Restrictions On The Appointment Of An Administrator By Holders Of Floating Charges- Where There Are Competing Security Rights, Who Has Priority?

As previously discussed in our Article “To appoint a Receiver or an Administrator – the Conundrum with Debentures Executed pre-2015” available here, under Section 534 of the Insolvency Act, the holder of a qualifying floating charge in respect of a company's property may appoint an administrator of the company. According to the said provision, a floating charge is a qualifying floating charge if it is created by a document that: -

1. states that this section applies to the floating charge; or
2. purports to empower the holder of the floating charge to appoint an administrator of the company.

Restrictions on the appointment of an Administrator.

The Insolvency Act places some restrictions on the power of the holder of the floating charge to appoint an administrator. The said restrictions include but are not limited to: -

1. Where the floating charge on which the appointment is being made is unenforceable under the Insolvency Act and the other relevant laws.
2. A person may appoint an administrator under section 534 only if such person has given at least three days' notice to the holder of any prior floating charge that satisfies the provisions of Section 534 of the Insolvency Act.

In instances where directors of a Company intend to appoint an administrator of a Company under Section 541 of the Insolvency Act, certain restrictions are also imposed. We shall discuss the said restrictions in our subsequent articles in this area. In this article, we shall address the question of who has priority in appointing an Administrator where there are competing floating charges as contemplated under Section 534 of the Insolvency Act. Priority in the appointment of an Administrator by holders of floating charges. Section 535 of the Insolvency Act, 2015 provides that the priority of a floating charge shall be determined in accordance with the Movable Property Security Rights Act . Section 612 of the Act further provides that the Movable Property Security Rights Act determines whether one floating charge is prior to another for the purposes of appointing a replacement administrator where there exists a competing charge. According to the MPSRA, priority is determined according to the time of registration. Therefore, if a debenture was executed by Creditor A in 2018 but never registered and another debenture executed by Creditor B in 2021 and registered at the collateral registry as per the above provisions, the latter debenture shall have priority notwithstanding the time of execution. This position was reinforced by the Insolvency Court in I & M Bank Limited v ABC Bank Limited & another eKLR. In the said case, three different banks held debentures over the assets of the company. However, only one debenture, held by I & M Bank was registered at the collateral registry established under the Movable Property Security Rights Act. The Court held that since the debentures issued by the Company to I&M Bank were duly registered, the creditor ranked first in priority under Section 38 of the MPSRA which provides that: - “Subject to the other provisions of this Part, priority among competing security rights created by the same grantor in the same collateral is determined according to the time of registration.” In the said case, ABC Bank who had a debenture executed prior to that held by I & M Bank argued that I&M Bank was aware of its security as it had in fact sought its consent to create its security and notified it when it proposed to appoint its administrators. The Court, however, found that under Section 40 of the MPRSA, mere knowledge of the existence of a security right in favor of another person on the part of a secured creditor does not affect its priority under the Act.

Conclusion.

Based on the foregoing, when requiring the issuance of a debenture over the debtor’s assets as security for a finance facility, a financier must ensure that due diligence checks are conducted to determine whether competing security rights exist. Further, in addition to registering the debenture at the companies’ registry, a financier must also ensure that the debenture is registered at the collateral registry to ensure priority and compliance with the Insolvency Act and the Movable Property Security Rights Act. Also, when appointing an administrator under Section 534 of the Act, the debenture holder must ensure due diligence searches are conducted in the Companies registry as well as the collateral registry to ensure that it has priority in the appointment of such an administrator.

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Caroline Kendi–Senior Associate Wamuyu Mathenge- Associate

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