Beruflich Dokumente
Kultur Dokumente
Page 2
Tolley's Company Law Service/Division C/Company Charges II: Advantages and Disadvantages of the
Floating Charge, and Charges over Book Debts/Advantages and disadvantages of the floating charge
(a) The holder of a floating charge granted on or after 15 September 2003 (the 'prescribed
date') is no longer able to appoint an administrative receiver (IA 1986, s 72A). However, a
Page 3
floating charge granted prior to the prescribed date continues to entitle its holder to appoint an
administrative receiver. There are various exceptions to the general prohibition (set out in IA
1986, ss 72B-72GA), e.g. for the capital markets, public-private partnerships and project
finance.
(b) Crown preference was abolished in relation to debts due to Her Majesty's Revenue and
Customs and social security contributions (other preferential creditors, namely contributions to
occupational pension schemes, remuneration of employees for the relevant period and levies
on coal and steel production, remain in place). This amendment affected all floating charges,
whenever granted.
(c) For floating charges granted on or after the prescribed date, part of the property subject
to a floating charge (the 'prescribed part') is ring fenced for unsecured creditors (IA 1986, s
176A). The amount of the prescribed part is currently fixed as follows:
4
5
(See the Insolvency Act 1986 (Prescribed Part) Order 2003 (SI 2003 No 2097), effective 15
September 2003).
There are provisions disapplying the ring fencing:
1.
2.
3.
(i) where the net property is less than the prescribed minimum (currently fixed at
10,000) and the insolvency office-holder thinks that the cost of making a distribution to
the unsecured creditors would be disproportionate to the benefits;
(ii) where the net property is 10,000 or more and the office-holder applies to court for
an order disapplying the ring fencing; or
(iii) where it is disapplied by the terms of a company voluntary arrangement or a
scheme of compromise or arrangement,
7
8
and recent authorities relating to the 'prescribed part' are discussed in C5202.1 below.
(d) The EnA 2002 introduced the concept of a 'holder of a qualifying floating charge' (IA
1986, Sch B1). A floating charge qualifies if it is created by a charge document which:
4.
5.
6.
7.
10
In addition, in order to be a holder of a qualifying floating charge, a person must hold one or
more debentures of the company secured by either:
11
8.
9.
(i) a qualifying floating charge which relates to the whole or substantially the whole of
the company's property;
(ii) by a number of qualifying floating charges which together relate to the whole or
substantially the whole of the company's property; or
Page 4
10.
(iii) by charges and other forms of security which together relate to the whole or
substantially the whole of the company's property and at least one of which is a
qualifying floating charge.
12
Although under the out of court procedures no court application is required, certain papers still have to be
filed at court by the person wishing to use the relevant out of court procedure. The contents of the filing vary
depending on whether the process is commenced by either (i) a holder of a qualifying floating charge or (ii)
by the company or its directors.
If the company or the directors wish to appoint an administrator using the out of court procedure, the relevant
person has to first give five business days' written notice of the intention to appoint an administrator to any
person who is entitled to appoint an administrative receiver or who is or may be the holder of a qualifying
floating charge. As soon as reasonably practicable following the giving of such notice, the company or the
directors are then required to file a copy of the notice at court, accompanied by a statutory declaration
confirming, among other things, that the company is or is likely to become unable to pay its debts, that the
company is not in liquidation and that there is no outstanding winding-up petition or application for
administration. No appointment can be made until such notice period has expired, or the holder of such
qualifying floating charge has consented to it and during this period the charge holder can still appoint an
administrator, either using the out of court procedure or by making a court application pursuant to paragraph
12 or 35 of Schedule B1. If the holder of a qualifying floating charge applies to the court under paragraph 35
(as opposed to paragraph 12) it is not necessary for it to show that the company is or is likely to become
unable to pay its debts (although the qualifying floating charge must have become enforceable).
If an out of court appointment is to be made, it is necessary to file at court a notice of appointment,
accompanied by a statement from the prospective administrator consenting to his appointment and
confirming that in his opinion the purpose of an administration is reasonably likely to be achieved. In addition
to this:
13
14
(i) where the procedure is commenced by the holder of a qualifying floating charge, the
charge holder is required to file a statutory declaration confirming, amongst other things, that
the appointor is the holder of a qualifying floating charge and that such charge is enforceable.
In addition, if there is a prior ranking qualifying floating charge then the holder of such charge
must have been given two business days' written notice, or have consented in writing to the
appointment, before any other charge holder can appoint an administrator using this method;
(ii) where the procedure is commenced by the company or the directors the filing needs to
include a further statutory declaration confirming, among other things, that, so far as the person
making the statement is able to ascertain, the statements made and information given in the
statutory declaration filed with the notice of intention to appoint remain accurate. Accordingly, if,
in the meantime, the holder of a qualifying floating charge has itself appointed an administrator
out of court or made an administration application to the court, it will no longer be possible at
that stage for the company or its directors to continue with an out of court appointment (IA
1986, Sch B1, paras 7 and 25(b)).
If the company or directors decide not to make an out of court appointment but instead to make a court
application for the appointment of an administrator, they will have a duty to notify, inter alia, any qualifying
floating charge holder as soon as reasonably practicable following the making of the application. If the
Page 5
charge holder disagrees with the identity of the proposed administrator, the charge holder can decide either
to appoint its own administrator using the out of court procedure or to allow the court application to proceed
but apply to court to have a specified person (other than the administrator proposed by the company or its
directors) appointed as administrator (IA 1986, Sch B1, para 36). The court is obliged to grant the charge
holder's application unless the court thinks it right to refuse the application because of the particular
circumstances of the case. If the company is already in liquidation, the holder of a qualifying floating charge
may not make an out of court appointment of an administrator but may, where the winding up is by court
order, apply to court to appoint an administrator (IA 1986, Sch B1, paras 8 and 37).
Page 6
It should be noted that section 176A does not apply to any charge created or otherwise arising under a
'financial collateral arrangement' within the meaning of the Financial Collateral Regulations referred to in
C5205 below (see regulation 10(3)).
15
16
17
(a)
(b)
(c)
A parent company will be a 'small company' only if the group headed by it is a 'small group'. In this
connection, two of the thresholds are different from those stated above: there is an aggregate turnover
threshold of not more than 6.5 million net (or 7.8 million gross) and an aggregate balance sheet total
threshold of not more than 3.26 million net (or 3.9 million gross).
The moratorium is commenced by the directors of the company filing certain papers at court, at which point
the moratorium will automatically apply. Once the papers have been filed the procedure cannot be blocked
by a floating charge holder. It should be noted, however, that a company is not eligible for a small company
CVA if an administrator or administrative receiver is in place, and therefore a floating charge holder can
potentially prevent a small company CVA by acting first and enforcing its security before the directors make
the necessary filing.
The moratorium initially lasts for a period of 28 days, although this can be extended for a further two months
with the consent of creditors, and during the moratorium secured creditors are prevented from enforcing their
security.
Whilst the moratorium is in place, secured creditors have similar rights and protections as they have during
an administration. Assets subject to a fixed charge cannot be disposed of without the consent of either the
charge holder or the court and the proceeds from such a disposal (or, if greater, the asset's market value)
must be applied to repay the secured debt. It is unclear whether floating charge assets can be disposed of
without the charge holder's consent (no such consent is required during an administration) but if a floating
charge asset is realised, the holder of the charge will have the same rights over the sale proceeds as it would
have had in respect of the original charged asset.
Although the moratorium places a temporary block on creditor action there is nothing in the provisions
inserted by IA 2000 to prevent the secured creditor enforcing its security once the moratorium has elapsed.
Also, in many situations the company will be dependent upon the floating charge holder for continued
financial support, as in the case of a bank lender, and therefore the company will need to ensure that it has
the secured creditor's consent before filing for a small company CVA.
Although the small company CVA only presently applies to 'small companies' it should be noted that IA 2000
does give the Secretary of State the authority to amend the eligibility criteria which sets out which companies
can use this procedure, and therefore the scope of this Act could be expanded to apply to larger companies
at some point in the future. The Insolvency Service recently issued two consultations relating to the
expansion of the use of moratoria. The first, 'Encouraging Company Rescue' (June 2009), proposed the
expansion of the small company CVA to apply to all companies and LLPs (although existing exceptions, such
Page 7
as those relating to companies engaging in certain types of (predominantly financial) business, would
remain), as well as a longer (initially 42 days, but extendable) court-sanctioned moratorium. The second
consultation, 'Proposals for a restructuring moratorium' (July 2010), proposed a moratorium (initially three
months, but extendable) which would be available to companies seeking a contractual compromise or
preparing a statutory compromise proposal (a company voluntary arrangement or a scheme of arrangement).
It is therefore possible that there will be legislation in this area in the near future.
Where the small company CVA provisions apply, a provision in an instrument creating a floating charge is
void if it provides for:
18
19
to be an event causing the floating charge to crystallise or causing restrictions which would not otherwise
apply to be imposed on the disposal of property by the company or a ground for the appointment of a
receiver (IA 1986, Sch A1, para 43(1)).
Page 8
such application, the onus is on the secured creditor to show that, having regard to all relevant
circumstances and the interests of secured and unsecured creditors, leave should be given.
IA 1986, Sch B1, para 70 provides that, once appointed, the administrator may dispose of or take action
relating to property of the company which is subject to a floating charge security 'as if it were not subject to
the charge'. The charge holder then has the same priority in respect of the acquired property as he had in
respect of the property disposed of, but subject to the debts and liabilities arising out of contracts entered into
by the administrator (IA 1986, Sch B1, para 99(4)) and the administrator's remuneration and expenses (IA
1986, Sch B1, para 99(3)). In this connection, acquired property means property of the company which
directly or indirectly represents the property disposed of.
It is now established that there can be no objection to a lender taking a 'lightweight floating charge' (Re
Croftbell Ltd [1990] BCLC 844). This is a charge document which contains a floating charge purely for the
purpose of giving the lender the power to block the appointment of an administrator, although it should be
noted that this is now effective only where the floating charge is an existing AR floating charge. Such charges
will not prevent or restrict the borrower from creating other fixed or floating charges in favour of third parties.
The effectiveness of a lightweight floating charge raises the prospect that a borrower may have granted a
number of such charges during the 'old floating charge' regime. If so, might there be more than one
administrative receiver appointed of the borrower's property? Although a point not free from doubt, the better
view is that it is not possible to have multiple concurrent administrative receivers (see Fidelis Oditah, Legal
Aspects of Receivables Financing (1991) at 120-121).
Page 9
the interests of depositors (as well as public funds). In addition to the overriding objectives, many
consequential modifications to the provisions of IA 1986 (as well as other legislation) apply, including some of
those referred to in this section, which should be considered in detail where appropriate. In addition, HM
Treasury has recently issued a consultation (September 2010) regarding the possible introduction of a
special administration regime for investment firms, in the light of the serious challenges for insolvency
regimes posed by the failure of Lehman Brothers. If enacted, the introduction of such a regime would
introduce applicable overriding objectives and further consequential modifications to IA 1986 (and other
legislation).
The disadvantages of the floating charge: Insolvency Act 1986, section 245
[C5206]
By section 245 of the IA 1986, if a company enters administration or goes into liquidation, a floating charge
'created at a relevant time' is invalid except to the extent of the aggregate of:
20
21
22
(a) money paid or the value of goods and services supplied to the company at the same time
as or after creation of the charge (the value of goods and services for the purposes of the
section is the amount in money which, at the time they were supplied, could reasonably have
been expected to be obtained for supplying the goods or services in the ordinary course of
business and on the same terms (except price) as those on which they were supplied);
(b) the value by which any debt of the company is discharged or reduced at the time of or
after creation of the charge; and
(c) interest payable on an amount falling within (a) or (b) in pursuance of an agreement.
The 'relevant time' is, except as stated below, a period of twelve months ending with the 'onset of insolvency',
that is (as the case may be) the date on which an application for an administration order is made or the date
on which the notice of intention to appoint the administrator is filed or (if the administrator is otherwise
appointed) the date on which the appointment takes effect, the passing of a resolution for voluntary windingup or, if there has been no such resolution, the presentation of a petition for winding up to the court (IA 1986,
s 129). If the person in whose favour the charge is created is not 'connected' with the company, then if the
company was solvent when it granted the charge and remained solvent after granting the charge, the charge
is valid. In the words of IA 1986, the period of twelve months ending with the onset of insolvency is not a
relevant time if the charge is granted in favour of a person not connected with the company at the date of the
creation unless:
23
24
(i) the company is 'unable to pay its debts within the meaning of section 123 of the IA 1986'.
Under that section, a company is deemed to be unable to pay its debts if, amongst other things,
a written demand in the form prescribed by the Insolvency Rules 1986 in respect of a sum
exceeding 750 remains unpaid for three weeks, or it is proved to the court that the company is
unable to pay its debts as they fall due, or the value of the company's assets is less than the
amount of its liabilities, taking into account its prospective and contingent liabilities (see Byblos
Bank v Al-Khudhairy [1987] BCLC 232 and Re a Company [1986] BCLC 261 as to the meaning
of section 223(d) of the Companies Act 1948, the forerunner to section 123 of the IA 1986); see
also Re Cheyne Finance plc [2007] EWHC 2402 (Ch), [2007] All ER (D) 37 (Dec) and BNY
Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL plc and others [2010] EWHC 2005
(Ch), [2010] All ER (D) 351 (Jul)); or
(ii) the company becomes unable to pay its debts (again within the meaning of section 123)
in consequence of the transaction under which the charge is created.
In other words, if a charge is granted by a company which was insolvent or which as a consequence of
granting the charge was rendered insolvent, either on a liquidity or net assets test and if such charge is
Page 10
granted to a lender who is not connected with the company, then such charge is at risk for a period of twelve
months after the creation of such charge, except to the extent of new value actually provided to the company
granting such charge.
If the holder of the floating charge is 'connected' with the company granting it, the period of vulnerability is
extended to two years from the creation of the charge and even if the company was and remained solvent,
the time will be a 'relevant time'. A person is 'connected' with the company if he is a director or shadow
director of the company or an associate of a director or shadow director or if he or any other company is an
associate within section 435 of the IA 1986 (IA 1986, s 249). The definition of associate in section 435 is very
wide, and it includes relationships which arise when companies have control of other companies (section
435(6)). Control itself is defined as where a company's directors (or those of a company which controls that
company or any of those directors) are accustomed to act in accordance with another person's directions or
instructions, or where a person is entitled to exercise (or control the exercise of) one third or more of the
voting power of a company (or a company which controls that company) at its general meeting (section
435(10)).
It should be noted that money paid or goods or services supplied to the company (or the discharge or
reduction of its debt) prior to the creation of the charge, do not constitute new value. Money paid (except in
discharge or reduction of a debt of the company) or goods or services supplied to a third party (which will
include any related companies or companies in the same group), whether before or after creation of the
charge, will not be included, nor will new value advanced by a third party, unless the third party is an agent or
trustee for the creditor to whom the charge is granted (Re Thomas Mortimer [1965] Ch 186). It is arguable
that, if an advance is made for a specific purpose and is subject to a trust, the payment does not constitute
funds 'paid ... to the company' and does not constitute new value until the money is applied for the purpose.
Whilst section 245 of the IA 1986 differs in some material respects from the provisions of section 617 of the
CA 1985 which it replaced, the cases which considered the former provisions and their precursors may be an
aid in the interpretation of section 245. This will depend upon whether the court takes the view that the
language of section 245 differs significantly from the equivalent provisions in earlier legislation (cf. Re M C
Bacon Ltd [1990] BCLC 324 at 335). In Re Fairway Magazines Ltd [1992] BCC 924 at 931-932, Mummery J
placed considerable reliance on existing authority in interpreting the meaning of 'at the same time as' in
section 245. However, in Re Shoe Lace Ltd [1992] BCC 367 at 369, Hoffmann J (as he then was) said that
'there is no authority upon the meaning of 'at the same time as' in section 245'. The Court of Appeal
subsequently upheld the decision of Hoffmann J (Re Shoe Lace Ltd, Power v Sharp Investments Ltd [1993]
BCC 609). It is likely that the answer will depend upon the relevant phrase being construed by the court and
whether it has material similarities to a phrase previously construed by the courts under earlier legislation.
If the account is revolving and the bank does not rule it off, that is, notionally close the account leaving a
fixed balance and open a new one, the application of the rule in Clayton's case (payments are presumed to
discharge the oldest outstanding debts) may result in an advance of 'new value' to the extent of the amount
drawn on the account since the granting of the charge, ignoring any amounts paid into the company's
account (Re Yeovil Glove Co Ltd [1965] Ch 148). The Cork Committee (Report of the Review Committee:
Insolvency Law and Practice, Cmnd 8558, 1982) had recommended (para 1562 of the Report) that the effect
of the decision in Re Yeovil Glove should be reversed, but section 245 has not appeared to have done so.
On the other hand, payments made by a lender directly to a company's overdrawn bank account (which
consequently reduced the liability of the lender as guarantor of that account) have been held not to constitute
payments made 'to the company' for the purpose of section 245 (Re Fairway Magazines Ltd). The question
in each case is whether, in all the circumstances, the payment is in substance to the company for its benefit.
If the effect of a payment, which is in form made to the company, is merely to substitute a secured debt for an
unsecured debt, then the payment is not in substance a payment to the company. The money must become
available to the company to use as it likes (Re Orleans Motor Co Ltd [1911] 2 Ch 41). However, section 245
does not require dishonest or underhand conduct on the part of the lender in order to invalidate a floating
charge (Re Fairway Magazines Ltd at 933).
The holder of a floating charge will not be protected by crystallisation prior to the onset of insolvency. Section
251 of the IA 1986 provides that a 'floating charge' means a charge which, as created, was a floating charge.
However, based on the pre-IA 1986 case of Mace Builders (Glasgow) Ltd v Lunn [1987] BCLC 55, it is
Page 11
arguable that section 245 would not apply to anything done under the authority of the floating charge before
the onset of insolvency. For example, a liquidator or administrator could recover neither payments made by
the company to the lender nor proceeds of sale realised by a receiver and paid to the lender. If the onset of
insolvency occurs before actual payment, the liquidator or administrator might be entitled to prevent payment
being made to the charge holder.
Under the pre-IA 1986 provisions, the onus of proving the company's solvency was on the holder of the
floating charge (Re Patrick and Lyon Limited [1933] Ch 786 at 791). Accordingly, where no money was paid
to the company giving the floating charge as, for instance, where a subsidiary gave a charge to secure a
guarantee given by it for money advanced to its parent, it was common practice for two directors (or
sometimes the auditors) of the company to be asked to certify that it would be solvent immediately after the
creation of the charge. The onus of proving the company's insolvency at the relevant time is now on the
liquidator or administrator, however a lender may require the company (or the auditors) to confirm that the
company is not and will not as a consequence of the transaction be or become 'insolvent' within the relevant
meaning in the Act (often in conjunction with their consideration of whether the transaction is at an
undervalue; see C5207 below).
Under section 245 of the IA 1986, the new value must be paid or given 'at the same time as, or subsequent
to' the creation of the charge. This is an issue of fact and degree: Re Shoe Lace Ltd. In that case, money
was advanced in four payments on different dates in April, May, June and on 16 July, following a resolution of
the company's directors to grant the debenture in March. In fact, the debenture was not executed until 24
July. The Court of Appeal ([1993] BCC 609), affirming the decision of Hoffmann J ([1992] BCC 367), held that
the payments could not be said to have been made at the same time as execution of the debenture. Moneys
advanced prior to the execution of a debenture will only qualify for the exemption under section 245 if either:
25
26
(a) the interval between payment and execution is so short that it can be regarded as
minimal and payment and execution can be regarded as contemporaneous; or
(b) the promise to execute a debenture creates a present equitable right to a security (see
C5005 above), and moneys are advanced in reliance on it.
In the case of (b), any delay between the advance and the execution of the formal instrument is immaterial;
the charge has already been 'created' and is immediately registrable (Re Shoe Lace [1993] BCC 609 at 619).
Section 245 of the IA 1986 does not apply to any charge created or otherwise arising under a 'security
financial collateral arrangement' within the meaning of the Financial Collateral Regulations referred to in
C5205 above (see regulation 10(5)).
Page 12
matter of law, the grant of security does not involve a diminution in the value of assets cannot be accepted as
while there may be
'no change in the physical assets of the debtor when the security is given ... there seems to be no reason why the value
of the right to have recourse to the security and to take priority over other creditors ... should be left out of account.'
While this case considers transactions at an undervalue in relation to section 423, it should have equal
application to section 238. Although Arden LJ's remarks on this point were obiter, they serve to emphasise
the prudent approach that the creation of a floating charge over a company's assets without receiving
sufficient consideration is capable of constituting a transaction at an undervalue.
It is of course the very prospect of potential prejudice to the unsecured creditors of the chargor which will
persuade the courts to adopt a purposive approach in their interpretation of section 238. Section 238 is of
particular importance if a charge is being granted by a company to secure its liability as guarantor since it
may well be that the 'consideration to the company' has a value which is significantly less than the value of
the consideration provided by the company, that is, the guarantee. A lender should accordingly ask the
company (or the auditors) to confirm that the company is not and will not as a consequence of the
transaction be or become 'insolvent' within the relevant meaning in the Act.
A lender taking a charge in such circumstances should also ask the directors to confirm that the company
enters into the transaction in good faith and for the purpose of carrying on its business and to specify the
grounds for believing the transaction would benefit the company: see section 238(5) of the IA 1986.
No order may be made under sections 238 and 239 of the IA 1986 in relation to the provision, or realisation
of, a 'collateral security charge' within the meaning of the Settlement Finality Regulations referred to in
C5205 above (see regulation 17).
Page 13
a floating chargee. Furthermore, in HMRC v Royal Bank of Scotland plc the Court of Appeal adopted a wide
view of the concept of 'taking possession', although there had to be an act by which the debenture-holder
realised its security, not simply the ordinary discharge of the debtor's liability; this is a question of substance
rather than form.
It should be noted, in addition, that in Re H & K (Medway) Ltd [1997] 2 All ER 321, a first instance decision, it
was held that preferential creditors ranked ahead of a floating charge created by a company even though the
receiver had been appointed under the terms of another floating charge (in favour of a different creditor)
created by the same company. The case turned on whether the preferential creditors promoted by section 40
of the IA 1986 were only promoted ahead of the floating charge under which a receiver was actually
appointed or ahead of any floating charge then extant. Although considered, the problem (referred to above)
of receipt or realisation by a creditor outside of a liquidation other than by way of appointment of a receiver or
taking possession was not resolved.
Under section 40(3) of the IA 1986, payments made to preferential creditors in priority to the claims of the
floating charge holder may be recouped by the floating charge holder out of the assets of the company (if
any) available for payment of general creditors.
Section 175 of the IA 1986, which applies where a company is being wound up, provides that a company's
preferential debts shall be paid in priority to all other debts and rank equally among themselves, after the
expenses of the winding-up. To the extent that the assets available to general creditors are insufficient, the
preferential debts have priority over the claims of a holder of a floating charge and are to be paid out of any
property comprised in or subject to the charge. If the assets of the company are insufficient, the preferential
debts abate in equal proportions.
Until Re Leyland Daf Ltd, Buchler v Talbot [2004] UKHL 9, [2004] 1 All ER 1289, it was understood that
assets subject to a floating charge which were still in the receiver's hands when winding-up commenced fell
under section 175(2)(b) of the IA 1986 and were available to meet both preferential debts and the liquidator's
expenses. However the Leyland Daf decision reversed this position by holding that the floating charge assets
were the property of the floating charge holder and that therefore they comprised a distinct pool of assets to
those of the liquidation which were not available to meet the liquidator's expenses. However, section 1282 of
the CA 2006 reinstated the original position by enacting a new section 176ZA of the IA 1986 giving
liquidator's expenses priority in relation to floating charge realisations (to the extent that they cannot be met
from the assets of the company available for the payment of general creditors).
There was no provision for preferential debts in a company administration under the original IA 1986 Part II,
except where the administration was linked with a voluntary arrangement or where a winding-up order
immediately followed upon the discharge of the administration order. However section 387(3A) of IA 1986,
which applies to all administrations from 15 September 2003, brought administrations into line with other
insolvency procedures in this respect. In this regard, IA 1986, s 175 applies to any distribution by an
administrator as it applies in relation to a winding up (IA 1986, Sch B1, para 65(2)).
Administration debts and liabilities and the administrator's remuneration and expenses are payable in priority
to any floating charge (IA 1986, Sch B1, paras 99(4), 99(3) and 70).
In addition, as noted above (see C5202), where a company which has granted a floating charge over its
property on or after 15 September 2003 goes into liquidation, administration, provisional liquidation, or
receivership, the liquidator, administrator or receiver shall (subject to certain exceptions):
27
28
(a) make a 'prescribed part' of the company's net property available for the satisfaction of
unsecured debts, and
(b) not distribute that part to the proprietor of the floating charge except insofar as it exceeds
the amount required for the satisfaction of the debts.
The postponement of the floating charge to preferential debts and insolvency costs had long been regarded
as one of the weaknesses of the floating charge and it is one of the principal reasons why banks sought
(and, notwithstanding the enactment of EnA 2002, still seek) to take fixed charges over as many categories
Page 14
of asset as possible. The introduction of the 'prescribed part' arrangements has also contributed to the
continuation of this practice.
IA 1986, section 386 and Schedule 6 list the preferential debts for the purposes of sections 40 and 175, and
IA 1986, section 387 stipulates the date for determining such claims. See I5603 onwards INSOLVENCY:
RECEIVERS IV (PART I) for a discussion of preferential claims.
Regulation 14(5) and (6) of the Settlement Finality Regulations provides that in certain circumstances the
claims of a chargee under a 'collateral security charge' (taken in connection with a 'designated' system) shall
be paid in priority to preferential debts and the expenses of a winding-up or administration. Similar, but not
identical, provisions apply to 'security financial collateral arrangements' under the Financial Collateral
Regulations in relation to preferential creditors and the 'prescribed part' arrangements -- see regs 10(3) and
(6).
[C5210]
The ability of the company to grant a second floating charge depends on the nature and terms of the first
floating charge. If the first floating charge encompasses all of the company's property, assets and
undertaking, the company will not be entitled, in the absence of a special or implied permission, to create a
second floating charge ranking ahead of or pari passu with the first charge; the second charge ranks behind
the first since it is incompatible with the contract creating the first charge that another should enjoy priority or
equality (Re Benjamin Cope & Sons Limited [1914] 1 Ch 800). If the first charge covers only a part of the
assets, the company might be free to grant a second floating charge which, as to the remaining assets, ranks
ahead of the first charge (see Goode, Legal Problems of Credit and Security (4th Edition, 2008) at pp 200201).
The better view is that if a company creates more than one floating charge, the first charge will have priority
even if the second charge is the first to crystallise, assuming that each has been perfected by timely
registration (Re Household Products Co Ltd (1981) 124 DLR (3d) 325). This is on the basis of the general
priority rule that, as between competing equitable interests, the first in time prevails. Crystallisation
should not affect this principle, as crystallisation merely converts a charge, which as created was a floating
charge, into a fixed equitable charge for purposes of enforcement.
Page 15
However, in Griffiths v Yorkshire Bank plc (see C5208 above), Morritt J expressed the view that priority as
between competing floating charges is determined by the timing of crystallisation (at 1435). Prior to the
Griffiths case, it was believed that crystallisation had no effect on the ranking of a floating charge in
competition with another floating charge. Unfortunately, the decisions in Re Benjamin Cope & Sons Ltd and
Re Household Products Co Ltd were not drawn to the attention of Morritt J before he expressed his views on
the effect of crystallisation. For this reason, it is believed that these views are not good law (see Goode on
Commercial Law (4th edition, 2010) at 733, footnote 79).
A permission to create security includes the granting of a floating charge (Re Automatic Bottle Makers
Limited [1926] Ch 412).
(b)
[C5211]
The floating charge will not enjoy priority over a purchase money charge. Where a company agrees to
purchase property on terms that part of the purchase price should remain outstanding to the vendor on a
charge of the property to be executed in his favour, the interest which the company acquires in the property
is subject to that of the unpaid vendor or chargee. Thus the floating charge will also be subject to his interest
(Wilson v Kelland [1910] 2 Ch 306).
The position is similar if a company which wishes to borrow part of the purchase price for an asset, enters
into an agreement with the lender which provides for him to have a charge over the asset for the amount lent
by him and then enters into the contract to purchase the asset. The company will only acquire the asset
subject to the lender's security, notwithstanding that the charge to the lender is executed some days after the
date of the conveyance to the company, so that the floating charge will also be subject to that lender's
security (Re Connolly Brothers Limited (No 2) [1912] 2 Ch 25; Security Trust Co v Royal Bank of Canada
[1976] AC 503 at 518). In other words, when the company acquires the property and it becomes subject to
the floating charge, the property is already fettered by the agreement to give the purchase money charge
(Security Trust Co at 520A). The same result follows even if the floating charge has crystallised prior to the
acquisition of the asset by the chargor (Security Trust Co).
In Abbey National Building Society v Cann [1991] AC 56, the House of Lords took the opportunity to clarify
these principles. It is now clear that:
29
30
(i) an agreement to give a charge may for all practical purposes be assumed to exist under
normal lending and security practice (at least where the charge is in favour of a financier of the
purchase) (at 92 and 102); and
(ii) it makes no difference whether the purchase money charge at completion is legal or
equitable, since both are equally derived from and dependent on the acquisition of the legal title
by the chargor at completion.
The same results follow even where the debenture containing a floating charge also contains a negative
pledge. This is because the courts have assumed that the asset acquired with purchase money financing
never becomes the subject of the floating charge. The chargor acquires merely the equity of redemption in
the asset (see W J Gough, Company Charges (2nd Edition, 1996) at 278 and Law Commission for England
and Wales, Registration of Security Interests: Company Charges and Property other than Land (Consultation
Paper 164) at para 4.155).
It is less certain whether, on the basis of Cann, an agreement to give a charge in respect of land would be
upheld so as to secure priority for the purchase money charge if there is no writing satisfying the
requirements of section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989 (that is, a written
document signed by or on behalf of both lender and borrower). The difficulty is that that Act was not in force
at the time the House of Lords gave their decision in Cann. The moral is clear. In the absence of clear
Page 16
authority, no advance should be made, unless and until the purchase money lender has in place an
agreement to grant a charge in writing which satisfies the requirements of the 1989 Act.
Cann was applied in Whale v Viasystems Technograph Ltd [2002] All ER (D) 457 (Mar), a converse case. In
Whale a company granted a debenture which contained a fixed equitable charge of all its present and future
leasehold property. Such a charge created an immediate equitable charge over any leasehold property
thereafter acquired by the company as from the moment of its acquisition. The company later acquired a
lease of property and almost simultaneously granted a sub-lease of that property. The court held that the
fixed equitable charge created by the debenture over the lease did not take priority over the sub-lease as the
company, in substance, only ever acquired a nominal reversion. It was only that reversion to which the
debenture could attach. The Cann principle was not confined merely to property acquisition charges.
(c)
[C5212]
For many years it has been the practice for debentures to contain a provision prohibiting or restricting the
right of the company to create prior or pari passu (and generally subsequent) charges or to deal with its
assets except in the ordinary course of trading. These restrictions are often in the form of a 'negative pledge'
discussed in C5004 COMPANY CHARGES I. Most restrictive clauses are drafted in broad terms but such
clauses are strictly interpreted against the charge holder (Robson v Smith [1895] 2 Ch 118). For example, a
clause prohibiting the company from creating charges does not apply to a garnishee order obtained by a
creditor, or to other forms of execution (see C5215 below).
While such clauses are effective between the company and the charge holder, the priorities as between the
chargees are governed by different rules. The general rule is that charges enjoy priority according to
date of creation. There are two important exceptions. First, a subsequent legal interest acquired by a
bona fide purchaser for value without notice will prevail over a prior equitable interest. Secondly, for
debts and other receivables, the priority of successive assignments is determined by the first to give
notice to the debtor, unless the second assignee had notice of the first assignment at the time he
took his assignment. This is known as the rule in Dearle v Hall (1828) 3 Russ 1.
The general rule that time of creation determines priorities is of limited application to floating
charges because a floating charge (even if expressed to be a 'first charge') does not enjoy priority
over subsequent specific charges taken prior to crystallisation (Wheatley v Silkstone and Haigh
Moor Coal Co (1885) 29 Ch D 715; and Cox Moore v Peruvian Corp Ltd [1908] 1 Ch 604).
Notwithstanding the radical proposals contained in the Law Commission's final report of August 2005 (LC
296) on security interests created by companies registered in England and Wales (to the effect that both
fixed and floating charges should rank in accordance with the date on which they are registered) it
continues to be the case that the holder of a proprietary security interest granted subsequent in time
will enjoy priority even if he knows of the existence of a floating charge.
The restrictive or pari passu clause is intended to prevent the company from granting charges which will
have priority over the floating charge. As discussed below (see C5409 COMPANY CHARGES III), section
860(7)(g) of the CA 2006 requires registration of a floating charge. Common practice is to include in the Form
MG01 (used for registration of charges under section 860 of the CA 2006) details of any restrictions
appearing in the charging document. It is clear that registration of the prescribed particulars will constitute
constructive notice of the same to a person who might reasonably be expected to search the register, but
that is not so of the restrictions in the charging document. That is to say that filing of particulars may
constitute constructive notice as regards the statutorily prescribed particulars requiring filing, but
not of restrictions. (See further English & Scottish Mercantile Investment Co Ltd v Brunton [1892] 2
QB 700. See also the Law Commission for England and Wales, Registration of Security Interests:
Company Charges and Property other than Land (Consultation Paper 164), at para 2.42).
It follows from the above, that if the subsequent encumbrancer has actual notice of the relevant
floating charge and of any prohibitions or restrictions of competing security interests at the time he
Page 17
takes his security (legal or equitable), he does not obtain priority (Wilson v Kelland [1910] 2 Ch 306).
The current position, however, is that there is no authority to suggest that such a subsequent encumbrancer
would be taken to have notice of such prohibition or restriction merely because the same had been included
in a Form MG01.
In Griffiths v Yorkshire Bank plc [1994] 1 WLR 1427 at 1435, Morritt J expressed the view that such a
restrictive clause could not affect the priorities as between a floating chargee and a subsequent chargee with
actual notice of the restriction. It is not clear on the facts of Griffiths whether the relevant chargee had notice
of the bank's negative pledge. Accordingly, these observations are not part of the ratio and have not been
followed on the basis of their inconsistency with previous authority. The effect of notice is to subject the
subsequent purchaser or chargee to a personal equity in favour of the floating chargee, so that the
latter has priority even though his charge has not yet crystallised (see Goode, Legal Problems of
Credit and Security (4th Edition, 2008) at pp 196-197).
Notwithstanding that a floating charge prohibits the creation of charges ranking in priority, a charge granted
subsequently will rank ahead of the floating charge in the following circumstances:
31
32
(i) where the third party acquires a legal mortgage of the property, if he had no notice of the
prohibition at the time of making his advance (English Scottish & Mercantile Investment
Company Limited v Brunton [1892] 2 QB 700); and
(ii) where the property is land and the third party acquires an equitable mortgage, if he had
no actual or constructive notice of the prohibition and obtained a deposit of the title
deeds, these having been left in the company's possession by the holder of the floating
charge (Re Castell & Brown Limited [1898] 1 Ch 315; Re Valletort Sanitary Steam Laundry
Company Limited [1903] 2 Ch 654). (These cases may also apply by analogy to instances
where the third party obtains a pledge or charge over shares or other securities by the deposit
of the relevant certificates.)
Actual knowledge that a company has issued debentures does not result in the imputed knowledge that
these contain a floating charge (Re Valletort above) or constructive knowledge of the prohibition against
prior-ranking charges which they contain (English & Scottish Mercantile Investment Company Ltd v Brunton
(above)).
(d)
Liens
[C5213]
A restrictive clause which provides that the company is 'not to be at liberty to create any mortgage or charge'
in priority to the floating charge does not apply to a lien, as a matter of interpretation, if the lien is conferred
by the general law and arises incidentally through the company carrying on its business in the ordinary
course.
A lien is a possessory security interest which confers a right at law to detain property until money
owed to the detainee is paid. It differs from a 'pledge' in that it generally does not confer a right of
sale.
An example is a solicitor's lien to retain deeds and papers until his bill of costs is satisfied. In such a case,
the lien arises by operation of law and is not created by the company (Brunton v Electrical Engineering
Corporation [1892] 1 Ch 434). For a case where an unpaid vendor's lien was described as arising by
operation of law and not by reason of a contract between the parties so that it was not a charge created by a
company within the meaning of section 95 of the CA 1948 (the forerunner of section 395 of the CA 2006 and
section 860 of the CA 2006) and accordingly not void against the chargees for non-registration, see London
and Cheshire Insurance Co Ltd v Laplagrene Property Co Ltd [1971] Ch 499). A possessory lien, however,
may also be created by contract.
Page 18
Both a particular lien and a general contractual lien (George Barker (Transport) Ltd v Eynon [1974] 1 WLR
462) will have priority over a floating charge, so long as the lien is not a disguised charge (that is, it is
intended and does take effect as a security interest which is perfected by possession of an asset title to
which is reducible to possession) created in favour of a chargee who has actual notice of the floating charge
and the relevant restrictive clause.
It has become common for the restrictive clause to be extended with a view to precluding such liens arising,
but it is doubtful whether this would be effective unless the person claiming the lien had actual notice of the
prohibition. It is also arguable that such a clause, in order to have business efficacy, must be read subject to
an implied exception for liens arising in the ordinary course of trading since otherwise some very normal
transactions, such as the delivery of a vehicle to a garage for repairs, would be prohibited on the basis that it
could result in the garage having a lien on the vehicle for the reasonable cost of the repairs completed. Even
if the clause is so extended, it will have no application to a freezing (previously a Mareva) injunction, because
no rights in the nature of a lien arise when such an injunction is granted (Cretanor Maritime Co Limited v Irish
Marine Management Limited [1978] 1 WLR 966).
(e)
Sales of assets
[C5214]
Unless there is a specific restriction in the charge instrument, a company that has granted a floating charge
is permitted to manage and deal with its assets 'in the ordinary course of its business'. The decision of
Etherton J in Ashborder BV v Green Gas Power Ltd [2004] EWHC 1517, [2005] 1 BCLC 623 clarified a
number of principles relevant to a determination of whether a disposal by a company, which has given a
floating charge, is properly to be considered as being carried out 'in the ordinary course of business' -- see
further the discussion at C5020 COMPANY CHARGES I. It has been held that the fact that a company has
given a floating charge over all its undertaking and assets does not prevent it from selling substantially all its
assets, including goodwill, to a new company formed for the purpose in exchange for shares and debentures
in the new company. In the light of the principles established in the Ashborder case, this is likely to be
permissible if:
33
34
35
36
(i) an objective observer with knowledge of the company, its constitution and its business
would view the transaction as having taken place in the ordinary course of business;
(ii) on the proper interpretation of the document creating the floating charge, and applying
normal techniques of interpretation, the parties intended that the transaction should be
regarded as being in the ordinary course of the company's business for the purpose of the
charge;
(iii) there is no other special restriction contained in the charge instrument; and
(iv) notwithstanding the sale, the vendor company continues to carry on business, even if it is
not the business on the security of which the holder of the floating charge relied (Re Borax
Company, Foster v Borax Company [1901] 1 Ch 326, but see Hubbuck v Helms (1887) 56 LJ
Ch 536).
Debentures and debenture stock trust deeds therefore usually contain provisions preventing companies from
disposing of a substantial part of their assets without the holder's or trustee's prior consent.
Frequently more detailed restrictions on disposals are included. Such provisions will not, however, bind a
purchaser who had no actual or constructive notice of them and, in this context, the considerations
mentioned above in relation to the effectiveness as against third parties of prohibitions on granting prior
charges should be noted (see also C5212 above).
(f)
Page 19
[C5215]
The rights of the holder of a floating charge will prevail against those of a creditor who levies execution over
property subject to the charge if the floating charge crystallises before the sheriff sells the goods (Re
Standard Manufacturing Company [1891] 1 Ch 627 at 640; Re Opera [1891] 3 Ch 260), or before the
proceeds of sale are paid over to the execution creditor. (The main authorities for this view are dicta in Evans
v Rival Granite Quarries Ltd [1910] 2 KB 979 at 995 and 1000, Taunton v Sheriff of Warwickshire [1895] 2 Ch
319 and Norton v Yates [1906] 1 KB 112.)
Similarly, the rights of the holder of a floating charge will prevail against those of a creditor who seeks by
garnishee proceedings to attach a debt due to the company only if a receiver is appointed or the charge
otherwise crystallises before the garnishor obtains payment of the debt attached or, perhaps, before the
order absolute is granted (Norton v Yates [1906] 1 KB 112; Cairney v Back [1906] 2 KB 746; Evans v Rival
Granite at 997 and Geisse v Taylor [1905] 2 KB 658). A floating charge will only prevail against a distress by
the landlord if the charge crystallises before the distraint (Re Roundwood Colliery Company [1897] 1 Ch 373;
Metropolitan Life Assurance Co of New Zealand v Essere Print Ltd [1991] 3 NZLR 170; and see Gough,
Company Charges at 317-318).
Thus, if the holder of a floating charge is to ensure that his rights prevail against such creditors, he might
need to take prompt action to appoint an administrator or administrative receiver or otherwise crystallise and
perhaps enforce his charge before the execution is completed.
(g)
[C5216]
As a general rule, the holder of a floating charge can acquire no interest in an asset which, although in the
possession of the company, is in fact owned by someone else. Since the case of Aluminium Industrie
Vaassen BV v Romalpa Limited [1976] 1 WLR 676 it has become common for suppliers to include a
'retention of title' clause in the supply contract whereby property in and title to the goods remains vested in
the supplier until they have been paid for by the purchaser.
There are many variations on the theme, including a retention of title to secure all amounts owing by the
purchaser (the 'all moneys' clause) and a claim to all 'proceeds', that is, the proceeds of sale of any goods
supplied whether in the same or an altered form. The purchaser might be obliged to keep such proceeds
separate from other receipts and be constituted the trustee of such proceeds for the supplier.
One of the purposes of such clauses is to prevent the goods from becoming the property of the company and
subject to the floating charge. An effective reservation of title clause allows the supplier to reclaim the goods
and, possibly, the proceeds of sale so that he is not restricted to his often empty claim as an unsecured
creditor in the event of non-payment by the purchaser. However, he will be a mere unsecured creditor if the
reservation of title clause constitutes a charge and is not registered. (It seldom is registered and often
constitutes a charge -- see also C5010 COMPANY CHARGES I.)
There were several reported cases during the 1980s and early 1990s concerning attempts to create effective
retention of title clauses. The principle in Romalpa has been limited by the courts and is now likely only to
protect a simple reservation of title to the goods actually supplied (Clough Mill v Martin [1984] 3 All ER 982;
John Snow & Co Ltd v DBG Woodcroft Ltd [1985] BCLC 54), but will not normally extend to the proceeds of
sale (Tatung (UK) Ltd v Galex Telesure Ltd (1988) 5 BCC 325; Compaq Computer Ltd v Abercorn Group Ltd
[1991] BCC 484 and Modelboard Ltd v Outer Box Ltd [1992] BCC 945) nor to goods which have been
processed (Re Peachdart [1983] 3 All ER 204). In each case, whether a clause validly reserves title is a
matter of construction and context (see Bulbinder Singh Sandhu (trading as Isher Fashions UK) v Jet Star
Retail Limited T/A Mark One (In Administration) and others [2010] EWHC 1936 (QB)).
The retention of title clause is a security device but in some circumstances, if properly drafted, no charge is
created by the company and no registration is required to protect the claim of the supplier. This may be so
Page 20
even where the clause is an 'all moneys' reservation of title clause: Armour v Thyssen Edelstahlwerke AG
[1991] 2 AC 339. Such clauses are, in certain circumstances, effective against the holder of the floating
charge and on crystallisation, the charge holder will take subject to the claim of the supplier with the benefit
of the retention of title clause. Since such goods in those circumstances never become the property of the
company, there is no proprietary interest to which the floating charge can attach. For a more comprehensive
discussion of retention of title clauses, reference should be made to I5617 onwards INSOLVENCY:
RECEIVERS IV (PART I). See also Law Commission for England and Wales, Registration of Security
Interests: Company Charges and Property other than Land (Consultation Paper 164), at para 6.16 onwards
(which included proposals (not adopted) for the registration of reservation of title arrangements as 'quasisecurity').
(h) Existing contractual rights, rights to set off and freezing (previously Mareva)
injunctions
[C5217]
The claim of the holder of a floating charge to specific assets which is brought about by crystallisation (for
example, on the appointment of a receiver) is subject to the rights already given by the company to other
persons under ordinary trading contracts (George Barker (Transport) Limited v Eynon [1974] 1 WLR 462 at
473). It is also subject to the rights of third parties to set off against amounts due from them (whether or not
then payable) to the company under a pre-receivership contract (i) amounts which have accrued due
(whether or not then payable) from the company before notice of the receiver's appointment, or (ii) amounts
subsequently accruing due from the company under the pre-receivership contract or which are otherwise
closely connected with the company's claim under the contract (Business Computers Limited v Anglo-African
Leasing Limited [1977] 1 WLR 578). However, a creditor who contracts with the receiver cannot set off
against the receiver a debt owed to the company prior to receivership, since there is no mutuality.
The effect of a freezing injunction is to restrain the company from removing a certain asset from the
jurisdiction. If a receiver is subsequently appointed under a floating charge which covers that asset and
which also provides for the receiver to be the agent of the company, the receiver, as the company's agent, is
bound by the injunction but may apply to the court to have the injunction varied so as to enforce the security
without impediment. The holder of the floating charge is not so bound and he can assert a right to have the
asset discharged from the injunction (Cretanor Maritime Co Limited v Irish Marine Management Limited
[1978] 1 WLR 966).
(i)
[C5218]
In the interests of protecting the UK's financial markets from systemic and other risks which arise as a result
of the insolvency of a participant in those markets, the general law of insolvency is disapplied in a number of
material respects to certain charge arrangements which are put in place as part of the operation of those
markets. The disapplication of the relevant provisions of insolvency law is to be found principally in (a) Part
VII of the CA 1989; (b) the Financial Markets and Insolvency Regulations 1996 (SI 1996 No 1469); and (c)
the Settlement Finality Regulations. (For further details, see I7001 onwards INSOLVENCY: SPECIAL
PROVISIONS FOR FINANCIAL MARKETS.)
The main purpose of these statutory provisions is to disapply various provisions of the IA 1986 which might
otherwise adversely impact upon the validity and enforceability of charges taken by banks and other financial
institutions in support of credit and/or liquidity which they provide to the financial markets.
In addition, the moratorium provisions in relation to creditors' voluntary arrangements for small companies,
as contained in the Insolvency Act 2000 and set out in Schedule A1 to the IA 1986, are disapplied in relation
to the operation of financial markets by paragraph 2(2) of that Schedule A1.
Page 21
Certain of these insolvency provisions have also been disapplied in relation to 'financial collateral
arrangements' upon the implementation of Directive 2002/47/EC on financial collateral arrangements as part
of the law of the United Kingdom (see C5008 COMPANY CHARGES I) pursuant to the Financial Collateral
Regulations. These regulations also disapply, among other things, IA 1986, s 176A (share of assets for
unsecured creditors), IA 1986, s 245 (avoidance of certain floating charges) and the effect of the moratorium
on creditors where there is a 'small company CVA' under IA 1986, Sch A1.