A Secured Creditors Dilemma: To Vote or Not?
When a company is placed into liquidation, it can sometimes be quite tempting for a secured creditor to vote at a meeting of creditors. This is not always such a great idea.
Under regulation 22(2) of the Companies Act 1993 Liquidation Regulations, a secured creditor is deemed to have surrendered its security if it voted, in respect of its entire debt, at a creditors meeting.
It is surprising how many secured creditors fall foul of this regulation.
Under section 305(1) of the Companies Act 1993 a liquidator can require a secured creditor exercise its rights in respect of its security. The options are simple, to;
a) Realise the property subject to its charge, if it is entitled to do so, or
b) Value the property subject to its charge and claim in the liquidation as an unsecured creditor for the balance due, if any, or
c) Surrender the charge to the liquidator for the general benefit of the creditors and claim in the liquidation as an unsecured creditor for the whole debt..
This is a useful tool for a liquidator as it forces the secured creditor to act and not procrastinate. Failure to act within 20 days (s305(8)) and the property subject to the secured creditor’s charge is automatically surrendered for the general benefit of all creditors.
As one can imagine, the majority of secured creditors immediately realise the property subject to the charge or occasionally value the property and claim the balance, if any, due.
But what happens when a creditors meeting is called? Can the secured creditor still vote?
The simple answer is yes but if the secured creditor votes on its whole debt then, in the normal course of events, the secured creditor is deemed to have surrendered its security (regulation 22(2) referred to above).
However, what if the secured creditor has advised the liquidator that they intend to realize their security and the liquidator has acknowledged and accepted their intent? Recently, the Court of Appeal considered this very question.
The secured creditor had mortgages over a number of properties and had advised the liquidator they would be realizing the property in question. The liquidator had acknowledged and accepted the secured creditors right to do so.
Subsequently, the secured creditor called a creditors meeting with the express intent of replacing the liquidator. The secured creditor voted on its whole debt at the meeting. The vote failed and the liquidators then claimed the secured creditor had relinquished its security by voting at the meeting.
The Court of Appeal clarified the intent of regulation 22(1) in that the secured creditor is entitled to vote “for the whole debt” if it had elected to surrender the charge for the general benefit of the creditors. A secured creditor is also able to vote “in respect of the balance of the debt” if it had realized the property and there had been a short fall.
In this particular case, the creditor had made its election to realize the property and had not sought to surrender its charge. Furthermore, this had been accepted by the liquidators. The Court therefore determined that the secured creditors vote at the creditor meeting was invalid and should not have been accepted. It simply was not entitled to vote at all as it had elected to realize its property.
This case reminds us of two important factors for any secured creditor;
- Make sure you make your election in accordance with S305 if you are asked to do so.
- If you’ve elected to realize or value your property ensure you only vote of the remaining balance due and not the whole debt.