this. In Toogood the judge said there was nothing in the legislation that compelled that conclusion and said:

“Only those who have an economic interest in the outcome should be concerned to make decisions about the continuance of the administration”

This view is consistent with the approach taken in the other cases which are referenced in the judgment and it is also consistent with discussions in parliament regarding para.78 at the time the legislation was debated in the Lords where the view was expressed that including creditors in decisions where they have no financial stake “would simply add unnecessary administrative burdens and costs to the administration”.

Having flagged a few words of warning in our previous blog and suggested readers take a cautious approach and seek the consent of all secured creditors – whether paid or not – the judiciary have been very firm on how s248 should be interpreted. In fact, making strong comments in Toogood about the Insolvency Service’s view:

“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.”

The judge in Toogood also noted: “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 decisions about administrations that no longer affect it. Why should it spend its time, unremunerated, to do so?” This is a fair reflection of the attitude many secured lenders already have.

Can we now be confident that practitioners do not need the consent of paid secured creditors?

Yes, as far as we can be, but there are always niggling questions of doubt where applications are uncontested and (as it was in Toogood) dealt with on paper. However, we do have two judges giving a clear view on how s248 should be interpreted and that should give sufficient comfort to practitioners to rely on these decisions. 

Ultimately if a different judge reaches a different conclusion on the interpretation of s248 and we end up with competing decisions then practitioners can take comfort from existing case law that if an extension is invalid because the procedural requirements were not met, the Court will try to remedy this where it can.

For the cautious amongst us, if practitioners want to obtain consent from both paid and unpaid secured creditors, there is no harm in doing so. However, will paid creditors engage – probably not. It was difficult enough to extract the consent of paid secured creditors before these decisions and as the judge in Toogood notes, why should they?

We also queried in our previous blog whether practitioners could get a consensual extension where all secured creditors have been paid in full. Commenting that paragraph 78 did not seem to work in this situation and the only solution appeared to be to go to court to obtain an extension at the end of the one-year anniversary. Toogood seems to confirm this view:

If all the creditors have been paid off, there are no creditors with an interest in the outcome, and the court should take the decision.” 

There is precedent for involving the court when there are no creditors who can make a decision. In Re Lehman Brothers Europe Ltd (in administration) [2020] EWHC 1369 (Ch) the court was faced with the question of how administrators could obtain their discharge from office when there was no creditors committee because all creditors had been paid – concluding that they should apply to court.

Will leaving £1 outstanding to a secured creditors (to have the ability to extend the administration by consent) provide a solution?

This is how some practitioners have addressed uncertainty about whether paid secured creditors need to consent to an extention (at least until now) by ensuring that they are not fully paid. However, considering these recent decisions, we would expect this practice to stop because why would those creditors now wish to engage – the court has recognised that this creates an administrative burden for them and it appears to be clear that practitioners need to apply to court if there are no creditors who can make a decision.

Although leaving £1 does provide a mechanism for an extension by consent it seems unlikely that secured creditors will engage for the sake of £1 and practitioners will need to apply to court for an extension in any event. Even if they did consent, we would not expect the judiciary to look favourably on this practice when it comes to the second extension.

What are the Key Takeaways?

  • If secured creditors have been paid insolvency practitioners do not need their consent to extend the administration but consider whether to ask paid secured creditors to confirm that they have been paid in full and to formally discharge their security (although this is not strictly necessary).
  • If there are unpaid secured creditors practitioners will need the consent of those creditors – these decisions do not change that.
  • If all secured creditors have been paid (so there are none) practitioners should apply to court at the one-year anniversary for an extension.
  • Consider whether a secured creditor will consent to an extension prior to payment. If a practitioner can give reasons for needing to extend long before the one-year anniversary, then it is possible to obtain consent early (although early can be too early in some cases – see our previous blog) and a secured creditor might be unwilling to do this if they know they will be paid shortly.

As a final point, in both cases the judges considered r15.11 and the Insolvency Services’ plan to amend that rule. However, r15.11 does not apply when obtaining secured creditor consent to an extension where neither a decision process nor the deemed consent procedure is used. This point does not appear to have been drawn to the judges’ attention.

When seeking consent from secured creditors there is no decision process, and we know from Biomethane that office holders cannot obtain secured creditor consent by deemed consent. Consent is usually sought by email or letter. Rule 15.11 does not, therefore, come into play and references to r15.11 in this context are a bit of a red herring. However this does not change the findings in these cases because the judges’ conclusions ultimately rest on the interpretation of s248.

Do these decisions impact other decisions that require secured creditor consent?

Most certainly given that the judge in Toogood held:

“that a secured creditor whose debt is paid off ceases to be a secured creditor for the purposes of Schedule B1 of the 1986 Act, and its consent is no longer needed for any decision requiring the consent of such a creditor”

As to the practical solutions for dealing with, for example, remuneration approval, we’ll leave that for another blog.

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