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Floating Charges & Priorities

Dr Hasani Mohd Ali


FUU, UKM

Priority of charges will depend onRegistration


Fixed/floating
When crystallization occurs s 294
Other Preferential creditors s 292

Priorities among charges


A legal charge v an equitable charge = LC
unless EC first + notice
EC v EC = The first in time

Effect of Registration
Protection of security otherwise it may be
void
Priority over other charges the chargees
priority over later charges is protected.

Floating charge is vulnerable as:- the chargor is allowed to deal with the
property in the normal course of business.
- Retention of title clause assets mixed
- Later specific charge may take priority
(legal/ equitable/ notice regardless)

Protection for the floating charge holder


Negative pledge an equitable restriction
on the co.s power to create subsequent
charges. (subs. Chargee must notice)
Registration a constructive notice that
charge exists, but not of its terms
Wilson v Kelland [1910] 2 Ch 306; UMBC
v Aluminex [1993] 3 MLJ 587
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A second floating charge may be created ranking


pari passu with or in priority to a prior floating
charge
Re Benjamin Cope [1914] 1 Ch 800, where a
company has created a charge over the whole of
its undertaking, a second floating charge would
take priority after the first unless the terms of the
prior charge allowed the company to create
subsequent charges with an equal or higher
priority.
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Book debts fixed or floating?


Siebe Gorman & Co Ltd v Barclays Bank Ltd
[1979] 2 Lloyd's Rep. 142.
fixed charges can be held over book debts if
the proceeds are not made available for use
in the course of business--eg, by providing
that all such proceeds are to be paid into a
"blocked" account.
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Book debts
in Brumark, Re [2001] 3 W.L.R. 454,
no blocking in the debenture if it was not in
fact operated as a blocked account.

Book debts
Spectrum Plus Ltd v National Westminster
Bank Plc [2005] 3 W.L.R. 58 The House of
Lords
the unrestricted right to draw on the account
of the book debts was inconsistent with
there being a fixed charge over those debts.

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Floating charges in liquidation &


receivership
During winding up or receivership, floating
charges claim is subject to those of
preferred creditors.
They are: listed under s 191 & s 292

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Distress & judgment debts


Landlord may seize goods subject to a
floating charge for rent.
A judgment creditor is postponed to the
rights of the debenture holders if he has not
completed execution before the charge
crystallizes. See S 298
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Section 298. Restriction of rights of creditor as to execution


or attachment.

(1) Where a creditor has issued execution against the goods or land of a company or has attached any
debt due to the company and the company is subsequently wound up, he shall not be entitled to
retain the benefit of the execution or attachment against the liquidator unless he has completed the
execution or attachment before the date of the commencement of the winding up, but

(a) where any creditor has had notice of a meeting having been called at which a resolution for
voluntary winding up is to be proposed, the date on which the creditor so had notice shall for the
purposes of this section be substituted for the date of the commencement of the winding up;

(b) a person who purchases in good faith under a sale by the bailiff any goods of a company on
which an execution has been levied shall in all cases acquire a good title to them against the
liquidator; and

(c) the rights conferred by this subsection on the liquidator may be set aside by the Court in favour
of the creditor to such extent and subject to such terms as the Court thinks fit.

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(2) For the purposes of this section

(a) an execution against goods is completed by seizure and sale;

(b) an attachment of a debt is completed by receipt of the debt; and

(c) an execution against land is completed by sale or, in the case of an equitable interest,
by the appointment of a receiver.

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Set-off
If there are mutual debts between cos.
(Courts of Judicature Act: para 13 of the
Sch.)
Debenture Holder (via a receiver) may
refuse a set-off (for the benefit of DH) or
claim it.
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Liens
Take priority over a floating charge.
If a lien arises in the ordinary course of the co.s
business, the DHs rights is postponed to those of
the lien holder.
George Barker v Eynon [1974] 1 AER 900
A lien arising under a contract made before
crystallization of the FC may take priority over the
FC.
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Floating charges in a winding up


- Their claims are subject to those of preferred
creditors
- A FC created within 6 months of the winding up is
void, unless the company was solvent at the time
the charge was created (s. 294)
- Unless the chargee advanced cash to the company,
the charge is valid
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