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Two companies challenged the appointment of administrators by a qualifying floating charge holder on the basis the floating charge was not enforceable as the bank was estopped from making demand for money owing to it. Estoppel is where a party’s actions prevent it later doing or claiming something contradictory to those previous actions.

The Court did hold, as a preliminary point, that the companies directors still had the authority to bring this challenge on the companies’ behalf – even though administrators had been appointed.

Facts

Before the administration, in November 2011 the companies had brought a separate claim against the bank for damages, which led to lengthy negotiations between the parties.

The companies’ claim against the bank had been formally stayed (that is, put on hold) while negotiations to settle continued, on terms that either party could lift the stay on 3 days’ notice. The companies put forward an offer of settlement of just over £18 million, conditional on the companies getting third-party finance, which they had been offered in principle.  The parties had a meeting in January 2013, at which the bank’s representative said the matter was “commercial, not litigation” now.  The bank’s correspondence after this date contained “reservation of rights” statements.

Unfortunately the negotiations were drawn out. The Court ordered stay expired on 30 April 2013. The bank told the companies they were content to allow the court case to take its course.

On 4 September 2013 the companies told the bank that their offer of funding had been withdrawn and they were seeking alternative funding. Hearing nothing further, on 11 October, the bank told the companies of their decision to demand and appoint administrators.

The companies argued a “promissory estoppel” had arisen because the companies had understood the bank’s correspondence to be a representation that neither side would take any action while negotiations were continuing, without giving reasonable notice to the other.  This argument meant the companies were claiming the bank was not entitled to enforce the charge and so appoint an administrator because its actions or statements had led the companies to understand the bank wouldn’t take any action during negotiations without reasonable notice. This case was unusual in that the companies could not point to one particular statement by the bank and relied on the course of the settlement negotiations as creating the estoppel.

Judgment 

The High Court reviewed the case law on promissory estoppel. It confirmed there must have been a clear and unequivocal statement the other party relied on, and that if ambiguous words were used there would not be an estopppel unless the statement was clarified.

It was held on the facts of this case there had been no specific statement made by the bank that would result in a promissory estoppel.  The companies could not show that an estoppel had arisen through implication from a series of communications and meetings.  Even without this finding, the bank’s reservation of rights in its 2013 correspondence and its refusal to agree to a further stay of the legal proceedings were each enough to mean that it could not reasonably be understood the bank had agreed to hold off taking action.

The appointment of the administrators was therefore valid.

While this case went in favour of the bank it highlights the need for qualifying floating charge holders to reserve their rights specifically when entering negotiations with all customers, not just those who they are in dispute with or who are in financial distress. A clearly drafted reservation of rights letter can prevent the need to argue the point in court.

Case – Closegate Hotel Development (Durham) Limited v McLean and others [2013] EWHC 3237, case link: http://www.bailii.org/ew/cases/EWHC/Ch/2013/3237.html


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.