Dealing with secured creditors is a well-trodden path for insolvency practitioners. Fixed and floating charges are standard fare, particularly with the now common practice of Berkeley Applegate Orders (Re Berkeley Applegate (Investment Consultants) Ltd 1989) which allow a court to exercise discretion to award recovery of costs and expenses associated with the securing, management and realisation of fixed charge assets. A warning though – do not assume that the court will grant all costs and expenses; how you interact with the secured creditors will have a substantial impact on outcome.
What is a lien?
A lien is an equitable charge arising from a contractual right or interest and they are a wholly different prospect to the common forms of security an office holder deals with. Liens are not strictly security in the recognised sense of fixed and floating charges (and remember that the concept of floating charges is not recognised in numerous other jurisdictions).
The common misconception associated with liens is that the registration of the Unilateral Notice (UN1) at HM Land Registry creates the lien. The lien is actually created by the interest conferred by a contract dealing with the land or part thereof. The UN1 merely registers the interest and puts a liquidator or administrator on notice; likewise, the absence of a UN1 does not mean there is no lien.
How do they work?
The concept of liens is commonly found in off-plan property sales and are legally defined as ‘unitised property ownership schemes’. The last 20 years has seen a proliferation of development schemes where funding is raised by off-plan sales to investors (often in foreign jurisdictions), particularly in the hotel development and student housing development arenas and commonly in the form of contracts to create leases over rooms once the development is completed. A consequent trend is that the development does not complete (or in some cases even get off the ground) and the funds raised are either squandered or misapplied (despite the contracts often warranting that the funds will only be used to meet costs of development etc).
Once an investor has entered into a contract for lease, the interest which creates the lien exists and the investor will have usually parted with a substantial deposit or % of the contract price. Most investors will be pointed in the direction of a law firm tasked with representing them in their ‘investment’ and who will deal with the contract and handing over of the deposit monies. At this stage UN1s will be registered, giving an indication of priority between individual liens and secured creditor interests.
Once the development falters, the developing company will end in liquidation or administration. The administrator has Schedule B1 paragraph 71 of the Insolvency Act 1986 to fall back on, which is commonly coupled with an application for a Berkeley Applegate Order to meet the costs and expenses associated with the management and realisation of the fixed charge asset.
A fixed charge receiver (or LPA receiver) and a liquidator do not have access to Para 71. Instead, they will have to make an application for relief against the equitable charge holders (which can be coupled with a Berkeley Applegate application).
It is at the time of making the application that an office holder must apply the rule in Eason v Wong (2017) EWHC 209. In that case the court ruled that (1) the liens were equitable charges and as such the lien holders were secured creditors to the extent of monies paid over (2) the property could be sold by the liquidators, free of the liens, but (3) the liens are attached to the proceeds of sale.
The court required a calculation for the purpose of distribution of sale proceeds, to ensure that the liens were treated correctly alongside the secured creditors. For this purpose, UN1s assist in identifying the order of interests which may mean that you end up with different classes of distribution amongst lien holders depending on the priority and where any secured creditors sit in the order.
We recently dealt with an administration involving a proposed mixed-use development consisting to of residential units and hotel rooms, the latter being subject to off-plan sale contracts for long leases over some hotel rooms, involving almost 200 investors. A lien can only apply against that proportion of the proceeds of sale that related to the contracted part of the development. In this case the development was not built, and we sold the site for £2.25 million. It was necessary to calculate the % square footage of the whole proposed development, which applied to the contracted part of the development, before then establishing how and in what order that % of the proceeds of sale would be distributed between the lien holders and secured creditors. When undertaking that calculation, the administrator further had to establish and then ignore square footage for larger common areas.
In short, it is to a degree an inexact science often complicated by the sheer number of investors involved.
Recommendations in dealing with lien holders:
- Ensure you have correct details of investors so you can communicate with them and pass these details on to your law firm. Secure all solicitor files as a priority.
- If faced with a smaller number of readily available investors, invite surrender. On a completed or near complete development this is more attractive as contracts may have further onerous obligations.
- In our experience tracing and communicating with lien holders is an onerous and costly task and lien holders will always want, at the very least, to have some of their money back. A court application may be more cost-effective.
- Do not assume that UN1s represent all liens – the UN1 is not what creates the equitable charge. You may need to advertise to satisfy that you have exhausted investigations on potential liens.
- Ensure you have all the development plans to hand with all proposed final development measurements included – these are relevant when undertaking a calculation for a mixed-use scheme involving partial investor interest.