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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

ADVANTAGES AND DISADVANTAGES OF THE FLOATING CHARGE

The advantages of the floating charge
[C5201]
The floating charge was first recognised by the courts in Re Panama, New Zealand and Australia Royal Mail
Co (1870) 5 Ch App 318. The fundamental advantage to the company and charge holder alike arises from its
nature as a charge which does not attach to specific assets until crystallisation, thereby permitting the
company to conduct its business without the concurrence of the holder. For the holder, the charge will attach
upon the occurrence of some event without any further act on the part of the company. If the floating charge
contains a negative pledge prohibiting the company from granting security interests in its property, the
prohibition will be binding on a person with actual notice of it (see Re Standard Rotary Machine Company
Ltd (1906) 95 LT 829; Wilson v Kelland [1910] 2 Ch 306 and C5212 below; cf. Griffiths v Yorkshire Bank plc
[1994] 1 WLR 1427).
A significant advantage for the holder results from the terms in which most debentures are drafted which
permit the holder to demand payment and, after a very short time and subject to the limitations imposed by
the Insolvency Act 1986 ('IA 1986') (as amended by the Enterprise Act 2002 ('EnA 2002') -- see C5202
below) and the Insolvency Act 2000 ('IA 2000') (see C5203 below), appoint a receiver (R A Cripps & Son
(Pharmaceuticals) Ltd v Wickenden [1973] 1 WLR 944; Bank of Baroda v Panessar [1987] 2 WLR 208; but
contrast Ronald Elwyn Lister v Dunlop (1982) 135 DLR (3d) 1 at 16 where the Supreme Court of Canada
held that a 'reasonable time to pay' must be a commercially reasonable time, recognising that few companies
can immediately produce sufficient cash to discharge the debts owing to a debenture holder). The borrower
is given a reasonable opportunity to implement whatever reasonable mechanics of payment it may need to
employ to discharge the debt. This 'mechanics of payment' test does not allow a borrower time to raise the
money by, for example, new financing arrangements. The amount of time to be given is essentially a
practical question. Accordingly, where the borrower admitted that it would not be able to meet the lender's
valid demand for repayment, it has been held that a period of fifteen minutes between service of the demand
and appointment of a receiver was sufficient (Sheppard & Cooper Ltd v TSB Bank plc [1996] 2 All ER 654).
In the absence of bad faith, the lender can exercise the right to appoint a receiver at any time and has no
duty of care to the company or any subsequent chargee as to the timing of the appointment (Shamji v
Johnson Matthey Bankers [1986] BCLC 278; Downsview Nominees Ltd v First City Corporation [1993] AC
295). This means that the lender can, in the absence of agreement restricting its rights and if the charge so
provides (see, for example, Cryne v Barclays Bank plc [1987] BCLC 548 where the court held that there was
no implied right to appoint a receiver where the lender considered its security to be in jeopardy), at any time
bring an end to the business operations being conducted by the company.

The effect of the Enterprise Act 2002

[C5202]
The relevant provisions of the EnA 2002 have substantively affected the law relating to administrative
receiverships (as well as making various changes affecting the use and conduct of administrations). In
particular:

(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

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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:

Where the net property is 10,000 or less

Where the net property exceeds 10,000

4
5

50% of that property

50% of the first 10,000, plus 20% of the property
which exceeds 10,000, up to a maximum
prescribed part of 600,000

(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.

(i) states that paragraph 14 of Schedule B1 applies to the floating charge;

(ii) purports to empower the holder to appoint an administrator;
(iii) purports to empower the holder to appoint an administrative receiver; or
(iv) purports to empower the holder in Scotland to appoint a receiver who on
appointment would be an administrative receiver.

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

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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

(e) The administration procedure was 'streamlined' to enable, in certain circumstances,

holders of qualifying floating charges (IA 1986, Sch B1, paras 14-21) and companies and
directors (IA 1986, Sch B1, paras 22-34) to place a company into administration without the
need to apply to court. A court based method of appointing an administrator, with a few
modifications, also continues to be available (IA 1986, Sch B1, paras 10-13 and 35-38). The
administration procedure contained in IA 1986, Part II, survives in relation to a number of
categories of public-utility companies and to building societies.

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:

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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

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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).

The 'prescribed part'

[C5202.1]
There have been a number of cases in which the parameters of the 'prescribed part' provisions of section
176A of IA 1986 have been discussed.
In Re Hydroserve Ltd [2007] All ER (D) 184 (Jun), 122 creditors who would have been entitled to a share of
the prescribed part were entitled to such a small sum, about 5,000 between them, that the cost of agreeing
the value of their claims and making a distribution to them would have been disproportionate to the benefits.
Consequently, the court made a disapplication order under section 176A(5) of the IA 1986, with a provision
entitling any creditor to apply to set the order aside within 28 days.
Thorniley and another v Revenue and Customs Commissioners and another [2008] All ER (D) 47 (Feb)
concerned whether the prescribed part of the company's net property (as defined in section 176A(6)) was
available to satisfy any part of the debts due to a creditor which were secured by a floating charge in that
creditor's favour, but which could not be paid out of the realisation of the net property, due to a shortfall in the
value of the security. Patten J held that, on the true construction of section 176A, the floating charge holder
and fixed charge holder were excluded from participating in the prescribed part of the company's net profit as
defined in section 176A(6). The prescribed part was held for the benefit of unsecured creditors alone.
In Re Courts plc [2008] All ER (D) 83 (Oct), the applicant joint liquidators applied for a qualified disapplication
order ('QDO') pursuant to section 176A(5) of IA 1986 that section 176A(2) would not apply so as to require a
distribution of the prescribed part to any unsecured creditor owed 28,000 or less. The applicants believed
that the cost of making a distribution to such unsecured creditors would be disproportionate to the benefits.
They also applied for a costs order in the event that the court did not make the QDO, not exceeding 62,000,
such costs to be paid out of the prescribed part in accordance with Rule 12.2 of the Insolvency Rules 1986.
Blackburne J allowed the application in part. He held that the correct understanding of section 176A(2) was
that it applied either in its entirety or not at all. There was no discernible legislative intention that the power to
disapply section 176A(2) should be capable of producing the result that the largest creditors should take the
prescribed part in its entirety leaving the remaining creditors to receive nothing. The application for a costs
order would, however, be allowed for the processing of all the company's unsecured claims (for an amount
not exceeding 62,000).
In Re International Sections Ltd (in creditors' voluntary liquidation) [2009] All ER (D) 48 (Feb), the application
of the prescribed part would have resulted in each of the unsecured creditors receiving a dividend of 1.48
pence in the pound, with 46 creditors receiving a maximum dividend of 14.80. The liquidator applied to the
court under section 176A(5) to disapply section 176A(2). Judge Perle QC refused the application. He held
that, in deciding whether to disapply section 176A(2), the court had to be satisfied that the cost of making a
distribution would be disproportionate to the benefits, and that it was right to disapply the section on that
ground. The correct approach for a court to take in such cases was to look at the benefits to creditors as a
body and the court should not be too ready to disapply the section because the dividend would be small.
Further, the disapplication of section 176A(2) pursuant to section 176A(5) should be the exception, and not
the rule.

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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)).

Insolvency Act 2000: moratorium connected to a company voluntary arrangement

[C5203]
The IA 2000 introduced a new form of company voluntary arrangement (referred to below as the 'small
company CVA') for small companies that includes a moratorium on creditor action which could affect a
floating charge holder's ability to enforce its security (IA 1986, s 1A and Sch A1, inserted by IA 2000 -- for full
details, see I6004 onwards INSOLVENCY: VOLUNTARY ARRANGEMENTS). The definition of 'small
company' is found in sections 381-384 of the CA 2006 and applies (subject to certain statutory exceptions) if
a company satisfies at least two of the following criteria in the relevant financial year or years:

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17

(a)
(b)
(c)

its turnover is less than 6.5 million;

its balance sheet total is less than 3.26 million; or
it has no more than 50 employees.

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

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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:

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19

(a) obtaining a moratorium, or

(b) anything done with a view to obtaining a moratorium (including any preliminary decision
or investigation)

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)).

Insolvency Act 1986: administration procedure

[C5204]
This section relates to a floating charge granted prior to the prescribed date (15 September 2003) (as to
which, see the commentary on EnA 2002 at C5202 above) that still entitles the holder to appoint an
administrative receiver (referred to below as an 'AR floating charge').
An AR floating charge is a material benefit to a creditor and a fundamental impediment to a company as the
holder has the ability effectively to block the appointment of an administrator by appointing an administrative
receiver (see generally I3201 onwards INSOLVENCY: ADMINISTRATIONS I).
Assuming that a holder of an AR floating charge can appoint an administrative receiver under the express or
implied terms of the charge, the IA 1986 (as amended pursuant to EnA 2002) permits, in the period between
making an application for an administration order and the hearing or, as the case may be, in the period
between the filing of a notice of intention to appoint an administrator and making the appointment of the
administrator, the holder of the AR floating charge to appoint an administrative receiver.
Following the changes to the administration procedure made by the EnA 2002 which took effect from 15
September 2003 as referred to at C5202 above, there continue to be provisions (similar to those contained in
IA 1986, Part II, which, as noted above, have been replaced in most circumstances) for the giving of notice to
the holder of an AR floating charge of any proposed appointment of an administrator by the court or by a
company or its directors out of court (IA 1986, Sch B1, paras 12 and 26) or, where the AR floating charge is
prior ranking (even if it is not currently enforceable (although not if it will never be enforceable); see Re OMP
Leisure Ltd [2008] BCC 67), of any proposed appointment of an administrator out of court by the holder of a
subsequent ranking qualifying floating charge (IA 1986, Sch B1, para 15).
Accordingly, the holder of an AR floating charge still has an opportunity to make a pre-emptive appointment
of an administrative receiver. If it makes such an appointment, it will not then be possible for an administrator
to be appointed by way of out of court appointment, under the 'streamlined' administration procedure (IA
1986, Sch B1, paras 17 and 25). Nor may the court make an administration order unless either the holder of
the AR floating charge consents, the charge is invalid (see C5206 below) or the charge is liable to be set
aside as a transaction at an undervalue or a preference (IA 1986, Sch B1, para 39). If the holder of an AR
floating charge decides not to appoint an administrative receiver or, having done so, consents to an
administration order being made, that holder, once the company is in administration, cannot appoint an
administrative receiver or take any other steps to enforce any security (IA 1986, Sch B1, para 43). The
creditor may apply to the court for leave to enforce its security, for example, by appointing a receiver. On any

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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).

Capital markets charges

[C5205]
Certain capital markets charges are protected from the moratorium provisions of the IA 1986 (whether as a
result of administration or a company voluntary arrangement). Such charges include a 'market charge' (given
in favour, amongst others, to a 'recognised investment exchange' or a 'recognised clearing house', as
described in Part VII of the Companies Act 1989); a 'system-charge' given to a settlement bank (which
receives protection under the Financial Markets and Insolvency Regulations 1996 (SI 1996 No 1469) (as
subsequently amended)), and a 'collateral security charge' (which is given for the purpose of securing rights
and obligations potentially arising in connection with a system which is 'designated' under the Financial
Markets and Insolvency (Settlement Finality) Regulations 1999 (SI 1999 No 2979) (as subsequently
amended, the 'Settlement Finality Regulations') -- being securities settlement and payment systems). It is
also the case that an administrator's power to require a receiver to vacate office, and to deal with charged
property, is disapplied where the receiver is appointed or property is charged pursuant to a collateral security
charge under regulation 19(1) of the Settlement Finality Regulations). In addition, following implementation of
Directive 2002/47/EC on financial collateral arrangements (see C5008 COMPANY CHARGES I), certain
collateral arrangements over securities and cash credited to an account are enforceable free from the
constraints of a moratorium, under the Financial Collateral Arrangements (No 2) Regulations 2003 (SI 2003
No 3226) (as amended by the Financial Collateral Arrangements (No 2) Regulations 2003 (Amendment)
Regulations 2009 (SI 2009 No 2462), together the 'Financial Collateral Regulations').

The Banking Act 2009

[C5205.1]
Institutions to which the Banking Act 2009 (and its associated subordinate legislation) applies are subject to
modified liquidation and administration procedures. These provide for new overriding objectives for those
procedures in line with the aims of the special resolution regime created by Part I of the Banking Act 2009.
This regime was introduced as a response to the global financial crisis (which began in 2008) to protect and
enhance the stability of the UK financial system and confidence in the UK banking systems, and to protect

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

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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)).

Insolvency Act 1986: sections 238 and 239

[C5207]
The floating charge and, indeed, any other security granted by a company to a lender may be vulnerable
under section 238 of the IA 1986 (transactions at an undervalue) and section 239 of the IA 1986
(preferences). (For a general discussion of these provisions and the equivalent provisions applicable to
Scotland, the reader is referred to I4502 onwards INSOLVENCY: LIQUIDATIONS IV.) The safer view is that
the creation of a floating charge over a company's assets may be vulnerable to challenge as a transaction at
an undervalue. This is so notwithstanding the decision of Millett J in Re MC Bacon Ltd [1990] BCLC 324 at
340. In that case, it was said that the mere creation of security could not constitute a transaction at an
undervalue because it does not deplete or otherwise diminish the value of the company's assets. It was
argued that loss by the company of the ability to apply the proceeds of the assets otherwise than in
satisfaction of the secured debt is not capable of valuation in money terms. The ruling in MC Bacon was
applied by the Court of Appeal in National Bank of Kuwait v Menzies [1994] 2 BCLC 306. However, it has
subsequently been rejected by the Court of Appeal in Hill v Spread Trustee Company Ltd and another [2006]
EWCA Civ 542, [2007] 1 All ER 1106 per Arden LJ at para 138. Arden LJ states that the proposition that, as a

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).

The disadvantages of a floating charge: preferential debts, liquidator's costs,

administrator's costs and the prescribed part
[C5208]
EnA 2002 abolished Crown preferential claims (for which see further at C5202 above). It should be noted that
the abolition of Crown preference applied to all floating charges, whenever granted.
Section 40 of the IA 1986 provides that, if a company is not being wound up when a receiver is appointed
under a floating charge, the company's preferential debts shall be paid out of the assets coming into the
hands of the receiver in priority to a claim for principal or interest in respect of the debentures under which
the receiver was first appointed. This will apply even where the floating charge has crystallised before the
appointment of the receiver or administrative receiver.
If a lender enforces a floating charge by taking possession of any property in or subject to the charge or by
causing another to take possession on his behalf, the lender or his appointee is required to pay the
preferential debts out of the assets coming into his hands: CA 2006, s 754 (see HMRC v Royal Bank of
Scotland plc [2008] BCC 135, in which section 196 of CA 1985 (the predecessor of section 754) and section
175 of IA 1986 (see below) were discussed in some detail)). If a lender, without putting the company into
receivership or taking possession of the assets, is paid before the commencement of liquidation, there is no
statutory provision which makes the holder of the floating charge responsible for paying the claims of
preferential creditors.
In the absence of such an express provision, it has been held that a floating chargee who enforces his
security outside a liquidation other than by way of appointment of a receiver or taking possession has no
obligation to account to preferential creditors prior to his own claims: Griffiths v Yorkshire Bank plc [1994] 1
WLR 1427. The decision has, however, attracted criticism as being at odds with the policy objective of the
insolvency legislation that preferential creditors, whether in a receivership or liquidation, should rank ahead of

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).

The disadvantages of a floating charge: priorities

[C5209]
It is of the essence of a floating charge that, until the charge crystallises, the company retains the ability to
deal with the assets subject to the charge in the ordinary course of its business (unless the charge provides
to the contrary, in which case the charge may not constitute a floating charge at all). As a result, the holder of
a floating charge is liable, subject as mentioned below, to be postponed to interests in the charged property
which are created or arise in the ordinary course of the company's business.
In the absence of some provision to the contrary, a floating charge leaves the company free to sell its assets,
whereupon a purchaser will take free of the charge, or to create specific charges over its property which will
have priority over the floating charge, even if the floating charge is stated to be 'a first charge' (Re Colonial
Trusts Corporation (1880) 15 ChD 465 at 472 and Wheatley v Silkstone and Haigh Coal Company (1885) 29
ChD 715) (a prohibition against granting subsequent charges ranking in priority or pari passu with the
floating charge is invariably included). The main types of such interests which may affect the holder of the
floating charge are described below.

Other charges and claims

(a)

Subsequent floating charge

[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)

Purchase money charges

[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)

Subsequent fixed charges: restrictive clauses

[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)

Execution creditors and statutory claims

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)

Sellers under title retention clauses

[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)

Market and other charges

[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.