Enforceability of security interests on insolvency - two recent decisions
In Bushby & Anor v Actua (Re Rodus Developments Ltd)  EWHC 3232 (Ch), ICC Judge Barber made a declaration that an equitable charge was void for non-registration at Companies House. This decision is a timely reminder that the deadline for registration must be met for security interests to be enforceable against a liquidator or administrator.
The background to the decision was that Rodus Developments Ltd ("the Company") was an SPV for a build to rent scheme in Salford, on land purchased in July 2018, funded by secured loans. In due course, the secured creditor appointed Administrators. Shortly after their appointment, solicitors for Actua Investment LLC ("Actua"), a Duabi company, made an application to the Land Registry for a unilateral notice in respect of an equitable charge over the development land. Actua claimed to have loaned the Company £1.2m in April 2018 (prior to the Company's acquisition of the development land), and the relevant facility agreement allowed Actua to register a charge. However, the charge in question was not registered at Companies House within the mandatory 21 day timescale, and Actua sought to register a unilateral notice only after the Administrators' appointment.
The Administrators considered any equitable charge was void for want of registration. However, the unilateral notice application was not withdrawn, and was impacting the progression of agreed sales of units of the development. Further, the sums due to the secured creditor with priority were such that a significant shortfall was expected, so that it was extremely unlikely that any distribution would be made to Actua, even if it did have a valid second ranking equitable charge.
ICC Judge Barber had no issue finding that the equitable charge was "plainly void" for non-registration by virtue of section 859H of the Companies Act 2006.
In Candey Ltd v Crumpler  UKSC 35, the Supreme Court considered a different security interest, a solicitor's lien, and specifically, the circumstances in which it may be inferred that the solicitor has waived or surrendered the lien to which they would otherwise have been entitled.
The relevant background is that Candey Ltd ("Candey") was instructed by Peak Hotels and Resorts Limited ("Peak") in connection with litigation which settled after liquidators were appointed to Peak. Candey sought payment of its fees, contending that these were payable in priority to other creditors in the liquidation, asserting an equitable lien over the proceeds of the litigation. Peak's liquidators argued that Candey had waived or surrendered any lien when it accepted additional security for its fees wen its retainer was renegotiated, and/or when it submitted a proof of debt in the liquidation.
The retainer was renegotiated after Peak ran out of funds to continue litigation in which it was involved. Peak negotiated a fixed fee for Candey, deferred until handing down of judgment or settlement or the insolvency of Peak. The arrangement was supported by a floating charge over all of Peak's assets and undertaking. In due course, Peak was placed into liquidation in the BVI. Candey submitted a proof of debt in which it referred to the charge but made no reference to a lien.
At first instance, the Judge considered that acceptance of additional security when the retainer was renegotiated did waive the lien. The Court of Appeal upheld the decision on the basis that the lien must have been waived because the terms of the charge were inconsistent with a lien. Candey appealed to the Supreme Court.
The judgment helpfully sets out the key features of a solicitor's lien, namely that it is based on the principle that the client should not get the benefit of the solicitor's labour without paying for it, and the lien encourages solicitors to take on cases and is thus important in ensuring access to justice. It does not depend on possession of property, but operates by law as a first ranking right of the solicitor to be paid their fees out of the proceeds of the litigation, as a form of equitable charge which binds third parties with notice of it, which survives insolvency.
Whether a lien is waived will depend on the intentions of the parties. Where this is not explicitly addressed, as in this case, the intentions must be objectively inferred from all of the circumstances. The judgment sets out that where a solicitor takes new security over the asset covered by the lien, this will, on the face of it, displace the lien, particularly if the new security has a different priority. Lord Kitchin also highlights the duty of a solicitor, when taking security, to give express notice to the client if they wish to retain the lien.
When Candey took a charge in 2015, the charge document stated the agreement superseded and replaced any previous agreement. This was held to support the inference that the charge replaced the lien. The charge also altered the priority arrangements to confer priority on a funder, which was held to reinforce the inference the lien has been abandoned. Accordingly, the unanimous conclusion was that the lien was not expressly reserved and there were ample grounds to infer that the parties intended that the lien be replaced by the terms of the charge.
These two decisions highlight complexities that can arise in the question of enforceability of differing security interests, and importantly, that those intending to rely on security interests must have acted in a way consistent with the particular security interest on which they rely.