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Administration valid following failure of QFC Holder to give notice to prior outstanding (but marked ‘satisfied’) QFC Holder: Re NMUL Realisations Limited (in administration)  EWHC 94 (Ch)29th January 2021 Restructuring & Insolvency
The issue in this case concerned the failure of a holder of a Qualifying Floating Charge (QFC) to give notice to a prior QFC holder before appointing administrators, therefore potentially calling into question the validity of the administration.
Prior to administration, the Company manufactured Norton motorcycles. A corporate trustee of a pension scheme (‘the Trustee’) loaned £1M to the Company, secured by a QFC (‘the Pension QFC’) in 2008. There was then a series of unusual events which led to the Trustee being dissolved in 2016. In short, its two directors were convicted of fraud, imprisoned and confiscation orders made against them which specified that the benefit of the Pension QFC (and underlying loan) formed part of the realisable property of the directors and was subject to the Enforcement Receiver who had been appointed to enforce the confiscation order. This ultimately led to the Trustee being dissolved at Companies House.
10 years after the loan and registration of the Pension QFC, the director of the Company, apparently not having heard from the Trustee for some years, ‘wrongly concluded’ that the loan had been discharged and the Pension QFC satisfied. He then proceeded to cause the Company to file a notice of satisfaction at Companies House which was acted upon by the Registrar of Companies. In fact, the Company still owed approximately £1.5M (including interest) to the Trustee, secured by the Pension QFC.
The Company then obtained a loan from a Bank, secured by a QFC.
The Bank demanded repayment of the debt from the Company in 2020, absent which it filed a Notice of Appointment of Administrators. At this time, the only QFC showing at Companies House as unsatisfied was the Bank.
The court examined the status of the Pension QFC and noted the following:
- The discretion of the Registrar of Companies upon receipt of a certificate of satisfaction of a charge from the Company is very limited, in short if a certificate of satisfaction is filed by the Company, the Registrar must include a statement of satisfaction in the Register.
- The certificate of satisfaction and resulting statement of satisfaction is not conclusive since it is obtained by the Company alone, without any involvement of the holder of the charge. In particular, a discharge can be wrongly registered by the false statement of the Company.
- Strictly speaking a subsequent proposed secured creditor must satisfy itself as to the effective discharge of the previously registered charges because the Register is not conclusive in its effect.
- If a discharge is wrongly registered by the Company, the charge holder does not lose the benefit of its security.
- The holder of a prior QFC which has been wrongly marked satisfied on the Register, still needs to be given notice of an intention to appoint administrators by the holder of a subsequent QFC.
One of the issues which arose in the particularly unusual circumstances of this case was to whom notice should have been given in view of the dissolution of the Trustee. There was debate as to whether the Crown (bona vacantia) or the Enforcement Receiver became the holder of the QFC to whom notice should be given but ultimately the court did not decide the point other than to reject the administrators’ submissions that there was no party to whom notice could be given. The court suggested it may have been appropriate to serve the notice on both the Crown and the Enforcement Receiver given one of those parties would have been entitled to receive notice. However, that was with the benefit of hindsight given the Bank did not know of the existence of the Enforcement Receiver or the fact that the Pension QFC had been wrongly marked satisfied.
Having found that there was a failure by the Bank to give notice of an intention to appoint administrators to the Crown or the Enforcement Receiver (with no criticism of any of the parties involved), the court then examined the consequence of the failure.
The court’s decision in Re NMUL Realisations Limited was in line with the numerous authorities dealing with validity issues arising from a failure to follow the rules to the letter. In Re Tokenhouse  EWHC 3171 (Ch), the court concluded that the failure of directors to give notice of an intention to appoint administrators to the holder of a QFC was not a fundamental defect leading to invalidity but an irregularity giving rise to a formal defect that can be remedied by an order of the court under Rule 12.64 of the Rules. In Re NMUL Realisations Limited, the court decided that a failure by the holder of a QFC to give notice to a prior holder of a QFC could be dealt with in the same way, by making a declaration that the appointment of administrators was valid notwithstanding a failure by the Bank to give notice to the prior holder of the Pension QFC of its intention to do so.
Practitioners, often operating under pressure and at short notice, are unlikely to be in a position to investigate the veracity of QFCs marked satisfied at Companies House and will either assume the Register is correct (and rely on Rule 12.64 if it is not) or will serve notice on all historical QFC holders marked satisfied. The latter would seem most unlikely especially where an appointment is required pre-expiry of a notice period