Strategic Advantage SPC for and on behalf of Arlington 1 SP and Arlington 3 SP v ARL O09 Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Andrew Sutcliffe |
| Judgment Date | 09 December 2020 |
| Neutral Citation | [2020] EWHC 3350 (Ch) |
| Court | Chancery Division |
| Docket Number | Claim No: CR-2020-LDS-000831 |
| Date | 09 December 2020 |
[2020] EWHC 3350 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS IN LEEDS
INSOLVENCY AND COMPANIES LIST (CH D)
IN THE MATTER OF ARL O09 LIMITED (Co. No. 11113979)
AND IN THE MATTER OF ARL 011 LIMITED (Co. No. 11121147)
AND IN THE MATTER OF BRK 001 LIMITED (Co. No. 11243276)
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Mr Andrew Sutcliffe QC, sitting as a Judge of the High Court
Claim No: CR-2020-LDS-000831
Ms Lexa Hilliard QC, Mr Hugo Groves and Mr Matthew Maddison (instructed by Walker Morris LLP) for the Applicant
Mr Matthew Smith (instructed by TLT LLP) for the Respondents
Mr Adam Deacock (instructed by Walker Morris LLP) for the Proposed Administrators, interested parties
Mr Olivier Kalfon and Ms Hannah Ilett (instructed by Blake Morgan LLP) for AIL Administrators, interested parties
Ms Hilary Stonefrost (instructed by Michelmores LLP) for IMVA Limited, an interested party
Hearing date: 3 December 2020
Mr Andrew Sutcliffe QC:
Introduction
This is an application by Strategic Advantage SPC (the Applicant) for administration orders in relation to each of the Respondents (the Companies) pursuant to paragraphs 10 to 13 of Schedule B1 to the Insolvency Act 1986 ( Schedule B1). The grounds relied on by the Applicant are that (1) it is a creditor of the Companies, (2) the Companies are or are likely to become unable to pay their debts and (3) the orders are reasonably likely to achieve the purpose of administration.
The Companies oppose the application. They contend that the Applicant is not a creditor, that they are not insolvent and that the application imperils their survival as going concerns. The application is also opposed by the Companies' parent and sole shareholder, Arlington Infrastructure Limited ( AIL) which is already in administration, and by one of AIL's creditors, IMVA Limited.
The hearing took place remotely before me on Thursday, 3 December 2020. Ms Lexa Hilliard QC, Mr Hugo Groves and Mr Matthew Maddison appeared for the Applicant and Mr Matthew Smith appeared for the Companies. I gave permission pursuant to rule 3.12(1)(j) of the Insolvency Rules 2016 for three further parties be heard on the application. Mr Olivier Kalfon and Ms Hannah Ilett appeared for AIL, acting by its administrators, Simon Campbell and Andrew Watling of Quantuma Advisory Limited (the AIL Administrators), Ms Hilary Stonefrost appeared for IMVA Limited and Mr Adam Deacock appeared for Ben Woolrych, Paul Allen and Jason Baker of FRP Advisory Trading Limited (the Proposed Administrators).
A large amount of evidence has been filed on both sides. I shall refer to some of it. I have read all of the witness statements filed and the exhibits where relevant and I have taken it all into account in reaching my conclusions.
Background
The Applicant is a segregated portfolio company incorporated as an exempted company in the Cayman Islands on 28 March 2018. It carries on business providing secured term loan facilities. Such facilities are almost exclusively funded by Korean blue-chip investors. It has created a number of “segregated portfolios” for the purpose of its business activities including Arlington 1 SP and Arlington 3 SP through which it made loans to AIL. The Applicant's current directors are Heesuk (Shawn) Jee ( Mr Jee) (who has made two statements on the Applicant's behalf), Huan Koh, Annemarie Levin and John Lynden.
The Applicant provided loans in the total sum of approximately £39 million to AIL pursuant to facility agreements dated 13 September 2018 (as amended) and 7 March 2019 (the Facility Agreements). By clause 3.1.2 of the Facility Agreements, one of the purposes of the lending was for AIL to lend money by inter-company loans to the Companies (referred to in the Facility Agreements as the “Project Companies”). The AIL Administrators' solicitors have stated in a letter to the Applicant's solicitors dated 2 October 2020 that the sums borrowed by AIL from the Applicant were “ cascaded down” from AIL to the Companies by way of “ informal undocumented inter-company loans”.
The Applicant has the following security: (1) a debenture dated 13 September 2018 (comprising fixed charges and a floating charge) over all AIL's assets including a fixed charge over AIL's shares in the Companies (the AIL Debenture) and (2) debentures dated 13 September 2018, 21 September 2018 and 7 March 2019 (comprising fixed and floating charges) over all of the assets of the Companies (the Company Debentures).
By clause 2 of each of the Company Debentures, each Company covenanted to “… on demand, pay to the Lender [the Applicant] and discharge the Secured Liabilities when they become due for payment and discharge in accordance with the terms of the Facility Agreement” (the covenant to pay). Clause 1 defines “ Secured Liabilities” as “all present and future obligations and liabilities of the Borrower [AIL] to the Lender [the Applicant], whether actual or contingent and whether owed jointly or severally as principal or surety or in any other capacity, under or in connection with the Facility Agreement or this deed ….”.
A group of lenders including IMVA Limited and the directors of AIL (the Senior Creditors) loaned approximately £5 million (the Senior Debt) to AIL pursuant to a loan agreement dated 20 September 2019, which is secured by a debenture comprising fixed and floating charges over the assets of AIL, but not over the Companies. Accordingly, the only lender with fixed and floating security over the assets of the Companies and AIL is the Applicant.
By clause 2.3 of a deed of priority also dated 20 September 2019 (the Deed of Priority) between the Senior Creditors, the Applicant and AIL (but not the Companies), the Senior Creditors' security interests rank to the extent of the Senior Debt in priority to the security interests of the Applicant in respect of the sums loaned by the Applicant to AIL (defined as the Junior Debt). Clause 10 of the Deed of Priority has the effect that the Senior Debt ranks ahead of the Junior Debt.
On 17 August 2020 the Senior Creditors made an out of court appointment of the AIL Administrators pursuant to paragraph 14 of Schedule B1. The appointment of administrators over AIL constituted an Event of Default under clause 17.7.4.3 of the Facility Agreements.
On 28 September 2020, the Applicant filed notices for the out of court appointment (again pursuant to paragraph 14 of Schedule B1) of the Proposed Administrators as joint administrators of the Companies.
By application issued on 27 October 2020, AIL (acting by the AIL Administrators) and Mark Agrasut (the Security Trustee for the Senior Creditors) applied for a declaration that the appointment of the Proposed Administrators as joint administrators of the Companies was invalid because the Applicant's floating charges were “not enforceable” at the relevant time within the meaning of paragraph 16 of Schedule B1 (the Paragraph 16 Application). The ground on which AIL and the Senior Creditors contended that the Applicant's qualifying floating charges over the Companies were not enforceable was that, by clause 9.1.4 of the Deed of Priority, the Applicant had agreed with the Senior Creditors that it would not (except with the prior written consent of the Senior Creditors) “take any step to enforce any Junior Security Interest, whether by appointing a Receiver, exercising its power of sale or otherwise”.
The Paragraph 16 Application was heard by me on 13 November 2020 and I handed down judgment on 19 November 2020 ( [2020] EWHC 3123 (Ch)). I held that the appointment of the Proposed Administrators as joint administrators of the Companies was invalid because (1) the requirement in clause 9.1.4 of the Deed of Priority for the Applicant to obtain the written consent of the Senior Creditors prior to filing an out of court appointment of administrators was a condition precedent to the enforcement of the Applicant's qualifying floating charges and (2) the Senior Creditors' written consent had not been sought or provided. I gave the Applicant permission to appeal and, upon the Applicant undertaking to issue this application (which it did that afternoon), I granted a stay of the declaration of invalidity pending the hearing of the appeal or this application, whichever occurred first.
Notwithstanding the fact that the Companies' directors had offered undertakings on 24 November 2020 not to take any steps other than steps relating to the day-to-day operation of the Companies pending the hearing of this application on 3 December 2020, the Applicant applied on short notice on 26 November 2020 to appoint the Proposed Administrators as interim managers. That afternoon Marcus Smith J dismissed the Applicant's application and lifted the stay, such that the directors were placed back in control of the Companies subject to undertakings to take no steps other than to operate the day-to-day business of the Companies until the hearing of this application.
The relevant statutory provisions
The requirements for making an administration order in respect of the Companies are as follows:
(1) the Applicant must be a creditor of the Companies. A creditor for these purposes can be an actual creditor or a contingent or prospective creditor: sub-paragraphs 12(1)(c) and 12(4) of Schedule B1;
(2) the court must be satisfied that the Companies are or are likely to become unable to pay their debts: paragraph 11(a) of Schedule B1. By paragraph 111(1) of Schedule B1, the term “unable to pay its debts” has the meaning given by s. 123 of the Insolvency Act 1986, in other words, insolvent on either a “cash-flow” or a “balance sheet” basis;
(3) the court must also be satisfied...
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