The recent High Court decisions in Boughey & Anor v Toogood International Transport and Agricultural Services Ltd and Re Pindar Scarborough Ltd (in administration) have helpfully provided clarity on the extent to which secured creditors that have been paid in full are required to consent to proposed administration extensions. Unhelpfully, however, the court’s approach is fundamentally at odds with the position of the Insolvency Service.  

For an administration to be extended by consent, the Insolvency Act 1986 (the Act) requires the consent of each secured creditor plus the consent of either the unsecured or preferential creditors, dependent upon the prospects of a distribution. The Insolvency Service’s First Review of the Insolvency (England & Wales) Rules 2016 (the First Review) confirms that a creditor’s categorisation as secured or otherwise is determined at the point of entry into the relevant insolvency process. On this basis, a secured creditor that has been repaid in full by an administrator will still fall within the class of secured creditors that should be consulted, and provide their consent in relation to, a proposed administration extension. The High Court’s view, expressed in both the Pindar and Toogood decisions, is that only secured creditors that have a continuing economic interest in the process (namely, those that have not yet been repaid in full) should be required to provide their consent. This aligns with the definition of “secured creditor” set out within the Act - which considers a creditor’s status by reference to the present position and whether the creditor in fact “holds” security at the point at which its consent is required – and also accords with the common-sense view that a creditor that has been repaid in full is simply no longer a “creditor”.  

The position therefore seems to be (for now at least – both decisions are first instance) that paid secured creditors are not required to consent to administration extensions. The judge in Toogood considered that the government would need to legislate more clearly if its intention was for secured creditors with no continuing economic interest in the outcome of an administration to retain the ability to determine what happens within that process. Although given the serious implications of an invalid extension, and pending further clarification on this issue, office holders may, understandably, choose to err on the side of caution and seek the consent of both paid and unpaid secured creditors.

While the pragmatic approach adopted by the High Court will no doubt be welcomed by insolvency practitioners, both decisions fail to address an important practical point. Where a secured creditor has been repaid in full, the High’s Court’s view is that the creditor’s consent is no longer required for an administration extension by consent. However, if there are no longer any remaining secured creditors because they have all been repaid, it is unclear how the consent mechanism within the Act will operate in practice given that it is premised upon obtaining secured creditor consent in all cases. Toogood and Pindar related to administrations where there remained at least one unpaid secured creditor capable of consenting to the proposed administration extension – it remains unclear what the position would be if all secured creditors had been repaid in full.

One option to address this lacuna might be to leave a small proportion of secured debt outstanding so that there is at least one remaining secured creditor capable of providing consent, as necessary. Alternatively, office holders could seek the consent of secured creditors even in circumstances where they have all been repaid in full. The challenge with both of these approaches, however, will be obtaining creditor engagement. What incentive will a secured creditor have to expend management time to consider and approve matters in respect of an administration in which it has no continuing (or meaningful) economic interest? In these circumstances, it seems office holders will likely have no choice but to apply to the court for an administration extension, with the increased costs associated with this necessarily being borne by the insolvency estate.

Whether the government steps in and seeks to legislate more clearly on this issue remains to be seen. In the meantime, office holders should tread carefully when considering administration extensions by consent, particularly in circumstances where all secured creditors have been repaid in full.