Lee Manning v Neste AB
| Jurisdiction | England & Wales |
| Judge | Mr Simon Gleeson |
| Judgment Date | 12 October 2022 |
| Neutral Citation | [2022] EWHC 2578 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CR-2021-000940 |
[2022] EWHC 2578 (Ch)
Mr Simon Gleeson
SITTING AS A DEPUTY HIGH COURT JUDGE
Case No: CR-2021-000940
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
IN THE MATTER OF BITUMINA INDRUSTRIES LIMITED (IN ADMINISTRATION)
AND IN THE MATTER OF INSOLVENCY ACT 1986
7 Rolls Buildings
Fetter Lane, London
EC4A 1NL
Mr. Olivier Kalfon and Mr. Joseph Bunting (instructed by Locke Lord (UK) LLP) for the Applicants
Mr. Daniel Petrides (instructed by McCarthy Denning) for the First Respondent
Mr. Christopher Brockman (instructed by Keystone Law) for the Second Respondent
Hearing dates: 14 July 2022
APPROVED JUDGMENT
This judgment was handed down remotely by circulation to the parties' representatives by email and release to the National Archives. The date and time for hand-down is deemed to be 12 October 2022 at 10.30 am.
This is an application made by the joint administrators of Bitumina Industries Limited (“the Company”) for directions as to the validity and enforceability of a charge given to the Second Respondent by the Company in January 2020 (“the Charge”).
The Charge constituted a grant of a floating charge to a connected person at a relevant time, and is therefore prima facie invalidated by s.245 of the Insolvency Act 1986 (“ The Act”). However, that section provides that such a charge is not invalidated if consideration is given for it at the time of or after its creation.
The Second Respondent argues that he did give such consideration both at the time when the charge was created and thereafter. There is no dispute about the facts in this regard – the issue is simply whether, as a matter of law, his interactions with the Company constituted the giving of good consideration at the same time as or after the creation of the Charge so as to validate it.
The First Respondent (who is the largest unsecured creditor of the Company) argues that the Charge, although validly created, was invalid under s.245 at its moment of creation, and that it is not validated by any of the subsequent actions of the Second Respondent.
Introduction
Bitumina International DMCC (“ DMCC”) was a company established in Dubai on 10 April 2019. It was owned by the Second Respondent, Mr Farah. Its main (and apparently only) asset appears to have been a cash balance of $2,350,000. On 22 November 2019, Mr Farah entered into a sale and purchase agreement (the “ SPA”) to sell DMCC to the Company in consideration of the issue by the company to him of 2,332,750 convertible secured loan notes of $1 each (the “ Notes”). The security for the Notes was to be constituted through a separately executed debenture granting a floating charge over the assets of the Company. The terms of the Notes were recorded in a document called the Convertible Loan Note Instrument (“ CLNI”).
At the time of the sale of DMCC to the Company, and for some time thereafter, Mr Farah was a director of the Company.
The SPA was executed on the 22 November 2019. It provided that completion should take place “immediately after the signing of this agreement”, at which point the shares in DMCC should be transferred and the Notes issued.
The issue of the Notes was approved by a board resolution of the Company, on the same day as the execution of the SPA, and certificates evidencing the issue of the Notes were issued under the Company's seal on that date (the “ Certificates”).
A debenture securing the Notes was also executed on that day (the “ First Debenture”). It appears that this debenture was validly executed. However, it was not registered within the prescribed period, and therefore became ineffective against the Joint Administrators at the expiry of that period.
The completion process of the SPA was protracted, since the UAE company law formalities relating to the transfer of the shares in DMCC took time to complete. Since the SPA had provided for completion to take place “immediately”, both parties were now in breach – the Company because it had not granted a valid Debenture, and Mr Farah because he had not transferred the shares. During this period, the parties to the SPA clearly agreed to vary its terms to require the creation of another Debenture. A second debenture was created (the “ Second Debenture”), which was invalid on its face. However, nothing turns on that document.
It was therefore agreed between the parties that another Debenture (the “ Third Debenture”) should be executed on the same day that the share transfer was to be completed. This was 22 January 2020.
The Third Debenture was formally invalid for two reasons. First, Mr Farah was both a party to it and witnessed the signatures of Mr Schmidt and Mr Hamoud ( Seal v Claridge (1881) 7 QBD 516 at 519); and second, that the execution pages were not in fact executed, but the execution page of the Second Debenture was attached to it ( R (On the application of Mercury Tax Group) & Another v HMRC [2008] EWHC 2721 (Admin)). It therefore never took effect as a deed. It was, however, registered with the registrar of companies as a charge.
It is not legally necessary for a floating charge to be granted in the form of a deed. Where parties bind themselves to create a charge, purport to do it by deed, and the deed itself fails, the question becomes simply one of whether the steps taken by the parties, disregarding the deed, were sufficient to create a legally enforceable obligation on the chargor to apply the charged property in discharge of the secured obligation. It is common ground between the parties that that was the case here. A valid equitable charge (the “ Charge”) therefore came into existence at this time.
Shortly after the completion of the SPA, the terms of the agreement between the parties were significantly renegotiated. This renegotiation involved amendments to the terms of the Notes recorded in the CLNI, and these amendments were effected by the execution of a deed of amendment dated 23 April 2020 (the “ Deed of Amendment”). The question of whether the effect of the Deed of Amendment was in fact to cancel the existing Notes and replace them with new instruments is a significant point in this application.
It should be noted that the Charge was in the form of an “all monies” debenture – thus the amendments effected by the Deed of Amendment did not require any amendment to the Charge, and would not have done so even if they had constituted the extinction of the existing Notes and the creation of new instruments.
Mr Brockman, for Mr Farah, says that the restructuring of arrangements between the parties went some way beyond the specific measures recorded in the Deed of Amendment, and that in analysing the position I should look at the entire agreement between the parties, and not merely the terms of the Deed of Amendment. I accept that submission. I will therefore refer to the entirety of the restructuring of the arrangements between the parties as the “ Renegotiation”.
The joint administrators of the Company were appointed pursuant to an Order of ICC Judge Prentis on 30 June 2021.
The Law
S.245(2) of the Act so far as relevant to this application provides:
“(2) [Invalidity of floating charge] Subject as follows, a floating charge on the company's undertaking or property created at a relevant time is invalid except to the extent of the aggregate of–
(a) the value of so much of the consideration for the creation of the charge as consists of money paid, or goods or services supplied, to the company at the same time as, or after, the creation of the charge,
(b) the value of so much of that consideration as consists of the discharge or reduction, at the same time as, or after, the creation of the charge, of any debt of the company, and
(c) the amount of such interest (if any) as is payable on the amount falling within paragraph (a) or (b) in pursuance of any agreement under which the money was so paid, the goods or services were so supplied or the debt was so discharged or reduced.”
S.235(3) provides:
“the time at which a floating charge is created by a company is a relevant time for the purposes of this section if the charge is created – in the case of a charge which is created in favour of a person who is connected with the company, at a time in the period of 2 years ending with the onset of insolvency”
S.245(5) (a) provides that the onset of insolvency in cases where an administrator is appointed by the court is the date of the administration application.
S.249 provides that a person is “connected” with a company if they are a director of that company. It is accepted that for the purposes of s.245 Mr Farah is connected to the Company and that the relevant period is two years.
Section 245 is not based on any requirement for, or implication of, a desire to prefer a particular creditor — there is no “mental element”. Questions as to the intention of the company, the connected person or indeed anyone else are not relevant – if a charge is granted within the relevant time, it is prima facie invalidated.
The section does, however, save certain charges. Where a charge is granted “for consideration”, it is valid to the extent of the value of that consideration, provided that the consideration is given at the same time as, or after, the granting of the charge. However, words of limitation are included in the section in order to make clear that only certain types of assets can constitute consideration for this purpose. Thus in order to show that he has given consideration, the beneficiary of the charge must show that he has either provided “money paid, or goods or services supplied” to the company granting the charge,...
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